1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
-------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 Number)
4041 Hadley Road, South Plainfield, NJ 07080
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 561-1200
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if
changed since last report.
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
--- ---
16,218,877 shares, par value $.001 per share were outstanding as of
April 24, 1996.
2
FORM 10-Q
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
March 31, 1996
INDEX
Page
----
No.
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Part I - Financial Information
Consolidated Balance Sheets
March 31, 1996 (Unaudited) and
September 30, 1995 3
Consolidated Statements of
Income for the three months ended
March 31, 1996 and 1995 (Unaudited) 5
Consolidated Statements of
Income for the six months ended
March 31, 1996 and 1995 (Unaudited) 6
Consolidated Statements of Cash Flows for the
six months ended March 31, 1996
and 1995 (Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Management's discussion and analysis of
financial condition and results of operations 11
Part II - Other Information
Item 3. Exhibits and Reports on Form 8-K 13
Signatures 14
3
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
1996 1995
------------ ------------
ASSETS (Unauduted)
CURRENT ASSETS
Cash $ 1,804,000 $ 20,000
Accounts receivable, net of allowance for doubtful
accounts of $236,000 and $150,000 at March 31,
1996 and September 30, 1995, respectively 5,555,000 4,929,000
Notes due from officers 823,000 698,000
Deferred tax assets 300,000 300,000
Other current assets 470,000 549,000
------------ ------------
Total current assets 9,952,000 6,496,000
EQUIPMENT AND IMPROVEMENTS
Equipment 2,751,000 2,619,000
Leasehold improvements 177,000 252,000
------------ ------------
2,928,000 2,871,000
Accumulated depreciation and amortization 2,125,000 2,054,000
------------ -----------
803,000 817,000
DEFERRED TAX ASSETS, net of current portion 460,000 460,000
GOODWILL, net of amortization 5,928,000 5,050,000
OTHER ASSETS 944,000 1,007,000
------------ ------------
TOTAL ASSETS $ 16,087,000 $ 13,830,000
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
4
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
1996 1995
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unauduted)
CURRENT LIABILITIES
Short-term borrowings $ 3,038,000 $ 5,019,000
Current portion of long-term debt 596,000 958,000
Accounts payable 1,303,000 1,629,000
Accrued expenses and other current 2,206,000 2,839,000
------------ ------------
Total current liabilities 7,143,000 10,445,000
LONG-TERM DEBT 123,000 133,000
OTHER LIABILITIES -- 42,000
------------ ------------
Total Liabilities 7,266,000 10,620,000
SHAREHOLDERS' EQUITY
Preferred Stock, $.10 par value; authorized 5,000,000;
none issued and outstanding -- --
Common Stock, $.001 par value; authorized 40,000,000;
issued and outstanding 15,500,000 and 14,010,121 at
March 31, 1996 and September 30, 1995, respectively 17,000 14,000
Additional paid-in capital 13,204,000 8,307,000
Deficit (4,400,000) (5,111,000)
------------ ------------
Total shareholders' equity 8,821,000 3,210,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 16,087,000 $ 13,830,000
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
5
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS
MARCH 31,
1996 1995
---------- ----------
OPERATING REVENUES 24,017,000 16,741,000
DIRECT OPERATING EXPENSES 21,864,000 15,173,000
Gross profit 2,153,000 1,568,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,669,000 1,070,000
DEPRECIATION & AMORTIZATION 117,000 100,000
Income from operations 367,000 398,000
OTHER INCOME (EXPENSE)
Interest and other income 7,000 62,000
Interest expense (55,000) (86,000)
(48,000) (24,000)
Income before tax 319,000 374,000
INCOME TAX EXPENSE 0 (35,000)
NET INCOME 319,000 339,000
NET INCOME PER COMMON SHARE 0.02 0.02
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 15,561,454 14,781,912
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial statements.
6
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS
MARCH 31,
---------------------------------
1996 1995
------------ ------------
OPERATING REVENUES $ 47,107,000 $ 32,627,000
DIRECT OPERATING EXPENSES 42,780,000 29,568,000
------------ ------------
Gross profit 4,327,000 3,059,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,288,000 2,282,000
DEPRECIATION & AMORTIZATION 256,000 206,000
------------ ------------
Income from operations 783,000 571,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 75,000 157,000
Interest expense (137,000) (127,000)
Other expense (10,000) --
------------ ------------
(72,000) 30,000
------------ ------------
Income before tax 711,000 601,000
INCOME TAX EXPENSE -- (79,000)
------------ ------------
NET INCOME $ 711,000 $ 522,000
============ ============
NET INCOME PER COMMON SHARE $ 0.05 $ 0.04
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 14,921,114 14,735,181
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
7
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
MARCH 31,
-------------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 711,000 $ 522,000
----------- -----------
Adjustments to reconcile net income to net
cash used in operating activities:
Deferred income taxes -- 79,000
Depreciation and amortization 256,000 206,000
Provision for doubtful accounts 86,000 4,000
Amortization of rent deferral (42,000) (14,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (712,000) (2,026,000)
Increase in other assets (46,000) (828,000)
(Decrease) increase in accounts payable,
accrued expenses and other current liabilities (959,000) 984,000
----------- -----------
Net cash used in operating activities (706,000) (1,073,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (57,000) (224,000)
Acquisitions of businesses, net of cash acquired -- (1,673,000)
----------- -----------
Net cash used in investing activities (57,000) (1,897,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds from borrowings on revolving
line of credit - net (93,000) 765,000
(Payments) proceeds from long-term debt (372,000) 10,000
(Payments) proceeds from subordinated bridge loan (1,888,000) 1,803,000
Proceeds (expenses) from issuance of common stock - net 4,498,000 (114,000)
Proceeds from exercise of common stock options
and warrants - net 402,000 625,000
----------- -----------
Net cash provided by financing activities 2,547,000 3,089,000
----------- -----------
Net increase in cash 1,784,000 119,000
CASH AT BEGINNING OF PERIOD 20,000 178,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,804,000 $ 297,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 137,000 $ 65,000
=========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated financial statements.
8
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS:
Digital Solutions, Inc. (the Company) was incorporated under the laws
of the State of New Jersey on November 25, 1969. The Company, with its
subsidiaries, provides a broad spectrum of human resource services
including Professional Employee Organization (PEO) services, payroll
processing, human resource administration and placement of temporary
and permanent employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements included herein have been
prepared by the registrant, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the registrant believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest annual report on form 10-K.
This financial information reflects, in the opinion of management, all
adjustments to present fairly the results for the interim periods. The
results of operations for such interim periods are not necessarily
indicative of the results for the full year.
The accompanying consolidated financial statements include those of
DSI, a New Jersey Corporation and its wholly-owned subsidiaries; DSI
Contract Staffing, DSI Staff ConnXions, Digital Insurance Services,
Inc., DSI Staff ConnXions of Mississippi, DSI Staff ConnXions -
Southwest, MLB Medical Staffing, Inc., Ram Technical Services, Inc. and
DSI Staff Rx, Inc. The results of operations of acquired companies 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.
9
Revenue Policy
The Company recognizes revenue in connection with PEO business and its
temporary placement service program, when the services have been
provided. Revenues are recorded based on the Company's billings to
customers, with the corresponding cost of providing those services
reflected as direct operating expenses. Payroll services, commissions
and other fees for administrative services are recognized as revenue as
the related service is provided.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using straight-line and accelerated methods
over the estimated useful asset lives (3 to 5 years) and the shorter of
the lease term or estimated useful life for leasehold improvements.
Goodwill
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at dates of acquisition and is being
amortized on a straight line basis over 40 years for acquisitions
completed through September 30, 1992. Commencing with the year ended
September 30, 1994, the Company's policy is to amortize any newly
acquired goodwill over 20 years.
Earnings Per Common Share
Earnings per common share are based upon the weighted average number of
shares outstanding as well as the dilutive effect of stock options and
warrants.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
liquid investments purchased with a maturity of three months or less to
be cash equivalents.
(3) COMMITMENTS AND CONTINGENCIES:
On April 1, 1996 the Company renewed its workers compensation minimum
premium agreement with a nationally recognized insurance carrier. In
connection with this program, the insurance company develops reserve
factors on each claim that may or may not materialize after the claim
is fully investigated. Generally Accepted Accounting Principals require
that all incurred, but not paid claims, as well as an estimate for
claims incurred, but not reported (IBNR), be accrued on the balance
sheet as a current liability, although
10
a portion of the claims may not be paid in the following twelve (12)
months. As of March 31, 1996 and September 30, 1995, this accrual
amounted to $525,000 and $785,000, respectively. During the six months
ended March 31, 1996 and 1995, the Company recognized approximately
$541,000 and $200,000, respectively, as its share of premiums collected
in excess of claims and fees paid and established reserves.
The Company has increased its outstanding letters of credit and related
restricted cash and cash equivalents to approximately $811,000 as of
March 31, 1995. These letters of credit are required to collateralize
unpaid claims in connection with the workers compensation insurance
policy for unpaid claims and can only be drawn upon by the beneficiary
if the Company does not perform according to the terms of the related
agreement.
(4) SHAREHOLDERS' EQUITY:
During the second quarter of fiscal 1996, the Company completed a
$3,500,000 private equity financing. The private equity financing
resulted in the issuance of approximately 1,556,000 shares of the
Company's common stock at $2.25 per share.
(5) SUBSEQUENT EVENTS:
On April 4, 1996, notes due from officers amounting to $709,000,
including accrued interest, were settled through remittance of 123,286
shares of the Company's common stock back to the Company.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's operating revenues for the three months ended March 31,
1996 and 1995 were $24,017,000 and $16,741,000, respectively, which represents
an increase of $7,276,000 or 43%. For the six months ended March 31, 1996 and
1995, the Company's operating revenues were $47,107,000 and $ 32,627,000,
respectively, which represents an increase of $14,480,000 or 44%. This increase
is attributable to continued efforts of the sales force to obtain new business
($10,000,000) and the full quarter revenue effect of a May 1, 1995 acquisition
($4,500,000).
Direct operating expenses, as a percentage of sales, were 91% and 94%
for the three months ended March 31, 1996 and 1995, respectively, reflecting
improved costs in the worker's compensation program and in administrative fees.
For the six months ended March 31, 1996 and 1995, direct operating expenses, as
a percentage of sales, were 91%.
Selling, general and administrative expenses, for the three months
ended March 31, 1996 and 1995, were $1,669,000 and $1,070,000, respectively, or
an increase of 56% reflecting primarily the increase in sales expenses due to
the Company's commitment to increase revenues through its own sales force to
complement the growth through the acquisition of other companies. For the six
months ended March 31, 1996 and 1995, selling, general and administrative
expenses were $3,288,000 and $2,282,000, respectively, representing an increase
of 44%.
Interest expense for the three months ended March 31, 1996 and 1995 was
$55,000 and $86,000, respectively, reflecting the payment of the bridge note
during the quarter. For the six months ended March 31, 1996 and 1995, interest
expense was $137,000 and $127,000, respectively.
Net income for the three months ended March 31, 1996 and 1995 was
$319,000 and $339,000, respectively, and $711,000 and $522,000 for the six
months ended March 31, 1996 and 1995, respectively.
12
Liquidity and Capital Resources
The Company's working capital at March 31, 1996 was $2,239,000 or a
ratio of 1.33 to one versus a negative working capital of $2,603,000 or .74 to
one at December 31, 1995. This improvement reflects the Company's successful
Private Placement offering of $3,500,000 in the second quarter as well as
approximately $300,000 raised in capital through the exercise of stock options
and warrants.
Total liabilities of the Company decreased by $3,354,000 or 32% during
the six months ended March 31, 1996, including the payment of $1,888,000 in
outstanding bridge notes to private investors.
The Company has increased its private offering by an additional 600,000
shares of common stock. The Company has agreed to pay broker fees of 8% and
non-accountable expense reimbursements of 1% of the money raised. The Company
will use the proceeds of this offering for working capital.
The Company had a net loss for the fiscal year ended September 30, 1995
of $3,316,000 and shareholders equity of $3,210,000. The Company has reported a
net profit for the six months ended March 31, 1996 of $711,000 and shareholders
equity of $8,821,000.
As of March 31, 1996, the Company is in compliance with all of its
covenants with its bank accounts receivable line. The line matured on January
31, 1996 and the Company has been granted an extension of the line through
August 31, 1996. Any previous non-compliance with any covenant has been waived
by the bank.
13
PART II
OTHER INFORMATION
Item 1. 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 (the "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 the Company
pledged as collateral had been transferred and sold in violation of the loan and
finance agreement. Through the efforts of the Company, the Company recovered
1,258,334 Shares.
In March 1996, the Company commenced an 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. The
Company seeks to recover 525,000 shares which were not returned and damages
against all of the defendants. The Company is engaged in preliminary discovery
and the defendants have not as yet answered the complaint.
Item 3. Exhibits and Reports on Forms 8-K.
(a) Exhibits
(b) Reports on Form 8-K
Item 5. Other Information
On January 19, 1996, the Company reported the misappropriation of
shares of the Company's common stock which were pledged as collateral for a
loan.
During the second quarter of fiscal 1996, the Company completed a
$3,500,000 private equity financing. The private equity financing resulted in
the issuance of approximately 1,556,000 shares of the Company's common stock at
$2.25 per share.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DIGITAL SOLUTIONS, INC.
(Registrant)
/s/ George J. Eklund
-----------------------
George J. Eklund
Chief Executive Officer
/s/ Kenneth P. Brice
-----------------------
Kenneth P. Brice
Chief Financial Officer
Date: April 30, 1996
15
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
5
3-MOS
SEP-30-1995
JAN-01-1996
MAR-31-1996
1,804,000
0
5,791,000
(236,000)
0
8,952,000
2,928,000
(2,125,000)
16,807,000
(7,143,000)
0
0
0
(17,000)
(8,804,000)
(16,087,000)
24,017,000
24,024,000
(21,864,000)
(23,650,000)
0
(4,000)
(55,000)
319,000
0
319,000
0
0
0
319,000
.02
0
