<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
19,108,427 shares of Common Stock, par value $.001 per share, were outstanding
as of May 12, 1997.
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<PAGE> 2
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
FORM 10-Q
March 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
March 31, 1997 (Unaudited) and
September 30, 1996 3
Consolidated Statements of
Income for the three months ended
March 31, 1997 and 1996 (Unaudited) 5
Consolidated Statements of
Income for the six months ended
March 31, 1997 and 1996 (Unaudited) 6
Consolidated Statements of Cash Flows for the
six months ended March 31, 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
</TABLE>
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<PAGE> 3
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 648,000 $ --
Restricted Cash 738,000 1,155,000
Accounts receivable, net of allowance 6,984,000 6,338,000
Notes due from officers -- 136,000
Other current assets 443,000 189,000
----------- -----------
Total current assets 8,813,000 7,818,000
EQUIPMENT AND IMPROVEMENTS
Equipment 2,958,000 2,883,000
Leasehold improvements 182,000 180,000
----------- -----------
3,140,000 3,063,000
Accumulated depreciation and amortization 2,349,000 2,226,000
----------- -----------
791,000 837,000
DEFERRED TAX ASSET 760,000 760,000
GOODWILL, net of amortization 4,468,000 4,780,000
OTHER ASSETS 421,000 605,000
----------- -----------
TOTAL ASSETS $15,253,000 $14,800,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 3 of 18
<PAGE> 4
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 2,957,000 $ 2,907,000
Current portion of long-term debt 93,000 88,000
Accounts payable 2,121,000 1,620,000
Accrued expenses and other current liabilities 5,380,000 2,917,000
------------ ------------
Total current liabilities 10,551,000 7,532,000
LONG-TERM DEBT 56,000 100,000
OTHER LIABILITIES 300,000 --
------------ ------------
Total Liabilities 10,907,000 7,632,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 19,096,707 and 18,786,609 at
March 31, 1997 and September 30, 1996, respectively 19,000 19,000
Additional paid-in capital 13,076,000 12,857,000
Accumulated deficit (8,749,000) (5,708,000)
------------ ------------
Total shareholders' equity 4,346,000 7,168,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 15,253,000 $ 14,800,000
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 4 of 18
<PAGE> 5
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
MARCH 31,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING REVENUES $ 30,225,000 $ 24,017,000
DIRECT OPERATING EXPENSES 28,633,000 21,864,000
------------ ------------
Gross profit 1,592,000 2,153,000
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,307,000 1,669,000
DEPRECIATION AND AMORTIZATION 438,000 117,000
------------ ------------
Income (loss) from operations (3,153,000) 367,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 16,000 7,000
Interest expense (105,000) (55,000)
------------ ------------
(89,000) (48,000)
------------ ------------
NET INCOME (LOSS) $ (3,242,000) $ 319,000
============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.17) $ 0.02
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,085,036 15,561,454
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 5 of 18
<PAGE> 6
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
MARCH 31,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING REVENUES $ 61,110,000 $ 47,107,000
DIRECT OPERATING EXPENSES 57,003,000 42,780,000
------------ ------------
Gross profit 4,107,000 4,327,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,368,000 3,288,000
DEPRECIATION AND AMORTIZATION 617,000 256,000
------------ ------------
Income (loss) from operations (2,878,000) 783,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 33,000 65,000
Interest expense (196,000) (137,000)
------------ ------------
(163,000) (72,000)
------------ ------------
NET INCOME (LOSS) $ (3,041,000) $ 711,000
============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.16) $ 0.05
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,021,425 14,921,114
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 6 of 18
<PAGE> 7
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(3,041,000) $ 711,000
----------- -----------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 617,000 256,000
Provision for doubtful accounts 1,052,000 86,000
Amortization of rent deferral -- (42,000)
Other non cash items 1,147,000
Changes in operating assets and liabilities:
Accounts receivable (1,698,000) (712,000)
Other current assets (254,000) (46,000)
Notes due from officers 136,000 --
Accounts payable, accrued expenses and
other current liabilities 2,142,000 (959,000)
----------- -----------
Net cash used in operating activities (101,000) (706,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (105,000) (57,000)
Net cash used in investing activities (105,000) (57,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) proceeds from borrowings on revolving
line of credit - net 50,000 (93,000)
Repayments of long-term debt (44,000) (372,000)
Repayments of subordinated bridge loan -- (1,888,000)
Proceeds from reduction of required Letters of Credit 417,000 --
Proceeds from issuance of common stock -- 4,498,000
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 229,000 402,000
----------- -----------
Net cash provided by financing activities 652,000 2,547,000
----------- -----------
Net increase in cash and cash equivalents 648,000 1,784,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- 20,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 648,000 $ 1,804,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 183,135 $ 137,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated financial statements.
Page 7 of 18
<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 six months
ended March 31, 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.
(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 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 March 31, 1997 and September 30, 1996, this
accrual amounted to $1,200,000 and $630,000, respectively.
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<PAGE> 10
During the six months ended March 31, 1997 and 1996, the Company
recognized approximately $517,000 and $541,000, 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 $1,193,000
as of March 31, 1997. 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. 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.
(4) SHAREHOLDERS' EQUITY
During the second quarter of fiscal 1997, $15,000 was raised from the
exercise of stock options and warrants.
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<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 operating revenues for the three months ended March 31,
1997 and 1996 were $30,225,000 and $24,017,000, respectively, which represents
an increase of $6,208,000 or 25.9%. For the six months ended March 31, 1997 and
1996, the Company's operating revenue were $61,110,000 and $47,107,000,
respectively, which represents an increase of $14,003,000 or 29.7%. This
increase is due to the efforts of the internal sale force to continually bring
in new business which accounted for all of the increase. PEO services accounted
for 85% of the growth while the balance is attributed to the Company's staffing
business.
Direct Operating Expenses were $28,633,000 for the three months ended
March 31, 1997 and $21,864,000 for the comparable period last year, representing
an increase of $6,769,000 or 31%. Profits from the Company's workers'
compensation program for the first four months of Fiscal 1996 were recorded as a
reduction in Selling, General and Administrative ("SG&A") expenses while
subsequent to that they were recorded as a reduction in Direct Costs. In the
second quarter of Fiscal 1996, $113,000 of workers' compensation profit was
recorded as a credit to SG&A. In addition, the second quarter of fiscal 1997
included one-time
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<PAGE> 12
charges amounting to $678,000 primarily related to a revised methodology in
evaluating workers' compensation reserves. The quarter ending March 31, 1997
also included an expense for underbilled/excess charges for medical expenses in
the amount of $206,000, $142,000 of which pertained to Fiscal 1996. After
adjusting for these changes, direct costs increased $5,998,000 or 27.6%. As a
percentage of revenue, and on a restated basis, direct costs for the three
months ending March 31, 1997, and 1996 were 91.8% and 90.6%, respectively. These
increases represent the corresponding higher costs associated with the increase
in revenue and a greater mix of PEO business. For the six months ending March
31, 1997 and 1996, direct costs increased $14,223,000 or 33.2%, from $42,780,000
to $57,003,000, respectively. The workers' compensation profit recorded as a
reduction of SG&A in the first six months of fiscal 1996 was $493,000 while the
first six months of fiscal 1997 Direct Costs included $284,000 in
underbilled/excess charges for medical expenses. After adjusting for the
treatment of the workers' compensation profit, one-time charges, and medical
expenses, direct costs increased $13,754,000 or 32.5%. As a percentage of
revenue, and on a restated basis, direct costs for the six months ending March
31, 1997 and 1996 were 91.7% and 90%, respectively. These increases were
attributed to the increase in the PEO business.
Gross profits were $1,592,000 and $2,153,000 for the quarters ended
March 31, 1997 and 1996, respectively, or a decrease of $561,000. After
adjusting for the one-time charges and medical expenses in the quarter ended
March 31, 1997, and for the workers' compensation profit in the quarter ended
March 31, 1996, gross profits for both periods were $2,476,000 and $2,266,000,
respectively. In light of the adjustments made in the fourth quarter of 1996 and
the application of conservative accounting controls taken in the second quarter
of 1997, management believes the gross profit of the second quarter of 1997
represents a larger improvement over the second quarter of 1996 as reported.
Restated gross profits, as a percentage of revenue, were 8.2% and 9.4% for the
quarters ended March 31, 1997 and 1996, respectively. For the six months ended
March 31, 1997 and 1996, gross profits decreased to $4,107,000 from $4,327,000,
respectively. After considering the previously discussed adjustments, gross
profits for the six months ended March 31, 1997 and 1996 were $5,069,000 and
$4,820,000, respectively (See management's statement above). As a percentage of
revenue, restated gross profits for the six months ended March 31, 1997 and 1996
were 8.3% and 10.2% respectively.
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<PAGE> 13
SG&A costs for the quarters ended March 31, 1997 and 1996 were
$4,307,000 and $1,669,000, respectively, for an increase of $2,638,000 or 158%.
Included in the second quarter 1997 SG&A costs were $1,973,000 of adjustments
resulting from a review of the Company's current business and the application of
the Company's conservative accounting controls as follows:
- - $1,002,000 to increase the Company's bad debt reserve. The Company has
intensified its campaign to recover all past due accounts. While the
Company has met with success and has collected over $1,200,000 in past
due accounts to date, and continues to vigorously pursue them, it has
decided to increase its reserve to avoid future exposure in certain
accounts.
- - $300,000 to absorb miscellaneous charges.
- - $124,000 to correct unrecorded 1996 expenses.
- - $102,000 to establish a vacation pay accrual.
- - $81,000 to change method of accounting for supplies.
- - $93,000 to establish a reserve for anticipated severance costs.
- - $271,000 various other miscellaneous items.
The SG&A for the quarter ended March 31, 1996 included $333,000 in credits due
to the reversal of prior period reserves as well as $113,000 in workers'
compensation profit that are now recorded as a reduction in direct costs. After
accounting for these adjustments, SG&A for the quarters ended March 31, 1997 and
1996 were $2,334,000 and $2,115,000 or an increase of 10.4%. For the six months
ended March 31, 1997 and 1996, SG&A increased to $6,368,000 from $3,288,000,
respectively. After reflecting the previously discussed adjustments, adjusting
for an additional $380,000 of workers' compensation profit recorded in the first
quarter of 1996 as a reduction of SG&A, and adjusting for $51,000 of severance
pay previously recorded in the first quarter of Fiscal 1997, SG&A for the six
months ended March 31, 1997 and 1996 were $4,344,000 and $4,114,000,
respectively, or an increase of 5.6%
Depreciation and amortization for the quarters ended March 31, 1997 and
1996 increased to $438,000 from $117,000, respectively, or $321,000. Of this
increase, $261,000 was due to the writing off of all intangible assets of
Digital Insurance Services Inc. while the balance was due to increased levels of
depreciable assets. Although the intangible assets of Digital Insurance Inc.
were still considered to have value, the management of the Company elected to
abandon these assets since it was decided not to remain in the insurance
business. For the
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<PAGE> 14
six month period ended March 31, 1997 and 1996, depreciation and amortization
increased to $617,000 from $256,000, respectively, or $361,000, for similar
reasons.
Net loss for the quarter ended March 31, 1997 was ($3,242,000) versus
net income of $319,000 for the similar period in 1996. This decrease of
$3,561,000 is attributed to the following:
- - $3,100,000 of adjustments booked in the second quarter of fiscal 1997
of which $2,208,000 were non-cash charges as discussed above.
- - $333,000 of reserve reversals recorded in the second quarter of 1996.
- - $128,000 of negative miscellaneous items.
For the six months ended March 31, 1997 the Company reported a loss of
$3,041,000 versus a profit of $711,000 in the similar period of 1996. This
decrease in earnings of $3,752,000 is attributed to the same reasons discussed
for the second quarter.
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<PAGE> 15
Liquidity and Capital Resources
The Company's working capital as of March 31, 1997 decreased to
($1,738,000) 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 control.
In February 1995, the Company entered into a one year revolving line
facility (the "Line") with a bank which was subsequently extended on five
occasions and modified. Each loan extension has been for limited periods of
time. Under the terms of the current agreement, 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 two and one-half
percent (11% at March 31, 1997).
The Line is collateralized by substantially all of the Company's
accounts receivable. However, the line has matured as of April 30, 1997. The
Company has negotiated a six month extension of the line with the bank at the
same terms, with the exception of interest which will be based upon the bank's
floating base rate plus three percent (11.5% at May 1, 1997).
In addressing the capital needs of the Company, management is presently
in negotiation with a potential lender to provide a line of credit to replace
the line. 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 receivables. 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 its letter of credit
requirement 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.
PART II
OTHER INFORMATION
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<PAGE> 16
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 $229,000 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. The Company seeks to recover 525,000 shares which were not
returned and damages against all of the defendants. The Company is
currently engaged in discovery proceedings in the action.
At March 31, 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.
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<PAGE> 17
Item 5. Other Events
The Company had previously addressed a Letter of Intent to
acquire a PEO business located in Texas. The Company has terminated such
discussions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
none filed during the quarter ended March 31, 1997.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to Report on Form
10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
DIGITAL SOLUTIONS, INC.
(Registrant)
/s/ Louis J. Monari
--------------------------------------
Louis J. Monari
Vice President
/s/ Donald T. Kelly
--------------------------------------
Donald T. Kelly
Chief Financial Officer
Date: July 1, 1997
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