<PAGE> 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, 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 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
--- ---
19,141,760 shares of Common Stock, par value $.001 per share, were outstanding
as of August 12, 1997.
1 of 16
<PAGE> 2
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 1997
Table of Contents
Page No.
--------
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
June 30, 1997 (Unaudited) and
September 30, 1996 3
Consolidated Statements of
Income for the three months ended
June 30, 1997 and 1996 (Unaudited) 5
Consolidated Statements of
Income for the nine months ended
June 30, 1997 and 1996 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1997 and 1996
(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 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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<PAGE> 3
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 879,000 $ --
Restricted Cash 738,000 1,155,000
Accounts receivable, net of allowance 5,656,000 6,338,000
Notes due from officers -- 136,000
Other current assets 482,000 189,000
----------- -----------
Total current assets 7,755,000 7,818,000
EQUIPMENT AND IMPROVEMENTS
Equipment 2,999,000 2,883,000
Leasehold improvements 199,000 180,000
----------- -----------
3,198,000 3,063,000
Accumulated depreciation and amortization 2,419,000 2,226,000
----------- -----------
779,000 837,000
DEFERRED TAX ASSET 760,000 760,000
GOODWILL, net of amortization 4,406,000 4,780,000
OTHER ASSETS 374,000 605,000
----------- -----------
TOTAL ASSETS $14,074,000 $14,800,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 3 of 16
<PAGE> 4
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
------------ -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 2,827,000 $ 2,907,000
Current portion of long-term debt 36,000 88,000
Accounts payable 1,897,000 1,620,000
Accrued expenses and other current liabilities 4,729,000 2,917,000
------------ ------------
Total current liabilities 9,489,000 7,532,000
LONG-TERM DEBT 56,000 100,000
OTHER LIABILITIES 262,000 --
------------ ------------
Total Liabilities 9,807,000 7,632,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 19,108,427 and 18,786,609 at
June 30, 1997 and September 30, 1996, respectively 19,000 19,000
Additional paid-in capital 13,054,000 12,857,000
Accumulated deficit (8,806,000) (5,708,000)
------------ ------------
Total shareholders' equity 4,267,000 7,168,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 14,074,000 $ 14,800,000
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 4 of 16
<PAGE> 5
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES $ 31,185,000 $ 26,791,000
DIRECT EXPENSES 28,908,000 24,474,000
------------ ------------
Gross profit 2,277,000 2,317,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,034,000 1,907,000
DEPRECIATION AND AMORTIZATION 213,000 208,000
------------ ------------
Income (loss) from operations 30,000 202,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 1,000 75,000
Interest expense (88,000) (116,000)
------------ ------------
(87,000) (41,000)
------------ ------------
Income/(loss) before tax (57,000) 161,000
INCOME TAX (EXPENSE) BENEFIT -- (1,000)
------------ ------------
NET INCOME (LOSS) $ (57,000) $ 160,000
============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.00) $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,103,854 19,167,152
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 5 of 16
<PAGE> 6
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES $ 92,295,000 $ 73,898,000
DIRECT EXPENSES 85,911,000 67,254,000
------------ ------------
Gross profit 6,384,000 6,644,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,402,000 5,195,000
DEPRECIATION AND AMORTIZATION 830,000 464,000
------------ ------------
Income (loss) from operations (2,848,000) 985,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 34,000 150,000
Interest expense (284,000) (253,000)
Other expense -- (10,000)
------------ ------------
(250,000) (113,000)
------------ ------------
Income/(loss) before tax (3,098,000) 872,000
INCOME TAX (EXPENSE) BENEFIT -- (1,000)
------------ ------------
NET INCOME (LOSS) $ (3,098,000) $ 871,000
============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.16) $ 0.05
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,048,901 16,336,460
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 6 of 16
<PAGE> 7
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS MONTHS
JUNE 30, JUNE 30,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $(3,098,000) 871,000
----------- -----------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 830,000 464,000
Provision for doubtful accounts 1,085,000 98,000
Amortization of rent deferral -- (42,000)
Other non cash items 1,109,000 --
Changes in operating assets and liabilities:
Accounts receivable 403,000 (1,289,000)
Other current assets (293,000) 143,000
Notes due from officers 136,000 (134,000)
Accounts payable, accrued expenses and
other current liabilities 369,000 (1,177,000)
----------- -----------
Net cash (used in) provided by operating activities 541,000 (1,066,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (163,000) (99,000)
----------- -----------
Net cash used in investing activities (163,000) (99,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) proceeds from borrowings on revolving
line of credit - net (80,000) (625,000)
Repayments of long-term debt (44,000) (907,000)
Repayments of subordinated bridge loan -- (1,887,000)
Proceeds from reduction of required Letters of Credit 417,000 --
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 208,000 6,791,000
----------- -----------
Net cash (used in) provided by financing activities 501,000 3,372,000
----------- -----------
Net increase in cash and cash equivalents 879,000 2,207,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- 20,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 879,000 $ 2,227,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 265,000 $ 253,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 7 of 16
<PAGE> 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 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., DSI Staff ConnXions of Mississippi, DSI Staff ConnXions -
Southwest, MLB Medical Staffing, 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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<PAGE> 9
Revenue Policy
The Company recognizes revenue in connection with its PEO business and
its temporary placement service program when the services have been
provided. The corresponding cost of providing those services are
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 20 years for substantially all
of the Company's acquisitions.
Earnings/(Loss) Per Common Share
Earnings/(Loss) per common share are based upon the weighted average
number of shares outstanding. 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 three and nine months
ended June 30, 1997 there would have been no effect on earnings per
share.
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.
9 of 16
<PAGE> 10
(3) COMMITMENTS AND CONTINGENCIES
In connection with the Company's former workers' compensation insurance
policy which expired on April 1, 1997, the insurance company develops
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 June 30, 1997 and September
30, 1996, this accrual amounted to $870,000 and $630,000, respectively.
With the implementation of the Company's new workers' compensation
insurance program the Company fully funds the maximum loss as required
on a monthly basis. Accordingly, no workers' compensation reserve is
maintained. During the nine months ended June 30, 1997 and 1996, the
Company recognized approximately $694,000 and $1,018,000, respectively,
as its share of premiums collected 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 10Q and the new insurance program.
The Company has outstanding letters of credit amounting to $1,193,000
as of June 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 fully funds the maximum loss as required on
a monthly basis.
(4) SHAREHOLDERS' EQUITY
During the third quarter of fiscal 1997, $5,000 of proceeds was
received from the exercise of stock options and warrants.
10 of 16
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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"). Digital Solutions, Inc. (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 Memorandum 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.
The Company's revenues for the three months ended June 30, 1997 and
1996 were $31,185,000 and $26,791,000, respectively, which represents an
increase of $4,394,000 or 16.4%. For the nine months ended June 30, 1997 and
1996, the Company's revenue were $92,295,000 and $73,898,000, respectively,
which represents an increase of $18,397,000 or 24.9%. 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 expenses were $28,908,000 for the three months ended June 30,
1997 and $24,474,000 for the comparable period last year, representing an
increase of $4,434,000 or 18.1%. Of this increase, $296,000 is due to reporting
less profit on the workers' compensation program in the quarter ended June 30,
1997 due to the revised methodology in evaluating workers' compensation reserves
and the new insurance program. As a percentage of revenue, direct expenses for
the three months ending June 30, 1997 and 1996 were 92.7% and 91.4%,
respectively. These increases represent the corresponding higher costs
associated with the increase in revenue and a greater mix of PEO business plus
lower workers' compensation profit. For the nine months ending June 30, 1997 and
1996, direct expenses increased $18,657,000 or 27.7%, from $67,254,000 to
$85,911,000, respectively. The workers' compensation profit recorded as a
reduction of Selling, General & Administrative ("S G & A") expenses in the first
nine months of
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<PAGE> 12
fiscal 1996 was $493,000, while the first nine months of fiscal 1997 direct
expenses included $308,000 in under-billed/excess charges for 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 expenses
increased $18,164,000 or 27.2%. As a percentage of revenue, and on an adjusted
basis, direct expenses for the nine months ending June 30, 1997 and 1996 were
92.0% and 90.3%, respectively. These increases were attributed to the increase
in the PEO business.
Gross profits were $2,277,000 and $2,317,000 for the quarters ended
June 30, 1997 and 1996, respectively, or a decrease of $40,000. Included in the
decrease is $ 296,000 of less workers' compensation profit reported in 1997 as
previously discussed. Gross profits, as a percentage of revenue, were 7.3% and
8.7% for the quarters ended June 30, 1997 and 1996, respectively. For the nine
months ended June 30, 1997 and 1996, gross profits decreased to $6,384,000 from
$6,644,000, respectively. After considering the previously discussed
adjustments, gross profits for the nine months ended June 30, 1997 and 1996
would have been $7,370,000 and $7,137,000, respectively. Reflected in the nine
months 1997 earnings is $324,000 less workers' compensation profit than 1996. As
a percentage of revenue, adjusted gross profits for the nine months ended June
30, 1997 and 1996 would have been 8.0% and 9.7% respectively.
SG&A costs for the quarters ended June 30, 1997 and 1996 were
$2,034,000 and $1,907,000, respectively, for an increase of $127,000 or 6.7%.
Included in the third quarter 1996 SG&A costs were $359,000 of credits due to
the reversal of prior period reserves no longer deemed necessary and other
balance sheet adjustments. After adjusting for these credits, SG&A for the
quarter ended June 30, 1996 would have been $2,266,000. Therefore, SG&A in the
quarter ended June 30, 1997 actually decreased by $232,000 or 10.0% over the
similar period in 1996, reflecting management's continued efforts to reduce
overhead costs. For the nine months ended June 30, 1997 and 1996, SG&A increased
to $8,402,000 from $5,195,000, respectively. After adjusting for the previously
discussed $359,000 in credits, $333,000 in similar credits reported in the
second fiscal quarter of 1996 and $493,000 of workers' compensation profit
recorded as a reduction in 1996's SG&A costs, the SG&A for the nine months ended
June 30, 1996 would have been $6,380,000. After adjusting for the $1,973,000 of
charges recorded in the second quarter of 1997 ($1,000,000 of which was to
increase the bad debt reserve with the balance for other miscellaneous items)
and for $51,000 of severance pay recorded in the first quarter of 1997, SG&A for
the nine months ended June 30, 1997 would have been $6,378,000, essentially the
same as the adjusted SG&A for the similar period in 1996.
Depreciation and amortization for the quarters ended June 30, 1997 and
1996 increased to $213,000 from $208,000, respectively, or $5,000. For the nine
month period ended June 30, 1997 and 1996, depreciation and amortization
increased to $830,000 from
12 of 16
<PAGE> 13
$464,000, respectively, or $366,000, due to the write off of all the intangible
asset of Digital Insurance Services Inc. recorded in the second fiscal quarter
of 1997.
Net loss for the quarter ended June 30, 1997 was ($57,000) versus net
income of $160,000 for the similar period in 1996. This decrease of $217,000 is
attributed to $296,000 in less workers' compensation profit in 1997 and $359,000
in credits booked in 1996 as previously mentioned.
For the nine months ended June 30, 1997 the Company reported a loss of
$3,098,000 versus a profit of $871,000 in the similar period of 1996. This
decrease in earnings of $3,969,000 is attributed to less workers' compensation
profit of $324,000 booked in 1997, $3,100,000 of adjustments booked in the
second quarter of 1997 and $692,000 of credits recorded in 1996.
Liquidity and Capital Resources
The Company's working capital as of June 30, 1997 decreased to
($1,734,000) versus $286,000 as of September 30, 1996. The decrease reflects a
review of the Company's current business and the application of the Company's
conservative accounting controls.
In February 1995, the Company entered into a one year revolving line
facility (the "Line") with a bank which was subsequently extended on six
occasions and modified. Each loan extension has been for limited periods of
time. Under the terms of the current agreement, which expires on October 31,
1997, the Company may not borrow any additional funds available on the line and
must make weekly principal payments of $10,000. The Company is obligated to make
monthly payments of interest on the outstanding amounts at the bank's floating
base rate plus three (11.25% at June 30, 1997). The Line is collateralized by
all of the Company's accounts receivable as well as all of it's other assets.
To address the capital needs of the Company, management is presently in
discussions with several potential lenders to provide a new line of credit. As
currently being discussed, this facility will be secured by substantially all
assets of the Company and will be available based on a percentage of eligible
receivable. There can be no assurance that the Company will be successful in its
efforts to obtain a new line of credit.
In December 1996, due to favorable trends in losses in its workers'
compensation program, the Company's carrier reduced it's letter of credit
required from $1,610,000 to $1,193,000 which resulted in $417,000 of 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.
13 of 16
<PAGE> 14
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 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 $230,000 for a portion of 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 on or before August 4, 1997. The payment
was not made by LNB as of August 12, 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 $330,000
previously received from LNB bringing the total recovered to
approximately $1,006,000, 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.
14 of 16
<PAGE> 15
At June 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.
Item 5. Other Events
Effective May 28, 1997 and August 11, 1997, Mr. Sands and Mr. Koeppe,
respectively, resigned from the Board of Directors. The vacancies
resulting from such resignations have not been filled by the Board. The
resignation of Mr. Sands and Mr Koeppe did not result from any
disagreements with the Company on any matter relating to the Company's
operations, policies or practices.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
none filed during the quarter ended June 30, 1997.
15 of 16
<PAGE> 16
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/ Donald T. Kelly
-----------------------
Donald T. Kelly
Chief Financial Officer
Date: August 12, 1997
16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 879,000
<SECURITIES> 0
<RECEIVABLES> 6,893,000
<ALLOWANCES> (1,237,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,755,000
<PP&E> 3,198,000
<DEPRECIATION> (2,419,000)
<TOTAL-ASSETS> 14,074,000
<CURRENT-LIABILITIES> 9,489,000
<BONDS> 0
0
0
<COMMON> (19,000)
<OTHER-SE> (4,248,000)
<TOTAL-LIABILITY-AND-EQUITY> 14,074,000
<SALES> 0
<TOTAL-REVENUES> 92,295,000
<CGS> 0
<TOTAL-COSTS> 85,911,000
<OTHER-EXPENSES> 34,000
<LOSS-PROVISION> (1,085,000)
<INTEREST-EXPENSE> (284,000)
<INCOME-PRETAX> (3,098,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,098,000)
<DISCONTINUED> 0
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