1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 December 31, 1995
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
--- ---
14,731,790 shares, par value $.001 per share were outstanding as of February 2,
1996.
Page 1 of 14
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(Unaudited)
Page
----
Consolidated Balance Sheets As Of December 31, 1995 (unaudited)
and September 30, 1995 S-2
Consolidated Statements Of Operations (unaudited) for the Three months
Ended December 31, 1995 and 1994 S-4
Consolidated Statements Of Shareholders' Equity for the Three months
Ended December 31, 1995 (unaudited) S-5
Consolidated Statements Of Cash Flows for the Three months Ended S-6
December 31, 1995 and 1994 (unaudited)
Notes To Consolidated Financial Statements S-8
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1995
December 31, September 30,
ASSETS (Unaudited)
------ ------------ -------------
CURRENT ASSETS:
Cash $ 266,000 $ 20,000
Accounts receivable, net of allowance for doubtful accounts
of $232,000 at December 31, 1995 and $150,000
at September 30, 1995 5,501,000 4,929,000
Notes due from officers 712,000 698,000
Deferred tax asset 300,000 300,000
Other current assets 555,000 549,000
----------- -----------
Total current assets 7,334,000 6,496,000
EQUIPMENT AND IMPROVEMENTS:
Equipment 2,647,000 2,619,000
Leasehold improvements 252,000 252,000
----------- -----------
2,899,000 2,871,000
Less - accumulated depreciation and amortization 2,074,000 2,054,000
----------- -----------
825,000 817,000
DEFERRED TAX ASSET, net of current portion 460,000 460,000
GOODWILL, net of amortization 4,970,000 5,050,000
OTHER ASSETS 967,000 1,007,000
----------- -----------
$14,556,000 $13,830,000
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated balance sheets.
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1995
December 31, September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
------------------------------------ ------------ -------------
CURRENT LIABILITIES:
Short-term borrowings $ 4,700,000 $ 5,019,000
Current portion of long-term debt 945,000 958,000
Accounts payable 1,426,000 1,629,000
Accrued expenses and other current liabilities 2,866,000 2,839,000
------------ -------------
Total current liabilities 9,937,000 10,445,000
LONG-TERM DEBT, net of current portion 130,000 133,000
OTHER LIABILITIES 42,000 42,000
------------ -------------
Total liabilities 10,109,000 10,620,000
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized 5,000,000 shares;
2,366,670 issued and outstanding 237,000 0
Common stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 14,551,140 as of December 31, 1995 and
14,010,121 as of September 30, 1995 15,000 14,000
Additional paid-in capital 8,914,000 8,307,000
Accumulated deficit (4,719,000)
(5,111,000)
------------ -------------
4,447,000 3,210,000
------------ -------------
$ 14,556,000 $ 13,830,000
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated balance sheets.
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended December 31,
---------------------------------------
1995 1994
------------ ------------
OPERATING REVENUES $ 23,090,000 $ 15,886,000
DIRECT OPERATING COSTS 20,916,000 14,395,000
------------ ------------
Gross profit 2,174,000 1,491,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,619,000 1,158,000
DEPRECIATION AND AMORTIZATION 139,000 106,000
------------ ------------
Income from operations 416,000 227,000
------------ ------------
OTHER CREDITS (CHARGES):
Interest and other income 68,000 95,000
Interest expense (82,000)
(41,000)
Other expense (10,000) --
------------ ------------
(24,000) 54,000
------------ ------------
Income before income taxes 392,000 281,000
INCOME TAX EXPENSE -- 44,000
------------ ------------
Net income 392,000 $ 237,000
============ ============
NET INCOME PER COMMON SHARE $ 0.03 $ 0.02
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,280,774 14,431,168
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
5
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended December 31,
---------------------------------------
1995 1994
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 392,000 $ 237,000
Adjustments to reconcile net income to net
cash used in operating activities-
Deferred income taxes 0 44,000
Depreciation and amortization 140,000 106,000
Provision for doubtful accounts 82,000 8,000
Amortization of rent deferral (7,000)
(7,000)
Changes in operating assets and liabilities-
Increase in accounts receivable (1,361,000)
(463,000)
Increase in other assets (108,000)
(203,000)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 284,000
(166,000)
Decrease in other liabilities -- 129,000
----------- -----------
Net cash used in operating activities (668,000)
(225,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (100,000)
(28,000)
Acquisitions of businesses, net of cash acquired -- (1,790,000)
----------- -----------
Net cash used in
investing activities (1,890,000)
(28,000)
----------- -----------
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For the Three Months Ended December 31,
---------------------------------------
1995 1994
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds/(payments) from borrowings on revolving line
of credit, net of repayments $ (70,000) $ 725,000
Principal payments on long-term debt (16,000) (40,000)
Proceeds/(payments) from subordinated bridge loan,
net of repayments (250,000) 1,797,000
Net proceeds from issuance of common stock,
net of expenses 835,000
Other increase (decrease) 0 (24,000)
----------- -----------
Net cash provided by financing activities 499,000 2,458,000
----------- -----------
Net increase (decrease) in cash 246,000 (100,000)
CASH AND CASH REQUIREMENTS AT
BEGINNING OF PERIOD 20,000 178,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 266,000 $ 78,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 97,000 $ 33,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
TRANSACTIONS:
Notes payable issued in a business acquisition -- $ 1,300,000
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
Digital Solutions, Inc. (the Company) was incorporated under the laws of
the State of New Jersey on November 25, 1969. The Company, with its
subsidiaries, provides a broad spectrum of human resource services
including professional employee services (employee leasing), payroll
processing, human resource administration and placement of temporary and
permanent employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation-
The 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
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest
annual report on Form 10K. 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.
Revenue Policy-
The Company recognizes revenue in connection with its employee leasing
program and its temporary placement service program, when the services
have been provided. Revenues are recorded based on the Company's
billings to customers, with the corresponding cost of providing those
services reflected as direct operating expenses. Payroll services,
commissions and other fees for administrative services are recognized
as revenue as the related service is provided.
Equipment and Improvements-
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using straight-line and accelerated methods
over the estimated useful asset lives (3 to 5 years) and the shorter of
the lease term or estimated useful life for leasehold improvements.
Goodwill-
8
10
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. Goodwill, as well as other long-lived
assets, are evaluated on a quarterly basis to determine whether any
impairment has accrued.
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.
Statement of Cash Flows-
For purposes of the statements of cash flows, the Company considers all
liquid investments purchased with a maturity of three months or less to
be cash equivalents.
(3) ACQUISITIONS:
On November 22, 1995, the Company entered into a letter of intent to
purchase certain assets of a Florida Professional Employer Organization
(Employee Leasing). The acquisition will add approximately $35 million
in annualized revenues and will be the Company's entree into the
Florida Marketplace.
The purchase price will be in the form of an earnout over a 5 year
period and will be based on a percentage of revenues acquired with a
down payment in cash at the time of closing of approximate 8% of the
estimated earnout. Total earnout is estimated to be $3,000,000. The
additional down payment of approximately 25% of the estimated earnout
will be in the form of shares of common stock held in escrow and
released at the rate of 50% on the 6th month anniversary of the closing
and the remaining 50% of shares released on the 12th month anniversary
of the closing. The Company will record goodwill in the amount of the
earnout on an annual basis which will be amortized over a 20 year
period.
The Company will enter into a 2 year employment agreement with one of
the principals and will execute non-compete agreements with all key
employees.
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(4) COMMITMENTS AND CONTINGENCIES
The Company is a party to a workers' compensation minimum premium
agreement with a nationally recognized insurance carrier. As part of
this program, the Company shares in any "claims not paid" pool.
Generally accepted accounting principals require that all incurred,
but not paid claims, as well as an estimate for claims incurred, but
not reported (IBNR), be accrued on the balance sheet as a current
liability, although a portion of the claims may not be paid in the
following twelve (12) months. Additionally, the insurance company
develops reserve factors on each claim that may or may not
materialize after the claim is fully investigated. As of December 31,
1995, the total accrual related to this program was $706,000.
(5) SHORT-TERM BORROWINGS:
In February 1995, the Company entered into a one year revolving line
facility (the "Line") with a bank. Under the terms of the agreement the
Company may borrow up to the lesser of $3,500,000, or 80% of eligible
accounts receivable, as defined. The Company is obligated to make
monthly payments of interest on the outstanding amounts at the bank's
floating base rate plus one and one-half percent (10.25% at December
31, 1995). As of December 31, 1995, the Company had $3,062,000
outstanding and no amounts available under this facility based upon the
borrowing base calculation.
The Line is collateralized by substantially all of the Company's
accounts receivable and contains certain covenants, including an
interest coverage ratio, current ratio, total liabilities (as defined)
to tangible net worth (as defined) ratio and total tangible capital
funds (as defined). As of December 31, 1995, the Company was out of
compliance with its financial covenants. The Company is presently
negotiating with the bank to develop mutually agreeable terms and
conditions in response to the Company's request for forbearance.
While the Company believes it will be able to negotiate such terms
and renew the line, in the event that this does not occur, the Company
will pursue other financing alternatives including those described in
Note (6).
(6) ADDITIONAL FINANCING
In addressing the capital needs of the Company, management has
secured two equity financings and is in the process of negotiating
with other sources for additional capital.
In November, 1995, the Company raised $500,000 through the issuance
of convertible preferred stock at a coupon rate of 6% and a 20%
discount to market at the date of conversion.
In November, 1995, the Company commenced a private offering of its
common stock. To date, the Company has raised $448,000 and will
attempt to raise up to an additional $3.5 million through the private
sale of its common stock. The company anticipates the offering will
be competed by the end of March 1996.
Additionally, the Company has also secured a letter of intent from an
investment banking firm to raise up to $5,000,000 in long-term
subordinated debt financing. The proposed financing will have a term
of 30 months from the date of issue and will bear interest at the
greater of the prime interest rate plus 1% or 9%.
Management believes that these financings will correct the working
capital deficiency of the Company, bring the Company back into
compliance with the credit line covenants as discussed in Note (5)
and provide the capital necessary to grow the business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's operating revenues for the three months ended December
31, 1995 and 1994, were approximately $23,090,000 and $15,886,000 respectively.
These revenues represented an increase of approximately 45% from the prior
period revenues. This increase is primarily the result of the expansion of
employee leasing services in New Jersey and Houston, increased revenues in the
payroll service division, and the acquisitions of an employee leasing firm in El
Paso, Texas.
Direct costs as a percentage of sales were 91% for the three month
period ended December 31, 1995 and 1994. This ratio will tend to stabilize as
the mix of business services offered approximates the cost of services for the
employee leasing business.
Selling, general, and administrative expenses before amortization and
goodwill as a percentage of sales was 7% for the first fiscal quarter of 1995
and 7% of sales in the first quarter of 1994. This ratio is in line with
management s plan as the Company experiences growth through acquisitions and
internally. Management is committed to control discretionary costs despite the
aggressive growth in revenues through acquisitions.
Interest expense, for the quarter ended December 31, 1995 and 1994 was
$82,000 and $41,000, respectively. This increase is attributable to the
increased use of the Line of Credit. This was needed to fund the acquisition of
the PEO company in El Paso, Texas as well as fund working capital needs as the
Company built its marketing and operational Hub programs.
Net income for the period ending December 31, 1995 was $392,000 as
compared to $237,000 for the comparable period in the previous fiscal year. The
profit increase is due to improved gross margins in the payroll service
division, the increase in administration fees in the employee leasing business
and the acquisition of the El Paso, Texas PEO company.
Liquidity and Capital Resources
The Company's working capital at December 31, 1995 improved to
$(2,603,000) or a ratio of .74 to 1.0 versus working capital of $(3,949,000) or
a ratio of .62 to 1.0 at September 30, 1995. The improvement reflects the
increased profits for the first quarter of 1995 and the impact of stock issued
to private investors.
Total debt has decreased as management strives to restructure the
balance sheet through various equity offerings and long term notes. See Note (6)
for discussion of current financing alternatives
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. For the three months ended
December 31, 1995, the Company reported a net profit of $392,000 and
shareholders' equity of $4,447,000. The Company is addressing its working
capital needs as discussed in Note (6) and believes that these financings will
correct the working capital deficiency of the Company, bring the Company back
into compliance with the credit line covenants as discussed in Note (5) and
provide the capital necessary to grow the business.
PART II
OTHER INFORMATION
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Item 3. Exhibits and Reports on Forms 8-K.
(a) Exhibits
(b) Reports on Form 8-K
During the quarter ended December 31, 1995, the Company did not file a Form 8-K.
However on January 19, 1996, the Company filed a form 8-K announcing the
termination of the agreement with LNB Investment Corporation.
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. Since that time, the Company has gained control over all but
approximately 525,000 shares of common stock wrongfully transferred by LNB
Investment Corporation, the proposed Lender. The Company is continuing its
efforts to recover these shares and intends to investigate and pursue all legal
remedies.
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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/ Raymond J. Skiptunis
------------------------
Raymond J. Skiptunis
Chief Executive Officer
/s/ Kenneth P. Brice
------------------------
Kenneth P. Brice
Chief Financial Officer
Date: February 6, 1996
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EXHIBIT INDEX
---------------
Exhibit No. Description
- ----------- ------------
27 Financial Data Schedule.
5
3-MOS
SEP-30-1995
OCT-01-1995
DEC-31-1995
266,000
0
5,501,000
232,000
0
7,334,000
2,899,000
2,074,000
14,556,000
9,937,000
0
15,000
0
0
0
14,556,000
23,090,000
23,090,000
20,916,000
22,674,000
24,000
0
82,000
392,000
0
0
0
0
0
392,000
.03
.03
