1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
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 June 30, 1996
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 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
--- ---
18,761,166 shares of Common Stock, par value $.001 per share, were outstanding
as of August 8, 1996.
2
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 1996
Table of Contents
Page No.
--------
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
June 30, 1996 (Unaudited) and
September 30, 1995 3
Consolidated Statements of
Income for the three months ended
June 30, 1996 and 1995 (Unaudited) 5
Consolidated Statements of
Income for the nine months ended
June 30, 1996 and 1995 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1996 and 1995
(Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Part II - Other Information
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27 - Financial Data Schedule
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1996 1995
----------- -------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents, including restricted cash
equivalents of $1,145,000 at June 30, 1996 (Note 3) $ 2,227,000 $ 20,000
Accounts receivable, net of allowance for doubtful
accounts of $227,000 and $150,000 at June 30,
1996 and September 30, 1995, respectively 6,123,000 4,929,000
Notes due from officers (Note 4) 123,000 698,000
Deferred tax asset 300,000 300,000
Other current assets 406,000 549,000
----------- -----------
Total current assets 9,179,000 6,496,000
EQUIPMENT AND IMPROVEMENTS
Equipment 2,803,000 2,619,000
Leasehold improvements 177,000 252,000
----------- -----------
2,980,000 2,871,000
Accumulated depreciation and amortization 2,152,000 2,054,000
----------- -----------
828,000 817,000
DEFERRED TAX ASSET, net of current portion 460,000 460,000
GOODWILL, net of amortization 4,875,000 5,050,000
OTHER ASSETS 813,000 1,007,000
----------- -----------
TOTAL ASSETS $16,155,000 $13,830,000
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 3 of 15
4
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1996 1995
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES
Short-term borrowings $ 2,507,000 $ 5,019,000
Current portion of long-term debt 45,000 958,000
Accounts payable 1,166,000 1,629,000
Accrued expenses and other current liabilities(Note 3) 2,095,000 2,839,000
------------ ------------
Total current liabilities 5,813,000 10,445,000
LONG-TERM DEBT 149,000 133,000
OTHER LIABILITIES -- 42,000
------------ ------------
Total Liabilities 5,962,000 10,620,000
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY
Preferred Stock, $.10 par value; authorized 5,000,000 shares;
none issued and outstanding -- --
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 18,465,394 and 14,010,121 at
June 30, 1996 and September 30, 1995, respectively 18,000 14,000
Additional paid-in capital 14,415,000 8,307,000
Accumulated deficit (4,240,000) (5,111,000)
------------ ------------
Total shareholders' equity 10,193,000 3,210,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 16,155,000 $ 13,830,000
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 4 of 15
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
-----------------------------------
1996 1995
------------ ------------
OPERATING REVENUES $ 26,791,000 $ 19,841,000
DIRECT OPERATING EXPENSES 24,474,000 18,141,000
------------ ------------
Gross profit 2,317,000 1,700,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,907,000 1,414,000
DEPRECIATION AND AMORTIZATION 208,000 133,000
------------ ------------
Income from operations 202,000 153,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 75,000 32,000
Interest expense (116,000) (100,000)
------------ ------------
(41,000) (68,000)
------------ ------------
Income before tax 161,000 85,000
INCOME TAX (EXPENSE) BENEFIT (1,000) 61,000
------------ ------------
NET INCOME $ 160,000 $ 146,000
============ ============
NET INCOME PER COMMON SHARE $ 0.01 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,167,152 14,619,580
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 5 of 15
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED
JUNE 30,
-----------------------------------
1996 1995
------------ ------------
OPERATING REVENUES $ 73,898,000 $ 52,468,000
DIRECT OPERATING EXPENSES 67,254,000 47,709,000
------------ ------------
Gross profit 6,644,000 4,759,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,195,000 3,696,000
DEPRECIATION AND AMORTIZATION 464,000 339,000
------------ ------------
Income from operations 985,000 724,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 150,000 189,000
Interest expense (253,000) (227,000)
Other expense (10,000) --
------------ ------------
(113,000) (38,000)
------------ ------------
Income before tax 872,000 686,000
INCOME TAX EXPENSE (1,000) (18,000)
------------ ------------
NET INCOME $ 871,000 $ 668,000
============ ============
NET INCOME PER COMMON SHARE $ 0.05 $ 0.05
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 16,336,460 14,729,275
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 6 of 15
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
JUNE 30,
-------------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 871,000 $ 668,000
----------- -----------
Adjustments to reconcile net income to net
cash used in operating
activities:
Deferred income taxes -- 18,000
Depreciation and amortization 464,000 339,000
Provision for doubtful accounts 98,000 24,000
Amortization of rent deferral (42,000) (21,000)
Changes in operating assets and liabilities:
Accounts receivable (1,289,000) (3,466,000)
Other current assets 143,000 (1,158,000)
Notes due from officers (134,000) (542,000)
Accounts payable, accrued expenses and
other current liabilities (1,177,000) 2,305,000
----------- -----------
Net cash used in operating activities (1,066,000) (1,833,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (99,000) (411,000)
Acquisitions of businesses, net of cash acquired -- (2,229,000)
----------- -----------
Net cash used in investing activities (99,000) (2,640,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) proceeds from borrowings on revolving
line of credit - net (625,000) 2,120,000
Repayments of long-term debt (907,000) --
(Repayments) proceeds from subordinated bridge loan (1,887,000) 1,887,000
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 6,791,000 573,000
----------- -----------
Net cash provided by financing activities 3,372,000 4,580,000
----------- -----------
Net increase in cash and cash equivalents 2,207,000 107,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,000 178,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,227,000 $ 285,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 253,000 $ 125,000
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 7 of 15
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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 Employer 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 necessary 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, Staff ConnXions - Northeast,
Inc., 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.
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Revenue Policy
The Company recognizes revenue in connection with its 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, 1993, 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. The dilutive effect of stock options and warrants was to
increase the weghted average number of shares outstanding by
approximately 2,000,000 shares for the quarter ended June 30, 1996.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
(3) COMMITMENTS AND CONTINGENCIES
In connection with the Company's workers compensation insurance policy,
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 a portion of the claims may not be paid in the following 12
months. As of June 30, 1996 and September 30, 1995, this accrual
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amounted to $512,000 and $785,000, respectively. During the nine months
ended June 30, 1996 and 1995, the Company recognized approximately
$1,018,000 and $397,000, respectively, as its share of premiums
collected in excess of claims and fees paid and established reserves.
The Company has outstanding letters of credit amounting to $1,600,000
as of June 30, 1996. The letters of credit are required to
collateralize unpaid claims in connection with the 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. In conjunction with the letters of credit, the Company is
required to maintain compensating cash and cash equivalent balances
amounting to $1,145,000.
During the third quarter of fiscal 1996, the Company favorably resolved
a claim for which it had previously established a reserve. Accordingly,
the reserve, amounting to $280,000, was reversed and included as a
reduction of selling, general and administrative expenses for the three
months ended June 30, 1996. For the nine months ended June 30, 1996,
the Company has reversed previously established reserves amounting to
$515,000 due to the favorable resolution of claims.
(4) SHAREHOLDERS' EQUITY
During the third quarter of fiscal 1996, the Company completed a
$1,200,000 private equity financing. The private equity financing
consisted of the issuance of 300,000 shares of the Company's common
stock at $4.00 per share.
On April 4, 1996, notes due from officers amounting to $709,000,
including accrued interest, were settled through the remittance of
123,286 shares of the Company's common stock back to the Company. The
exchange was based on the fair market value of the shares on the date
of the transaction, calculated using the closing stock price of $5.75
per share.
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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 June 30,
1996 and 1995 were $26,791,000 and $19,841,000, respectively, which represents
an increase of $6,950,000 or 35%. For the nine months ended June 30, 1996 and
1995, the Company's operating revenues were $73,898,000 and $ 52,468,000,
respectively, which represents an increase of $21,430,000 or 41%. This increase
is attributable to continued efforts of the sales force to obtain new business
which accounted for $11,507,000 of the increase and the effect of a May 1, 1995
acquisition which accounted for $9,923,000 of the increase.
Direct operating expenses, as a percentage of sales, were 91% for the
three months ended June 30, 1996 and 1995 and for the nine months ended June 30,
1996 and 1995.
Selling, general and administrative expenses for the three months ended
June 30, 1996 and 1995 were $1,907,000 and $1,414,000, respectively,
representing an increase of 35%. This increase is net of $280,000 of income
representing the reversal of a previously established reserve for a claim which
has been favorably resolved. The overall increase in selling, general and
administrative expenses is primarily due to increased sales expenses resulting
from the Company's commitment to increase revenues through its own sales force
to complement the growth resulting from the acquisition of other companies. For
the nine months ended June 30, 1996 and 1995, selling, general and
administrative expenses were $5,195,000 and $3,696,000, respectively,
representing an increase of 41%. This increase is net of $515,000 of income
representing the reversal of previously established reserves for claims which
have been favorably resolved.
Interest expense for the three months ended June 30, 1996 and 1995 was
$116,000 and $100,000, respectively. For the nine months ended June 30, 1996 and
1995, interest expense was $253,000 and $227,000, respectively.
Net income for the three months ended June 30, 1996 and 1995 was
$160,000 and $146,000, respectively, and $871,000 and $668,000 for the nine
months ended June 30, 1996 and 1995, respectively.
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Liquidity and Capital Resources
The Company's working capital as of June 30, 1996 amounted to
$3,366,000 or a ratio of 1.58 to one versus working capital of $1,809,000 or
1.25 to one at March 31, 1996 and a working capital deficiency of $3,949,000 or
.62 to one at September 30, 1995. This improvement reflects the Company's
successful $1,200,000 private placement offering of common stock in the third
quarter and total net proceeds from common stock and common stock options and
warrants of $6,791,000 for the nine months ended June 30, 1996.
Total liabilities decreased by $4,658,000 or 44% during the nine months
ended June 30, 1996, including the payment of $1,887,000 in outstanding bridge
notes to private investors.
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 income for the nine months ended June 30, 1996 of $871,000 and shareholders'
equity of $10,193,000.
As of June 30, 1996, the Company was in compliance with all covenants
under its revolving line of credit facility. The line matured on January 31,
1996, however, the Company has been granted an extension of the line through
August 31, 1996. Prior to August 31, 1996, the Company fully expects to renew
the line or to be granted a further extension. In the event that this does not
occur, the Company will pursue other financing alternatives.
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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 pledged as collateral
had been transferred and sold in violation of the loan and finance agreement.
Through the efforts of the Company, 1,258,334 Shares were 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. 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 yet answered the complaint.
Item 5. Other information
During the third quarter of fiscal 1996, the Company completed a $1,200,000
private equity financing under regulation D. The private equity financing
consisted of the issuance of 300,000 shares of the Company's common stock at
$4.00 per share. Net proceeds amounted to $1,092,000, after commissions to
various selling agents who assisted with the private placement. In addition to
the commissions paid amounting to $108,000, the selling agents also received
a total of 30,000 common stock warrants which can each be used to purchase one
share of the Company's common stock at a price yet to be determined.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
On April 4, 1996, the Company filed a Form 8-K to report under Item 5 that it
had completed a $3,500,000 private equity financing.
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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: August 8, 1996
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EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
5
9-MOS
SEP-30-1995
OCT-01-1995
JUN-30-1996
2227000
0
6350000
227000
0
9179000
2980000
2152000
16155000
5813000
0
0
0
18000
10175000
16155000
73898000
73898000
67254000
72913000
263000
98000
253000
985000
1000
872000
0
0
0
871000
0
.05
