<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 ON 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 No.)
4041 HADLEY ROAD SOUTH PLAINFIELD NEW JERSEY 07080
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (908) 561-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE
[Cover Page 1 of 2 Pages]
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
----------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
-----------------------
On January 13, 1997, the aggregate market value of the voting stock of
Digital Solutions, Inc. (consisting of Common Stock, $.001 par value per share)
held by non-affiliates of the Registrant was approximately $58,852,000 based
upon the average bid and asked price for such Common Stock on said date as
reported by Nasdaq. On such date, there were issued and outstanding 19,074,669
shares of Common Stock of the Registrant.
-----------------------
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1997 Annual Meeting of Shareholders
[Cover Page 2 of 2 Pages]
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Digital Solutions, Inc. ("DSI" or "the Company"), was founded in 1969
as a payroll service company and has evolved into a leading provider of human
resource management services to a wide variety of industries in 40 states.
DSI currently offers three general categories of services: (1)
professional employer organization ("PEO") services, (2) employer administrative
services, such as payroll processing, personnel and administration, benefits
administration and tax filing; and, (3) contract staffing, or the placement of
temporary and permanent employees. DSI currently furnishes PEO, payroll and
contract staffing services to over 1,300 client organizations with approximately
5,100 worksite PEO and staffing employees, and believes that it currently ranks,
in terms of revenues and worksite employee base, as one of the largest
professional employer organizations in the United States. In addition, DSI
places temporary help in hospitals and clinics throughout the United States
through its Houston, Texas and Clearwater, Florida offices. The Company has
three regional offices in South Plainfield, New Jersey; Houston, Texas; and
Clearwater, Florida and six sales service centers in New York, New York;
Ridgedale, Mississippi; El Paso and Houston, Texas; Clearwater, Florida; and
South Plainfield, New Jersey.
Essentially, the Company provides services that function as the
personnel department for small to medium sized companies. The Company believes
that by offering services which relieve small and medium size businesses of the
ever increasing burden of employee related record keeping, payroll processing,
benefits administration, employment of temporary and permanent specialized
employees and other human resource functions, the Company will position itself
to take advantage of a major growth opportunity during this decade and the next.
Recognizing the desire by many small businesses to be relieved not only
of the human resource administrative functions, but also of the responsibility
to manage employees and oversee operational tasks ancillary to their core
business, the Company has formulated a strategy of emphasizing PEO and
"outsourcing" services. In PEO, a service provider becomes an employer of the
client company's employees and provides these employees to the client to perform
their intended functions at the worksite. In outsourcing, the service provider
is not only responsible for human resource administration but also assumes
ultimate responsibility for management of the employees and their job functions.
For example, a provider of outsourcing services could be engaged by a hospital
or clinic to manage the maintenance and operation of the facility. The medical
staff would still be responsible for the medical functions but the physical
plant would be managed by the provider.
DSI is focusing its future growth on the PEO and outsourcing industry.
The Company's expansion program will focus on internal growth through the cross
marketing of its PEO services to its entire client base and the acquisition of
compatible businesses strategically situated in new areas
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or with a client base serviceable from existing facilities.
DSI is now committed to focusing on the PEO and outsourcing industry
for its future growth and to convert Staff-Rx, the Company's medical contract
staffing subsidiary, into more than a staffing business by focusing on PEO,
outsourcing and facilities management. While DSI will continue to sell
stand-alone employer services, such as payroll and tax filing, it will emphasize
the PEO component of its service offerings with a goal of becoming the leading
provider of PEO services in the United States. A major component of the
Company's growth strategy is the acquisition of well situated independent PEO
companies whose business can be integrated into the Companies operations.
However, there can be no assurance any such acquisition will be consummated by
the Company.
Digital Solutions, Inc. was organized under the laws of the State of
New Jersey on November 25, 1969 and maintains executive offices at 4041 Hadley
Road, South Plainfield, New Jersey 07080 where its telephone number is (908)
561-1200.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
BANK CREDIT LINE
In February, 1995, the Company renewed its one year revolving credit
line agreement with Summit Bank ("Summit"). The renewed line provides credit to
the Company at the lesser of $3,500,000 or 70% of accounts receivable balances
under 60 days. Interest on the loan is two and one-half percent over the bank's
floating base rate payable monthly. The Company utilizes the proceeds to fund
general working capital. The loan is collateralized by all of the Company's
receivables and contains certain covenants which require the Company to maintain
certain ratios on interest coverage, current ratio, total tangible capital funds
and total non-subordinated liabilities to tangible net worth plus subordinated
debt. The loan was not renewed in January 1996 and the Company has been
negotiating with prospective lenders for a new line of credit. Summit has
extended the loan periodically during the negotiations with new lenders and the
last extension expired December 31, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RECENT FINANCINGS
PRIVATE PLACEMENT
The Company offered and sold, in a private placement to "accredited
investors", 2,293,929 Shares, at prices ranging from $1.20 to 4.00 per Share,
for aggregate gross proceeds of approximately $5,100,000 during the period
commencing November 1995 to June 15, 1996 (the "November 1995 Offering"). The
Company paid selling commissions of 8% of the purchase price of the Shares sold
in the November 1995 Offering and issued Selling Agent Warrants equal to 10% of
the Shares sold by all selling agents authorized to accept such commissions. The
Company issued
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252,013 Selling Agent Warrants in the November 1995 Offering, of which 100,000
Selling Agent Warrants were issued to an investor purchasing 600,000 Shares in
the November 1995 Offering. In addition, the Company paid the selling agents a
nonaccountable expense allowance of 1% of the aggregate offering price of the
Shares sold by such selling agent.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area management intends to
promote, is its PEO services. When a client utilizes the Company's PEO services,
the client administratively transfers all or some of its employees to DSI which
then provides them to the client. DSI thereby becomes the recognized legal
co-employer and is responsible for all human resource functions, including
payroll, benefits administration, tax reporting and personnel record keeping.
The client still manages the employees and determines salary and duties in the
same fashion as any employer. However, the client is relieved of reporting and
tax filing requirements and other administrative tasks. Moreover, because of
economies of scale, DSI is able to negotiate favorable terms on workers'
compensation insurance, health benefits, retirement programs, and other valuable
services. The client company benefits because it can now offer its employees the
same or similar benefits as its larger competitors, and successfully compete in
recruiting highly qualified personnel, as well as build the morale and loyalty
of its staff.
The benefits DSI can offer include:
COMPREHENSIVE MAJOR MEDICAL PLANS -- DSI believes that medical
insurance costs have forced small employers to reduce coverage provided to its
employees and to increase employee contributions. DSI is able to leverage its
large employee base and allow their clients to offer a variety of health
coverage plans from traditional indemnity plans to Health Maintenance
Organizations (HMO) or Preferred Provider Organizations (PPO).
DENTAL AND VISION COVERAGE -- Such coverage is generally beyond the
reach of most small groups, but it is a cost effective option which can be
provided by DSI.
LIFE INSURANCE -- Affordable basic coverage is available, plus optional
supplemental life.
SECTION 125 PREMIUM CONVERSION PLAN -- Employees can pay for benefits
with pre-tax earnings, reduce their taxable income and FICA payments, and
increase their take-home pay.
401(K) RETIREMENT PLANS -- DSI believes that most small groups are not
provided with any significant retirement benefits due to the administrative and
regulatory requirements associated with the establishment and maintenance of
retirement plans. DSI enables small business owners to offer their employees
retirement programs comparable to those of major corporations. Such plans
can be used to increase morale, productivity and promote employee loyalty.
CREDIT UNION -- An opportunity for employees to borrow money at lower
interest than
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offered at most banks.
PAYROLL SERVICES -- Although ancillary to the PEO services, clients no
longer incur the expense of payroll processing either through in-house staff or
outside service. DSI's PEO services include all payroll and payroll tax
processing.
UNEMPLOYMENT COMPENSATION COST CONTROL -- DSI provides an unemployment
compensation cost control program to aggressively manage unemployment claims.
HUMAN RESOURCES MANAGEMENT SERVICES -- DSI can provide clients with
expertise in areas such as personnel policies and procedures, hiring and firing,
training, compensation and performance evaluation.
WORKERS COMPENSATION PROGRAM -- DSI has a national workers compensation
policy which can provide DSI with a significant advantage in marketing its
services, particularly in jurisdictions where workers compensation policies are
difficult to obtain at reasonable costs. DSI also provides its clients with
independent safety analysis and risk management services to reduce worker's
injuries and claims.
By relieving client companies of personnel administrative tasks, the
client is able to focus on its core business. The client is also able to offer a
broader benefits package for its employees, a competitive rate in workers'
compensation insurance, and savings in time and paperwork previously required in
connection with personnel administration.
PAYROLL SERVICES
DSI was established as a payroll service firm in 1969, and continues to
provide basic payroll services to its clients. Historically, DSI provided these
services primarily to the construction industry and currently 60% of the
Company's approximately 1,000 payroll service clients are in the construction
industry. DSI offers most, if not all, of what other payroll services provide,
including the preparation of checks, government reports, W-2's (including
magnetic tape filings), remote processing (via modem) directly to the clients
offices, and service.
In addition, DSI offers a wide array of tax reporting services
including accrual of tax summaries, timely deposit of taxes, impounding of tax
refunds, filing of returns, distribution of quarterly and year-end statements
and responding to agency inquiries.
CONTRACT STAFFING SERVICES
DSI's staffing subsidiaries have, in the aggregate, more than 26 years
of experience in placing permanent and temporary employees with specialized
skills and talents with regional, national and international employers. Contract
Staffing enables clients to attain management and productivity goals by matching
highly trained professionals and technical personnel to specific project
requirements. DSI works in two specific markets where it places people on a
temporary long term assignment, or on a
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permanent basis: (1) technical employees such as engineers, information systems
specialists and project managers primarily with Fortune 100 companies for
specific projects, and, (2) radiologists, therapists, nurses, doctors with
hospitals, clinics and therapy centers throughout approximately 40 states.
Clients whose staff requirements vary depending on the level of current projects
or business are able to secure the services of highly qualified individuals on
an interim basis.
DSI's staffing services provide clients with the ability to
"rightsize"; that is, expand or reduce its workforce in response to changing
business conditions. DSI provides numerous benefits to the client, such as
saving the costs of salary and benefits of a permanent employee whose services
are not needed throughout the year. The client also avoids the costs,
uncertainty and delays associated with searches for qualified interim employees.
The Company also provides insurance bonding where necessary and assumes all
responsibility for payroll tax filing and reporting functions, thereby saving
the client administrative responsibility for all payroll, workers' compensation,
unemployment and medical benefits.
DSI also increases the pool of qualified applicants for the client
since contract staffing employees have access to a wide array of benefits such
as health and life insurance, Section 125 premium conversion plans, and 401(k)
retirement plans. These benefits provide interim employees with the motivation
of full-time workers without additional benefit costs to the client. A client is
also able to temporarily rehire a retired employee for short-term or specialized
projects without jeopardizing their pension plan.
ACQUISITION STRATEGY
A key component of the Company's growth strategy has been, and will
continue to be, the acquisition of compatible businesses to expand its
operations and customer base. Currently, the human resource service industry
includes numerous small companies seeking to develop services, operations and
customer base similar to those developed by the Company. The Company has
actively acquired companies in the human resource industry during the last four
years. However, with the business and strategy of the Company further developed,
acquisitions in the future will be concentrated in the PEO and outsourcing
business. The Company believes that with a limited number of key acquisitions of
regional PEO companies who possess a strong customer base and regional
reputation, the Company will be able to grow into an industry leader, in not
only revenue size, but in scope of services offered.
A prospective acquisition candidate may be either a public or private
company, but will be required to meet certain financial criteria and growth
potential established by the Company. The Company evaluates acquisition
candidates by analyzing the company's management, operations and customer base,
which must complement or expand the Company's operations; financial stability,
including the company's profitability and cash flow. The Company's long term
plan is to expand sales and income potential by achieving economies of scale as
it expands and regionalizes its revenue base. However, there can be no assurance
that the Company will be able to successfully identify, acquire and integrate
into the Company operations, compatible PEO companies.
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CUSTOMERS
The Company's customer base consists of over 1,300 client companies,
representing approximately 29,000 employees (including payroll services) as of
September 30, 1996. The Company's client base is broadly distributed throughout
a wide variety of industries; however, approximately 60% of the customers in the
payroll processing area are in the construction industry and substantially all
of Staff-RX customers are in the healthcare industry.
The Company intends to maintain diversity within its client base to
lower its exposure to downturns or volatility in any particular industry and
help insulate the Company to some extent from general economic cycles. All
prospective customers are also evaluated individually on the basis of workers'
compensation risk, group medical history, unemployment history and operating
stability.
SALES AND MARKETING
The Company has established sales teams in all of its locations.
Sales personnel offer a full array of DSI services, professional
employment, payroll and contract staffing, which supports the cross-marketing of
DSI's products and enables the sales representative to employ a professional
consultative approach to satisfying clients needs rather than forcing a single
solution.
All sales personnel have quotas and are held accountable on a weekly
basis with a sales meeting held in each location where the activity for the week
is discussed.
The Company has also implemented several focused marketing activities
to increase sales opportunities. DSI has been licensed by the various state
Boards of Accountancy to hold continuing professional education seminars for
CPAs. In addition, the Company has become an active participant in many trade
and community associations and chambers of commerce.
Finally, the Company has signed an agreement as the exclusive
professional employment provider for a natonal buying group, the American Gem
Society. The Company will attempt to expand these relationships in the future.
COMPETITION
The PEO industry consists of approximately 2,200 companies, most of
which serve a single market or region. The Company believes that there are
several PEOs with annual revenue exceeding $500 million. The largest PEO is
Staff Leasing of Bradenton, Florida with revenue in excess of $1 billion. While
there are several other large PEOs among the approximately 2,200 companies, many
are located in Florida and other states in the Sunbelt. The Company considers
its primary competition to be these large national and regional PEO providers,
as well as the traditional form of employment of employees.
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The payroll services industry is characterized by intense competition.
The principal competitive factors are price and service. Management believes
that Automatic Data Processing, Inc., and Paychex, Inc. which each purchased
PEOs in Florida, will be major competitors in the future. The Company also
competes with manual payroll systems sold by numerous companies, as well as
other providers of computerized payroll services including banks, and smaller
independent companies. Some companies have in-house computer capability to
generate their own payroll documents and reports. The increasing availability of
personal computers at low cost may result in additional businesses acquiring
such capabilities. In the area of providing temporary technical and medical
personnel, the Company competes with companies such as Volt Information
Services, Butler Arde and Tech Aid, Inc., among others. Many of these
competitors have longer operating histories and greater financial resources than
the Company.
The Company competes with these companies by offering customized
products, personalized service, competitive prices and specialized personnel to
satisfy a client's particular employee requirements.
DSI believes that its broad scope of human resource management services
and its commitment to quality service will differentiate it from its
competition. Many companies compete in the various segments of the human
resource and financial services marketplace. However, the Company believes there
are none which compete in all of them and offer the broad range of services
which the Company offers. DSI believes that its concentration on providing
comprehensive services and moving into facilities management or outsourcing of
human resource management services will set it apart from its competitors. While
many of the PEOs entered the industry as a result of workers' compensation or
health insurance problems, DSI is establishing itself as a professional employer
organization which will assist companies, small and large, with all of their
human resource management challenges.
INDUSTRY REGULATION
INTRODUCTION
The Company's operations are affected by numerous federal and state
laws relating to labor, tax and employment matters. By entering into a
co-employer relationship with employees who are assigned to work at client
company locations (sometimes referred to as "worksite employees"), the Company
assumes certain obligations and responsibilities of an employer under these
federal and state laws. Many of these federal and state laws were enacted prior
to the development of nontraditional employment relationships, such as
professional employer organizations, temporary employment, and outsourcing
arrangements, and do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform. Accordingly, the application of
these laws to the Company's business cannot be assured.
Some governmental agencies that regulate employment and labor laws have
developed rules that specifically address labor and employment issues raised by
the relationship among clients and PEOs. Existing regulations are relatively new
and, therefore, their interpretation and application by administrative agencies
and federal and state courts is limited or non-existent. The development of
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additional regulations and interpretation of existing regulations can be
expected to evolve over time. The Company cannot predict with certainty the
nature or direction of the development of federal, state and local regulations.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships.
FEDERAL EMPLOYMENT TAXES
The Company assumes the sole responsibility and liability for the
payment of federal and state employment taxes with respect to wages and salaries
paid to its employees, including worksite employees. There are essentially three
types of federal employment tax obligations: (i) withholding of income tax
requirements governed by Code Section 3401, et seq.; (ii) obligations under
FICA, governed by Code Section 3401, et seq.; and, (iii) obligations under the
Federal Unemployment Tax Act (FUTA), governed by Code Section 3301, et seq.
Under these Code sections, employers have the obligation to withhold
and remit the employer portion and, where applicable, the employee portion of
these taxes. There is still considerable uncertainty as to the status of leased
employees in relation to these statutes. While the Company believes that it can
assume the client company's withholding obligations, in the event the Company
fails to meet these obligations, the client company may be held jointly and
severally liable for these payments. These interpretive uncertainties may have
an impact on the Company's PEO business.
EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its employees,
including its worksite employees. These plans include the 401(k) Plan (a
profit-sharing plan with a cash or deferred arrangement ("CODA") under Code
Section 401(k), a Section 125 plan, a group health plan, a group life insurance
plan and a group disability insurance plan. Generally, employee benefit plans
are subject to provisions of both the Code and the Employee Retirement Income
Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees. In addition to the employer/employee threshold,
pension and profit-sharing plans, including plans that offer CODAs under Code
Section 401(k) and matching contributions under Code Section 401(m), must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered, in
qualified employee benefit plans.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines "employer" as "any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term "employee" as "any individual employed by an
employer." A definitive judicial interpretation of "employer" in the context of
a PEO
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arrangement has not been established. If the Company were found not to be an
employer for ERISA purposes, its plans would not comply with ERISA,and, the
level of services the Company could offer may be adversely affected. Further, as
a result of such finding, the Company and its plans would not enjoy the
preemption of state laws provided by ERISA and could be subject to varying state
laws and regulations, as well as to claims based upon state common laws.
In addition to ERISA and the Code provisions discussed herein, issues
related to the relationship between the Company and its worksite employees may
also arise under other federal laws, including other federal income tax laws.
STATE REGULATION
As an employer, the Company is subject to all statutes and regulations
governing the employer-employee relationship. The Staff Leasing Services
Licensing Act (the "Act") now regulates PEOs in Texas. The Act, which became
effective on September 1, 1993, established a mandatory licensing scheme for
PEOs and expressly recognizes a licensee as the employer of the assigned
employee for purposes of the Texas Unemployment Compensation Act. The Company
possesses a license to offer PEO services in the state of Texas.
While many states do not explicitly regulate PEOs, approximately 16
states have passed laws that have licensing or registration requirements for
PEOs and other states are considering such regulation. Such laws vary from state
to state, but generally provide for monitoring the fiscal responsibility of
PEOs. Whether or not a state has licensing, registration or certification
requirements, the Company faces a number of other state and local regulations
that could impact its operations. The Company is currently licensed in Florida
and New Mexico as well as Texas.
EMPLOYEES
As of January 10, 1997, the Company employed 133 employees, both
full-time and part-time, including executive officers, a reduction from 149
during the previous fiscal year. The Company also employs approximately 5,100
leased employees and 200 temporary employees on client assignments. The Company
believes its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
OPERATIONS AND FACILITIES
The Company currently has three processing centers in South Plainfield,
New Jersey, Houston, Texas and Clearwater, Florida. The Company also has six
sales service centers which are located in New York City, South Plainfield, New
Jersey, Clearwater, Florida, Houston, and El Paso, Texas and Ridgeland,
Mississippi. A sales service center is an office used primarily for sales
efforts and client services. The Company's short term strategy is to target
acquisitions in the current areas of operation, whereby the Company will acquire
a business or business accounts and absorb these accounts into the current
operations with minimal additional overhead. The Company's strategic plan
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calls for limited amount of acquisitions over the next year, and, again,
targeted acquisitions in the current areas of operation. The Company intends to
continue its national expansion efforts in fiscal years 1997-1998, most likely
through additional acquisitions.
DSI leases its 17,000 square foot corporate headquarters in South
Plainfield, New Jersey, as well as offices in Clearwater, Florida and Houston,
Texas. The Company also leases sales offices in New York City, Ridgeland,
Mississippi, and El Paso, Texas. The facilities provide sufficient capacity to
meet demands for the foreseeable future. However, the Company anticipates
entering into additional leases as a result of planned acquisitions. In fiscal
year 1996, the Company's total lease expenses were $626,688.
Although DSI's offices are equipped with software and computer systems,
the Company is currently evaluating all systems including hardware and will
upgrade accordingly. At the Company's headquarters in South Plainfield, New
Jersey, two high speed Xerox printers produce 200,000 plus checks monthly for
its client base. These machines, which are integrated with the software system,
do all of the printing on the checks, including the client name, the employee,
dates, as well as the "Micro Encoding".
The following is summary information on DSI's facilities:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET DATE TERMS
- -------- ----------- ---- -----
<S> <C> <C> <C>
DSI Staff RX, Inc. (Houston) 5,398 9/30/99 $17,895 per month
2 Northpointe Drive, Suite 110 7,396 2/28/00
Houston, TX 77060
DSI Staff RX, Inc. (Clearwater) 4,000 7/31/97 $ 3,221 per month
1940 Drew Street
Clearwater, FL 34625
Staff ConnXions of Mississippi 850 7/31/97 $ 726 per month
525 Thomastown Lane, Suite C
Ridgeland, MS 39157
Staff ConnXions Southwest (El Paso) 4,540 2/28/97 $ 4,882 per month
9440 Viscount, Suite 101
El Paso, TX 79925
Corporate Office 17,180 8/31/97 $17,895 per month
4041 Hadley Road
South Plainfield, NJ 07080
New York Office 391 6/30/97 $ 2,120 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
In March 1996, the Company commenced an action against LNB Investment
Corporation ("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.
In October 1995, the Company entered into a note and finance agreement
with LNB providing for the loan to the Company of up to $3,000,000. The loan was
for a term of 15 months and was to be secured by shares of the Company's common
stock having a market value of no less than four times the outstanding balance
of the loan. LNB agreed not to sell or otherwise liquidate the shares unless the
Company were to default under the loan agreement and failed to cure such default
after notice. A total of 7,500,000 shares to be pledged as collateral were
registered under a registration statement filed under the Securities Act of
1933, as amended.
The Company issued 1,783,334 shares (the "Shares") in the name of LNB
and delivered the Shares to a depository to secure the first portion of the loan
of $1,000,000.
In January, 1996, the Company determined that the Shares the Company
pledged as collateral had been transferred and sold in violation of the loan and
finance agreement. Through the efforts of the Company, the Company recovered
1,258,334 Shares.
During the last fiscal year, the Company also settled litigation
commenced by a former landlord of the Company.
The Company is engaged in no other litigation, the effect of which is
anticipated to have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5. MARKET OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
A. Principal Market
The Company's Common Stock is traded in the over-the-counter market and
included in the Automated Quotation System of the National Association of
Securities Dealers, Inc. ("NASDAQ") under the symbol "DGSI".
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B. Market Information
The Company's common stock commenced trading in the over-the-counter
market on May 15, 1986. The range of high and low bid prices for such securities
for the periods indicated below, are:
Common Stock
<TABLE>
<CAPTION>
FISCAL YEAR 1995 HIGH LOW
---------------- ---- ---
<S> <C> <C> <C>
1st Quarter 2 3/4 2 3/8
2nd Quarter 3 1/16 2 1/4
3rd Quarter 2 1/2 2 3/16
4th Quarter 2 5/16 1 1/2
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
1st Quarter 5 15/16 1 15/32
2nd Quarter 6 15/16 4 5/16
3rd Quarter 6 1/8 3 9/16
4th Quarter 6 1/4 3 5/8
</TABLE>
The above quotations, reported by NASDAQ, represent prices between
dealers and do not include retail mark-ups, mark-downs or commissions. Such
quotations do not necessarily represent actual transactions.
C. Dividends
The payment by the Company of cash dividends, if any, rests within the
discretion of its Board of Directors and, among other things, will depend upon
the Company's earnings, capital requirements and financial condition, as well as
other relevant factors. The Company has not declared any cash dividends on its
common stock since inception, and has no present intention of paying any cash
dividends on its common stock in the foreseeable future, and it intends to use
earnings, if any, to generate increased growth.
D. Approximated Number of Equity Security Holders
The approximate number of record holders of the Company's common stock
as of January 7, 1997 was 336. Such number of record holders was determined from
the Company's stockholder records, and does not include beneficial owners of the
Company's common stock whose shares are held in the names of various security
holders, dealers and clearing agencies. The Company believes there are in excess
of 500 beneficial holders of the Company's common stock.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating Revenues $100,927,000 $73,821,000 $37,998,000 $14,681,000 $9,504,000
Direct Costs 92,490,000 68,530,000 34,939,000 12,459,000 7,643,000
Gross Profit 8,437,000 5,291,000 3,059,000 2,222,000 1,861,000
Selling, General & Administrative
Expenses 8,801,000 7,547,000 2,695,000 1,962,000 2,248,000
Income (Loss) From Continuing
Operations (364,000) (2,256,000) 364,000 260,000 (387,000)
--------- ----------- ------- ------- ---------
Net Income (Loss) $(597,000) $(3,316,000) $720,000 $301,000 $ (695,000)
========== ============ ======== ======== ==========
Income (Loss) From Continuing
Operations Per Share of Common
Stock ($0.02) ($0.16) $0.03 $0.04 ($0.18)
Net Income (Loss) Per Share ($0.04) ($0.24) $0.05 $0.04 ($0.16)
Dividends Paid Per Preferred Stock
$0.00 $0.00 $3.30 $4.00 $2.00
BALANCE SHEET DATA:
Assets $14,800,000 $13,816,000 $7,727,000 $4,264,000 $2,677,000
Liabilities 7,632,000 10,967,000 2,671,000 1,079,000 2,249,000
Long Term Debt 100,000 175,000 107,000 241,000 461,000
Working Capital (Deficiency) 286,000 (4,771,000) 1,146,000 1,920,000 (716,000)
Shareholders' Equity $7,168,000 $2,849,000 $5,056,000 $3,195,000 $326,000
</TABLE>
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1996 as Compared to Fiscal Year 1995
Operating Revenues for the fiscal year 1996 were $100,927,000 as compared
to fiscal year 1995 of $73,821,000 which represents an increase of 36.7%. This
increase is attributable to the increased sales efforts of the internal sales
force as well as the full year impact of the acquisition of Turnkey Services
which was acquired in May 1995.
Direct Operating Costs as a percentage of revenue for fiscal year 1996 was
91.6% as compared to 92.8% for fiscal 1995 and Gross Profit for the fiscal year
1996 increased to 8.4% as compared to 7.2% for the prior fiscal year. These
changes are attributable to the increased margins in the PEO business due to
reduced costs of the Company's workers' compensation programs and the full year
effect of the acquisition of Turnkey Services. The Company provides management
personnel services to certain clients of Turnkey Services which generate higher
than average administrative fees. The reduction in workers' compensation costs
was achieved through better managed claims experience.
Selling, general and administrative costs ("SG&A") increased $1,254,000.
This growth in expenses includes $195,000 in charges for intangibles associated
with acquisitions that were not consummated during the year, $210,000 in charges
for severance payments for employees terminated in fiscal 1996, and $178,000 in
an increase in the allowance for doubtful accounts attributable to accounts that
have aged beyond acceptable limits but which the Company continues to pursue.
Approximately $500,000 is attributable to the full year impact of Turnkey
Services which was acquired May 1, 1995. Additionally, the Company reversed
$515,000 in previously established reserves for claims which the Company
resolved in its favor. As a percentage of Gross Profit, SG&A expenses are 104.3%
in fiscal 1996 as compared to 126.7% in fiscal 1995 and 88.1% in fiscal 1994.
Management believes that although there is improvement from 1995, it will
continue to attempt to improve this margin in the future.
Net loss before taxes was ($563,000) in fiscal 1996 as compared to a loss
of ($3,453,000) in fiscal 1995. This decrease in net loss is primarily
attributable to the increase in gross profit and the decrease in SG&A as a
percentage of gross profit, explained above.
Fiscal Year 1995 as Compared to Fiscal Year 1994
Operating revenues for the fiscal year 1995 were $73,821,000 as compared to
fiscal year 1994 of $37,998,000. This represents an increase of $35,823,000 or
94%. This increase is attributable to the increased sales efforts of the
internal sales force $15,700,000, as well as the acquisition of Staff RX
$8,400,000, Turnkey Services, Inc. $6,200,000 and the full year effect of the
other PEO companies which were acquired in the second quarter of fiscal year
1994 $5,500,000.
14
<PAGE> 17
Cost of sales for fiscal year 1995 was 92.8% as compared to 92.0% in fiscal
year 1994. This increase is due to the continued growth in the PEO business
which has a higher direct cost than any other segment, as a percentage of
revenues.
Selling, general and administrative costs (SG&A) increased $4,007,000 from
fiscal year 1994 and was primarily due to: (i) increased selling and marketing
expenses including direct mail, the addition of 15 senior account managers
(sales force); (ii) additions at the corporate level needed to help position and
transform the Company into a national firm; (iii) the establishment of a Houston
processing center to support client and sales activities in the Southwest and
Florida; and, (iv) establishment of certain necessary reserves and balances at
year end.
Net loss before tax benefits was $3,453,000 for fiscal year 1995 as
compared to a net gain of $720,000 the prior year. In accordance with Statement
of Financial Accounting Standards 109 (SFAS 109), the Company has recorded an
additional tax asset of $160,000 in the current fiscal year of 1994,
representing the expected future utilization of existing net operating loss
carryforwards against operating income. As of September 30, 1995, the Company
has recorded total deferred assets of $760,000, which it believes, based on the
current level of sales activity and the positive impacts of recent acquisitions,
will more likely than not be realized in accordance with SFAS 109.
With the increase in sales volume in the fiscal year ended September 30,
1995 combined with anticipated growth, management believes that the recognition
of the $760,000 of deferred tax assets is more likely than not, in accordance
with SFAS 109. Management's tax planning strategy is consistent with its goal of
continued maximization of shareholder value through revenue growth by producing
improved employee benefits coverage, arranging sales representation alliances
and acquiring existing bases of business, mostly in the employee leasing area.
Finally, the Company's current processing operations has enough capacity for
this growth with minimal capital expenditures or operating costs.
Fiscal Year 1994 as Compared to Fiscal Year 1993
Operating revenues for the fiscal year 1994 were $37,998,000 compared to
fiscal year 1993 of $14,681,000. This is an increase of $23,317,000 or 159%. The
increase was attributable to the acquisition of Staff Leasing of Mississippi,
Inc., ($8,611,000) and the acquisition of certain other leasing companies and
the associated staff contracting companies ($6,508,000) during fiscal year 1994.
Revenues from DSI's operations, other than newly acquired companies mentioned
previously, were up approximately 50%. Payroll services increased $67,000; DSI
Staff Connxions increased $7,700,000 and DSI Contract Staffing increased
$387,000.
Cost of sales for fiscal year 1994 was 92% of total revenue as compared to
85% in fiscal year 1993. This ratio increased because of the incremental impact
of increased sales of employee leasing, which carries a lower margin than the
Company's other product lines.
Selling, general and administrative (SG&A) costs increased $733,000 from
fiscal 1993 and was primarily due to; (1) additions at the corporate level
needed to coordinate and control the functions
15
<PAGE> 18
of the acquired companies as the Company transforms into a national firm; and
(2) the associated overhead of these acquired companies in the area of selling
and client services especially in the Texas acquisition which created the
Company's processing center in the southwest.
Net income before tax benefits increased $227,000 or 225% over prior fiscal
year 1993.
Liquidity and Capital Resources
Working capital increased in fiscal year 1996 to $286,000 from a deficit in
fiscal year 1995 of $(4,771,000). This increase of $5,057,000 in working capital
is due primarily to a successful private offering of 1,800,000 shares of common
stock that produced $4,700,000 in net proceeds. In addition, the Company raised
$437,500 through the issuance of convertible preferred stock at a dividend rate
of 6% and convertible into common stock at a conversion price equal to a 20%
discount to market at the date of conversion. This capital was used to retire a
short term note of $1,887,500 in March 1996, provide $1,200,000 in additional
cash collateral for the Company's workers' compensation program, and 3) working
capital.
Although the PEO clients generally pay when their payroll is delivered,
certain large clients have extended payment terms that the Company is actively
trying to reduce or eliminate. These clients have increased the Company's need
for capital to support the growth in their businesses. Additionally, as the
Company's contract staffing business grows, additional capital is needed to fund
the receivables.
Current Assets increased $1,622,000 which is primarily due to an increase
in restricted cash of $1,155,000 as well as an increase in accounts receivable
of $1,409,000 offset by a decrease in loans receivable from officers of $562,000
and a decrease in other assets of $360,000.
In addressing the capital needs of the Company, management is presently in
negotiating with a bank to provide an $7,000,000 line of credit to replace the
matured line. This facility will be secured by substantially all assets of the
Company and will be available based on a percentage of eligible receivables.
Management believes that this facility, if obtained, will be sufficient to cover
its cash needs for the foreseeable future.
In December 1996, due to the favorable trends in losses in its Workers'
Compensation program, the Company's carrier reduced its letter of credit
requirement from $1,600,000 to $1,150,000 which resulted in $450,000 in
additional cash available. These funds were contributed to working capital.
Inflation and changing prices have not had a material effect on the
Company's net revenues and results of operations in the last three fiscal years,
as the Company has been able to modify its prices to respond to inflation and
changing prices.
16
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS
See Attached Financial Statements appearing at pages F-1 through F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
Karl W. Dieckmann 68 Chairman of the Board of Directors
George J. Eklund 53 President and Chief Executive Officer and
Director
Kenneth P. Brice 50 Vice President and Chief Financial Officer
Louis J. Monari 46 Vice President and Secretary
Senator John H.Ewing 76 Director
Alfred C. Koeppe 50 Director
William J. Marino 53 Director
Steven B. Sands 37 Director
Raymond J. Skiptunis 53 Director
</TABLE>
Each director is elected for a period of one year at the Company's
annual meeting of shareholders and will serve until his successor is duly
elected by the shareholders.
Karl W. Dieckmann, Director of the Company since April, 1990, has been
Chairman of the Board since November, 1991. From 1980 to 1988, Mr. Dieckmann was
the Executive Vice President of Science Management Corporation and managed the
Engineering, Technology and Management Services Groups. From 1948 to 1980, Mr.
Dieckmann was employed by the Allied Corporation (now Allied Signal Corporation)
in various capacities including President, Semet Solvay Division;
17
<PAGE> 20
Executive Vice President, Industrial Chemicals Division; Vice President
Technical -- Fibers Division; Group General Manager -- Fabricated Products
Division; and General Manager -- Plastics Division, as well as various positions
with the Chemicals Division.
George J. Eklund was President and Chief Operating Officer of the
Company since September 21, 1994, and President and Chief Executive Officer from
March 13, 1996. From 1992 to 1994, Mr. Eklund was President of the Human
Resource Information Services division of Fiserv, Inc., which provides
outsourcing services. From 1977 to 1992, Mr. Eklund was employed by ADP
(Automatic Data Processing) in various positions eventually serving as Corporate
Vice President and Eastern Division President. His eastern division served the
northeast area of the country.
Kenneth P. Brice, has been Chief Financial Officer since July 1, 1995
and was Vice President of Finance since he started at DSI on February 8, 1995.
From 1993 until 1995, he was vice-president of Mergers and Acquisitions for
Interim Services, Inc., a national provider of temporary help services. His
other industry experience includes 15 years with Automatic Data Processing where
he reached the position of Vice President and Group Controller of the Employer
Services division, ADP's largest operating unit.
Louis J. Monari is Vice-President of DSI Staff ConnXions NE, Risk
Management and Corporate Secretary. His experience includes 16 years with
Nabisco Brands in human resources positions based in manufacturing, research and
development and corporate headquarters. This includes 7 years in Nabisco's
international division. Prior to joining DSI, he was with Goodrich and Sherwood,
a major human resources consulting firm headquartered in New York City. From
1988-1993, he served as co-Founder and President of Holgate Associates, Inc., a
human resources consulting firm.
Senator John H. Ewing, has been a Director of the Company since April,
1990. Senator Ewing has been a State Senator for the state of New Jersey from
1978 to the present. From 1968 to 1977, Senator Ewing was a New Jersey State
Assemblyman. From 1940 to 1968, he was employed by Abercrombie and Fitch Co.,
New York City, and eventually rose to the position of Chairman of the Board.
Senator Ewing is also currently Chairman of the New Jersey Senate Education
Committee.
Alfred C. Koeppe, from October, 1995 to the present, is the Senior Vice
President of Corporate Services & External Affairs of Public Service Electric
and Gas Company and a graduate of Rutgers University and Seton Hall Law School.
In 1975, he served as clerk for U.S. District Judge Vincent Biunno and has
served as a trial attorney for the NJ Department of the Public Defender, the
American Electric Power Company in NY, and was a trial attorney with A.T. & T.
in the Department of Justice antitrust case. He was elected President and CEO of
NJ Bell on February 1, 1993. He holds memberships in various associations, among
them the NJ, American and Essex County Bar, the Board of Governors of the
National Conference of Christians and Jews .
William J. Marino, President and Chief Executive Officer of Blue Cross
and Blue Shield of New Jersey, joined the Board of Directors in October, 1995.
He joined Blue Cross and Blue Shield
18
<PAGE> 21
in 1992 and was named to his present post in 1994. From 1968 to 1991, Mr. Marino
held a variety of sales, marketing and management positions with the Prudential
Insurance Company of America. He is Chairman of the Board of Trustees of the
United Way of Essex and West Hudson (NJ) and is Chairman of the Board of
Directors and Executive Committee of the Regional Business Partnership, and a
Trustee of the New Jersey Network Foundation, St. Peter's College and the Newark
Museum.
Steven B. Sands was elected to the Board of Directors on April 25,
1994. Mr. Sands has been engaged in the investment banking business since 1980.
From 1987 to 1990, Mr. Sands was employed at Rodman & Renshaw, New York, NY, an
investment banking firm. Since 1990, Mr. Sands has been co-Chairman and Chief
Executive Officer of Sands Brothers & Co., Ltd., an investment banking firm. Mr.
Sands is a director of Semi-Conductor Packaging Materials Co. (semi-conductor
components manufacturer), Air Methods Corporation (emergency air medical
transport), The National Registry Inc. (fingerprint database technology),
Financing for Science International, Inc. (leasing of healthcare related
equipment), The Village Green Bookstore, Inc. (bookstore owner and operator),
Command Security Corp. (security guards) and Wholesale Cellular USA Inc.
(cellular telephone distributor), each a publicly-held company.
Raymond J. Skiptunis, has been a Director of the Company since October,
1985 and President and Chief Executive Officer from February, 1989 to October,
1989, and Chief Executive Officer from April, 1990 to March, 1996. Since March,
1984, Mr. Skiptunis has been a Partner of Venray Capital Management Partners, a
limited partnership providing financial consulting and managerial support to
companies in which it invests. He was the Chairman and President of Venray
Capital Management Corp., a financial management consulting firm from November,
1982 to March, 1984 and has held similar offices in Venray Capital Corp., both
of which are predecessors to Venray Capital Management Partners.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
Karl W. Dieckmann, John H. Ewing, William J. Marino and Stephen B.
Sands served on the Company's Compensation Committee during the last fiscal
year.
See "Certain Relationships and Related Transactions" for transactions
between the Company and members of the Compensation Committee.
ITEM 11. EXECUTIVE COMPENSATION
The following provides certain summary information concerning
compensation paid or accrued by the Company during the years ended September 30,
1996, 1995 and 1994 to the Company's Chief Executive Officer and each of the
executive officers of the Company who received in excess of $100,000 in
compensation during the last fiscal year.
19
<PAGE> 22
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG TERM COMPENSATION AWARDS
NAME AND
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS/SAR'S
<S> <C> <C> <C> <C>
Raymond J. Skiptunis (2) 1996 $214,061 $0 0
1995 $193,542 $15,000 0
1994 $167,003 $0 300,000
George J. Eklund (3) 1996 $207,924 $100,000 300,000
Chief Executive Officer 1995 $181,866 $50,000 0
Kenneth P. Brice, 1996 $120,000 (1) 0
Chief Financial Officer 1995 $68,077 $20,000 75,000
Louis J. Monari, 1996 $91,539 (1) 30,000
Vice President 1995 $90,538 $15,000 0
1994 $71,948 0 20,000
</TABLE>
- --------------------
(1) 1996 Bonuses are still to be determined.
(2)Mr. Skiptunis was replaced as Chief Executive Officer by Mr. Eklund in March
1996.
(3)Mr. Eklund's employment with the Company commenced on September 19, 1994. He
assumed the position of Chief Executive Officer in March 1996.
The Corporation provides normal and customary life and health insurance
benefits to all of its employees including executive officers. The Corporation
has no retirement or pension plan other than a 401(k), which is voluntary.
Compensation of Directors
Directors who are employees of the Company are not compensated for
services in such capacity except under the Director Plan, as defined below.
Non-Employee Directors receive $400 per meeting, $50 in travel expenses, and
$250 for each committee meeting.
Employment Agreement
Effective March 12, 1996, the Company entered into a new employment
agreement with Mr. Eklund for a three year term. The employment agreement
provides for (i) annual compensation of $210,000 for the first year of the
agreement increasing at the discretion of the Company; (ii) a bonus in
accordance with a plan to be established by the Company; (iii) the award of
stock options to purchase 300,000 shares of the Company's common stock, subject
to vesting requirements; (iv) certain insurance and severance benefits; and (v)
a $700 per month automobile allowance.
20
<PAGE> 23
OPTION/SAR GRANTS IN LAST FISCAL YEAR
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NO. OF PERCENTAGE OF
SECURITIES TOTAL
UNDERLYING OPTIONS/ EXERCISE OF
OPTIONS GRANTED IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
<S> <C> <C> <C> <C>
George J. Eklund 300,000 59% $3.50 3/12/2001
Louis J. Monari 30,000 6% $1.5625 12/20/2000
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning exercise of stock options and SARs during the last
fiscal year and the value of unexercised options and SARs held as of the year
ended September 30, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS/SARS AS OF AT SEPTEMBER 30,
ACQUIRED SEPTEMBER 30, 1996 1996
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Raymond J. Skiptunis 177,783 0 0 0
George J. Eklund 0 0 200,000/300,000 $712,500/$768,750
Kenneth P. Brice 0 0 42,500/22,500 $160,156/$125,790
Louis Monari 0 0 30,000/20,000 $81,250/$120,250
</TABLE>
- ----------------------------
(1) Based upon a closing bid price of the Common Stock at $6.0625 per share
on September 30, 1996.
1990 STOCK OPTION PLANS
In April, 1990, the Board of Directors adopted the 1990 Employees Stock
Option Plan (the "1990 Plan") which was approved by shareholders in August,
1990. The 1990 Plan provides for the
21
<PAGE> 24
grant of options to purchase up to 1,000,000 shares of the Company's common
stock. Under the terms of the 1990 Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISO's").
The 1990 Plan is administered by a Stock Option Committee designated by
the Board of Directors. The Stock Option Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted; whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option. The Committee has full authority to interpret the 1990
Plan and to establish and amend rules and regulations relating thereto.
Under the 1990 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the common stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent (10%) shareholder (as defined in the 1988 Plan), such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to
a participant, which are designated as ISOs and which become exercisable in any
calendar year, shall not exceed $100,000.
The Stock Option Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1990 Plan will expire in April 2000.
In April 1990, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by
shareholders in August, 1991 and amended in March 1996. The Director Plan
provides for issuance of a maximum of 500,000 shares of common stock upon the
exercise of stock options arising under the Director Plan. Options may be
granted under the Director Plan until April, 2000 to: (i) non-executive
directors as defined and, (ii) members of any advisory board established by the
Company who are not full-time employees of the Company or any of its
subsidiaries. The Director Plan provides that each non-executive director is
automatically granted an option to purchase 5,000 shares upon joining the Board
and each September lst, pro rata, based on the time the director has served in
such capacity during the previously year. Similarly, each eligible director of
an advisory board will receive on each September lst an option to purchase 5,000
shares of the Company's common stock each September lst. The Directors' Plan
also provides that directors, upon joining the Board, and for one (1) year
thereafter, will be entitled to purchase restricted stock from the Company at a
price equal to 80% of the closing bid price on the date of purchase up to an
aggregate purchase price of $50,000.
The exercise price for options granted under the Director Plan shall be
100% of the fair
22
<PAGE> 25
market value of the common stock on the date of grant. Until otherwise provided
in the Stock Option Plan, the exercise price of options granted under the
Director Plan must be paid at the time of exercise, either in cash, by delivery
of shares of common stock of the Company or by a combination of each. The term
of each option commences on the date it is granted and unless terminated sooner
as provided in the Director Plan, expires five (5) years from the date of grant.
The Director Plan shall be administered by a committee of the board of directors
composed of not fewer than three persons who are officers of the Company (the
"Committee"). The Committee has no discretion to determine which non-executive
director or advisory board member will receive options or the number of shares
subject to the option, the term of the option or the exercisability of the
option. However, the Committee will make all determinations of the
interpretation of the Director Plan. Options granted under the Director Plan are
not qualified for incentive stock option treatment.
In April 1990, the Board of Directors adopted and in August, 1990, the
Company's shareholders approved the Senior Management Incentive Plan (the
"Management Plan") for use in connection with the issuance of stock, options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
It is contemplated that only those executive management employees (generally the
Chairman of the Board, Chief Executive Officer, Chief Operating Officer,
President and Vice Presidents of the Company or Presidents of the Company's
subsidiaries) who perform services of special importance to the Company will be
eligible to participate under the Management Plan. A total of 5,000,000 shares
of common stock will be reserved for issuance under the Management Plan. Awards
made under the Management Plan will be subject to three-(3) year vesting
periods, although the vesting periods are subject to the discretion of the
Administrator.
Unless otherwise indicated, the Management Plan is to be administered
by the Board of Directors or a committee of the Board, if one is appointed for
this purpose (the Board or such committee, as the case may be, shall be referred
to in the following description as the "Administrator"). The Management Plan
generally provides that, unless the Administrator determines otherwise, each
option or right granted under a plan shall become exercisable in full upon
certain "change of control" events as described in the Management Plan. If any
change is made in the stock subject to the Management Plan, or subject to any
right or option granted under the Management Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Administrator will make appropriate adjustments to such plans and the classes,
number of shares and price per share of stock subject to outstanding rights or
options. The Management Plan permits awards until April, 2000.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan.
The Management Plan provides four types of awards: stock options,
incentive stock rights, stock appreciation rights (including limited stock
appreciation rights) and restricted stock purchase agreements, as described
below.
23
<PAGE> 26
Options granted under the Management Plan may be either incentive stock
options ("ISOs") or options which do not qualify as ISOs ("non-ISOs") similar to
the options granted under the 1990 Plan.
Incentive stock rights consist of incentive stock units equivalent to
one share of common stock in consideration for services performed for the
Company. If the employment or consulting services of the holder with the Company
terminate prior to the end of the incentive period relating to the units
awarded, the rights shall thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, shall be entitled to receive a pro-rata portion of the shares
represented by the units, based upon that portion of the incentive period which
shall have elapsed prior to the death or disability.
Restricted stock purchase agreements provide for the sale by the
Company of shares of common stock at a price to be determined by the Board of
Directors, which shares shall be subject to restrictions on disposition for a
stated period during which the purchaser must continue employment with the
Company in order to retain the shares. Payment can be made in cash, a promissory
note or a combination of both. If termination of employment occurs for any
reason within six months after the date of purchase, or for any reason other
than death or by retirement with the consent of the Company after the six month
period, but prior to the time that the restrictions on disposition lapse, the
Company shall have the option to reacquire the shares at the original purchase
price.
Restricted shares awarded under the Management Plan will be subject to
a period of time designated by the Administrator (the "restricted period")
during which the recipient must continue to render services to the Company
before the restricted shares will become vested. The Administrator may also
impose other restrictions, terms and conditions that must be fulfilled before
the restricted shares may vest.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of January 9,
1997 with respect to each director, each of the named executive officers as
defined in Item 402(a)(3), and directors and executive officers of the Company
as a group, and to the persons known by the Company to be the beneficial owner
of more than five percent of any class of the Company's voting securities.
<TABLE>
<CAPTION>
Number of Shares Percent of Company's
Name of Shareholder Presently Owned(1) Outstanding Stock
<S> <C> <C>
Kenneth P. Brice(2) 63,334 *
c/o Digital Solutions, Inc.
4041 Hadley Road
South Plainfield, NJ 07080
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
Karl W. Dieckmann(3) 249,493 1.3%
c/o Digital Solutions, Inc.
4041 Hadley Road
South Plainfield, NJ 07080
George J. Eklund(4) 243,334 1.3%
c/o Digital Solutions, Inc.
4041 Hadley Road
South Plainfield, NJ 07080
Senator John H. Ewing(5) 76,000 *
76 Claremont Road
Barnardsville, NJ 07924
Alfred C. Koeppe(6) 0 *
c/o PSE&G
80 Park Plaza
T-4B
Newark, NJ 07102
William J. Marino(7) 51,667 *
c/o Blue Cross/Blue Shield
of New Jersey
3 Penn Plaza East
Newark, NJ 07105
Louis J. Monari(8) 61,000 *
c/o Digital Solutions, Inc.
4041 Hadley Road
South Plainfield, NJ 07030
Steven B. Sands(9) 13,731 *
c/o Sands Brothers & Co.
90 Park Avenue
New York, NY 10016
Raymond J. Skiptunis 177,783 1.0%
c/o Digital Solutions, Inc.
4041 Hadley Road
South Plainfield, NJ 07080
All officers and directors as a group 936,342 4.9%
(9) persons (2,3,4,5,6,7,8,9)
</TABLE>
- -------------------
* Less than 1 percent.
25
<PAGE> 28
(1) Ownership consists of sole voting and investment power except as
otherwise noted.
(2) Includes options to purchase 50,000 shares of the Company's common
stock, and excludes unvested options to purchase 25,000 shares of
common stock.
(3) Includes options to purchase 5,000 shares of the Company's common
stock, and warrants to purchase 10,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(4) Includes options to purchase 200,000 shares of the Company's common
stock, and excludes unvested options to purchase 300,000 shares of
common stock.
(5) Includes options to purchase 30,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(6) Does not include unvested options to purchase 6,250 shares.
(7) Includes options to purchase 5,000 shares of the Company's common
stock, and excludes unvested options to purchase 5,000 shares in 1996.
(8) Includes options to purchase 30,000 shares of common stock, and
excludes unvested options to purchase 20,000 shares of common stock.
(9) Includes options to purchase 5,000 shares of common stock, and excludes
unvested options to purchase 5,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment agreements with and compensation
of the Corporation's executive officers and directors, see "Executive
Compensation".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
The financial statements and schedules of the Company are included in
Part II, Item 8 of this report and appear as pages F-1 through F-15 and includes
page S-1.
2. All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
Consolidated Financial Statements or the notes thereto.
26
<PAGE> 29
3. Exhibit List
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and, pursuant to
17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.
EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1 -- Agreement for purchase of Temp-Staff, Inc. (Exhibit 3 to Form 8-K dated May
17, 1990)
2.2 -- Agreement for purchase of X-L Technical Corp. (Exhibit 2a to Form 8-K dated
October 3l, 1990)
2.3 -- Agreement for the purchase of the business and assets of Anne Christine Clark, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3.2 -- Certificate of Designation of Series A Preferred Stock (Exhibit 3.2 to form
10-K for fiscal year ended September 30, 1991)
3.3 -- Certificate of Amendment changing the name of TSI to SCI (Exhibit 3.3 to form 10-
K for fiscal year ended September 30, 1991)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.2 -- Employment Agreement with Donald Kappauf (Exhibit 3 to Form 8-K dated May 17,
1990)
10.4 -- Agreement between Registrant and First Fidelity Bank, N.A. (Exhibit 10.4 to
form 10-K for fiscal year ended September 30, 1991)
10.5 -- Agreement between Registrant and Midlantic Banks, Inc. dated October 11, 1991
(Exhibit 10.5 to form 10-K for fiscal year ended September 30, 1991)
10.6 -- Lease dated 10/15/91 for office space at 4041 Hadley Road,
South Plainfield, New Jersey (Exhibit 10.6 to form 10-K for
fiscal year ended September 30, 1991)
10.7 -- Employment Agreement between Karl Dieckmann and the Company dated
November 1, 1991 (Exhibit 10.7 to form 10-K for fiscal year ended September
30,1991)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
10.10 -- Employment Contract between David L. Clark and the Company dated January 1,
1993
10.11 -- Bridge financing between Katie and Adam Bridge Partners, L.P. and the Company
in June 1993.
10.12 -- Sales representation agreement between Sid A. Robinson, III and the Company
dated April 14, 1993.
10.13 -- Agreement between Staff Leasing of Mississippi, Inc. and the Company for
purchase of business and assets dated November 4, 1993.
10.15 -- Employment agreement between George J. Eklund and the Company dated
September 19, 1994.
10.15.1* - Employment agreement between George J. Eklund and the Company dated March
12, 1996
10.16 -- Agreement between Registrant and United Jersey Bank Central, NA on the revolving
loan facility
11.0 -- Computation of Earnings per Share
21.0 * -- Subsidiaries
23.1 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-85526.
23.2 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-70928.
23.3 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-91700.
23.4 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-09313.
27. * -- Financial Data Schedule.
</TABLE>
28
<PAGE> 31
(b) Reports on Form 8-K No 8-K reports were filed in the last fiscal quarter.
(c) See Item (a)(3) above.
(d) See Schedule II annexed hereto and appearing at page S-1.
29
<PAGE> 32
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report Of Independent Public Accountants F-2
Consolidated Balance Sheets As Of September 30, 1996 And 1995 F-3
Consolidated Statements Of Operations For The Years Ended
September 30, 1996, 1995 And 1994 F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 1996, 1995 And 1994 F-6
Consolidated Statements Of Cash Flows For The Years Ended F-7
September 30, 1996, 1995 And 1994
Notes To Consolidated Financial Statements F-9
Schedule II -- Valuation And Qualifying Accounts For The Years Ended
September 30, 1996, 1995 and 1994 S-1
Schedules other than those listed above have been omitted as they are either not
required or because the related information has been included in the notes to
consolidated financial statements
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Digital Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Solutions, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1996. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Solutions, Inc. and
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the financial statements is the responsibility of the management of
Digital Solutions, Inc. and subsidiaries and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 30, 1996
F-2
<PAGE> 34
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 0 $ 20,000
Restricted cash (Note 9) 1,155,000 0
Accounts receivable, net of allowance for doubtful accounts
of $339,000 at September 30, 1996 and $150,000
at September 30, 1995 (Note 6) 6,338,000 4,929,000
Notes due from officers (Note 4) 136,000 698,000
Other current assets 189,000 549,000
----------- -----------
Total current assets 7,818,000 6,196,000
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Equipment 2,883,000 2,619,000
Leasehold improvements 180,000 252,000
----------- -----------
3,063,000 2,871,000
Less - accumulated depreciation and amortization 2,226,000 2,054,000
----------- -----------
837,000 817,000
DEFERRED TAX ASSET (Note 5) 760,000 760,000
GOODWILL, net of accumulated amortization of $713,000 in 1996
and $481,000 in 1995 (Notes 2 and 3) 4,780,000 5,036,000
OTHER ASSETS 605,000 1,007,000
----------- -----------
$14,800,000 $13,816,000
=========== ===========
</TABLE>
F-3
<PAGE> 35
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings (Notes 6 and 9) $ 2,907,000 $ 5,019,000
Current portion of long-term debt (Note 8) 88,000 958,000
Accounts payable 1,620,000 1,629,000
Accrued expenses and other current liabilities (Note 7) 2,917,000 3,186,000
------------ -----------
Total current liabilities 7,532,000 10,792,000
LONG-TERM DEBT, net of current portion (Note 8) 100,000 133,000
OTHER LIABILITIES (Note 9) 0 42,000
------------ -----------
Total liabilities 7,632,000 10,967,000
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, $.10 par value; authorized 5,000,000 shares;
none issued and outstanding 0 0
Common stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 18,786,609 in 1996 and 14,003,915 in
1995 19,000 14,000
Additional paid-in capital 12,857,000 7,946,000
Accumulated deficit (5,708,000) (5,111,000)
------------ -----------
7,168,000 2,849,000
------------ -----------
$ 14,800,000 $13,816,000
============ ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE> 36
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30
---------------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING REVENUES $100,927,000 $ 73,821,000 $37,998,000
DIRECT OPERATING COSTS 92,490,000 68,530,000 34,939,000
------------ ------------ -----------
Gross profit 8,437,000 5,291,000 3,059,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 9) 7,972,000 6,702,000 2,452,000
DEPRECIATION AND AMORTIZATION 829,000 845,000 243,000
------------ ------------ -----------
Income (loss) from operations (364,000) (2,256,000) 364,000
------------ ------------ -----------
OTHER CREDITS (CHARGES):
Interest income 173,000 124,000 40,000
Interest expense (Notes 6 and 8) (422,000) (935,000) (69,000)
Other income (expense) 50,000 (386,000) (7,000)
------------ ------------ -----------
(199,000) (1,197,000) (36,000)
------------ ------------ -----------
Income (loss) before income taxes (563,000) (3,453,000) 328,000
INCOME TAX BENEFIT (EXPENSE) (Note 5) (34,000) 137,000 392,000
------------ ------------ -----------
Net income (loss) ($597,000) ($3,316,000) $ 720,000
============ ============ ===========
NET INCOME (LOSS) PER COMMON SHARE ($0.04) ($0.24) $ 0.05
============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 16,840,371 13,595,382 12,867,027
============ ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 37
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock
------------------------------ --------------
Shares Issued Shares Issued
(Retired) Amount (Retired)
--------- ------ ---------
<S> <C> <C> <C>
BALANCE, September 30, 1993 29,658 $ 3,000 8,745,212
Common stock issued in connection with the acquisition of
Staff Leasing of Mississippi, Inc. 0 0 50,000
Expenses related to private placement of common stock 0 0 0
Common stock issued in connection with the acquisitions of
The Alternative Source, Inc., Ram Technical Corp. and MLB
Medical Staffing, Inc. 0 0 416,221
Exercise of stock options 0 0 250,000
Exercise of stock warrants 0 0 81,552
Common stock issued for services rendered 0 0 5,000
Dividends paid on preferred stock 0 0 0
Conversion of preferred stock into common stock (29,658) (3,000) 2,372,640
Common stock issued in connection with the acquisition of
M&B Staff Management, Inc. 0 0 205,128
Net income 0 0 0
------------ ------------ ------------
BALANCE, September 30, 1994 0 0 12,125,753
Exercise of stock options 0 0 1,605,426
Exercise of stock warrants 0 0 206,500
Retirement of common stock in connection with exercise
of stock options and warrants 0 0 (249,255)
Common stock issued in connection with the acquisition of Staff Rx 0 0 360,000
Expenses related to private placement of common stock 0 0 0
Common stock issued in connection with the acquisition of
Turnkey Services, Inc. 0 0 68,205
Common stock retired related to the acquisitions of
The Alternative Source,
Inc., Ram Technical Corp.
and MLB Medical Staffing, Inc. 0 0 (112,714)
Net loss 0 0 0
------------ ------------ ------------
BALANCE, September 30, 1995 0 0 14,003,915
Common stock issued in connection with private placements, net of expenses 0 0 2,304,200
Common stock received and retired in satisfaction of officer loans 0 0 (107,130)
Common stock issued 0 0 525,000
Exercise of stock options 0 0 794,157
Exercise of stock warrants 0 0 1,209,799
Stock issued for services rendered 0 0 56,668
Net loss 0 0 0
------------ ------------ ------------
BALANCE, September 30, 1996 0 $ 0 18,786,609
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common
Stock
------ Additional
Amount Paid-In Capital Deficit
------ --------------- -------
<S> <C> <C> <C>
BALANCE, September 30, 1993 $ 9,000 $ 5,243,000 ($ 2,417,000)
Common stock issued in connection with the acquisition of
Staff Leasing of Mississippi, Inc. 0 75,000 0
Expenses related to private placement of common stock 0 (282,000) 0
Common stock issued in connection with the acquisitions of
The Alternative Source, Inc., Ram Technical Corp. and MLB
Medical Staffing, Inc. 1,000 722,000 0
Exercise of stock options 0 175,000 0
Exercise of stock warrants 0 44,000 0
Common stock issued for services rendered 0 14,000 0
Dividends paid on preferred stock 0 0 (98,000)
Conversion of preferred stock into common stock 2,000 1,000 0
Common stock issued in connection with the acquisition of
M&B Staff Management, Inc. 0 500,000 0
Net income 0 0 720,000
------------ ------------ ------------
BALANCE, September 30, 1994 12,000 6,492,000 (1,795,000)
Exercise of stock options 2,000 853,000 0
Exercise of stock warrants 0 110,000 0
Retirement of common stock in connection with exercise
of stock options and warrants 0 0 0
Common stock issued in connection with the acquisition of Staff Rx 0 743,000 0
Expenses related to private placement of common stock 0 (164,000) 0
Common stock issued in connection with the acquisition of
Turnkey Services, Inc. 0 166,000 0
Common stock retired related to the acquisitions of
The Alternative Source,
Inc., Ram Technical Corp.
and MLB Medical Staffing, Inc. 0 (254,000) 0
Net loss 0 0 (3,316,000)
------------ ------------ ------------
BALANCE, September 30, 1995 14,000 7,946,000 (5,111,000)
Common stock issued in connection with private placements, net of expenses 2,000 4,526,000 0
Common stock received and retired in satisfaction of officer loans 0 (679,000) 0
Common stock issued 1,000 228,000 0
Exercise of stock options 1,000 48,000 0
Exercise of stock warrants 1,000 703,000 0
Stock issued for services rendered 0 85,000 0
Net loss 0 0 (597,000)
------------ ------------ ------------
BALANCE, September 30, 1996 $ 19,000 $ 12,857,000 ($ 5,708,000)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE> 38
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 597,000) ($3,316,000) $ 720,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities-
Deferred income taxes 0 (160,000) (400,000)
Depreciation and amortization 829,000 845,000 243,000
Provision for doubtful accounts 462,000 153,000 56,000
Amortization of rent deferral 0 28,000 28,000
Stock issued for services rendered 85,000 0 14,000
Changes in operating assets and liabilities-
Increase in accounts receivable (1,871,000) (2,490,000) (1,373,000)
(Increase) decrease in other assets 239,000 (909,000) (371,000)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities (278,000) 2,806,000 502,000
Decrease in other liabilities (75,000) (55,000) (79,000)
Increase in restricted cash (1,155,000) 0 0
----------- ----------- -----------
Net cash used in operating activities (2,361,000) (3,098,000) (660,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (187,000) (355,000) (208,000)
Collections on note receivable 0 0 176,000
Acquisitions of businesses, net of cash acquired 0 (1,351,000) (605,000)
----------- ----------- -----------
Net cash used in investing activities (187,000) (1,706,000) (637,000)
----------- ----------- -----------
</TABLE>
F-7
<PAGE> 39
<TABLE>
<CAPTION>
For the Years Ended September 30
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on revolving line
of credit, net of repayments ($ 225,000) $ 2,122,000 $ 1,010,000
Principal payments on long-term debt (941,000) (443,000) (260,000)
Proceeds from (principal payments on)
subordinated bridge loan (1,887,000) 1,887,000 0
Proceeds from other borrowings, net of repayments 71,000 837,000 (68,000)
Net proceeds from issuance of common stock,
net of expenses 4,528,000 245,000 (63,000)
Net proceeds from the exercise of stock options
and warrants 753,000 0 0
Net proceeds from common stock issued 229,000 0 0
Payment of dividends on preferred stock 0 0 (98,000)
Other (2,000) (43,000)
----------- ----------- -----------
Net cash provided by financing activities 2,528,000 4,646,000 478,000
----------- ----------- -----------
Net decrease in cash (20,000) (158,000) (819,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,000 178,000 997,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 0 $ 20,000 $ 178,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 412,000 $ 705,000 $ 70,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Value of common stock issued in a business
acquisition $ 0 $ 909,000 $ 1,297,000
=========== =========== ===========
Value of common stock retired in satisfaction of
shareholder loans $ 679,000 $ 0 $ 0
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-8
<PAGE> 40
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 employer services, payroll processing, human
resource administration and placement of temporary and permanent
employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation-
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 (see
Note 3) 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.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Policy-
The Company recognizes revenue in connection with its professional
employer organization program (PEO) 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.
F-9
<PAGE> 41
Goodwill-
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at the acquisition date and is being
amortized on a straight line basis over 20 years for substantially all
of the Company's acquisitions (see Note 3). Amortization expense
charged to operations was approximately $415,000 for 1996, $327,000 for
1995 and $74,000 for 1994. Amortization expense for 1996 and 1995,
includes a provision for goodwill impairment, as described below.
During 1995, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment
of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. As a
result of certain of the acquisitions described in Note 3 experiencing
operating cash flow losses for the current period, the Company,
utilizing the present value of estimated future cash flows from these
operations discounted at a rate of return (15%), determined that some
impairment had occurred in certain of these acquisitions. As a result,
the Company charged approximately $195,000 and $180,000 of additional
amortization to depreciation and amortization for the year ended
September 30, 1996 and 1995, respectively. Had the Company applied the
measurement criteria prescribed by SFAS 121 in prior years, the effect
would not have been material.
Insurance Programs-
The Company maintains a variety of large deductible insurance policies
(see Note 9) to cover its exposure to claims for medical, workers'
compensation and general liability on both a per occurrence and
aggregate basis. Provisions have been made in the financial statements
which represent the expected future payments based on individual case
reserves plus an estimate for claims that have been incurred but not
reported as of the balance sheet date.
Net Income (Loss) Per Common Share-
Net income (loss) per common share is based upon the weighted average
number of shares outstanding as well as the dilutive effect of stock
options and warrants (see Note 10). Dividends on preferred stock of
approximately $98,000 were declared and paid in 1994 and deducted from
earnings available for common shares. Outstanding stock options and
warrants have not been considered in the computations of net loss per
common share in 1996 and 1995 since their effect was antidilutive.
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.
Reclassifications-
Certain reclassifications have been made to the prior year financial
statements to conform them to the 1996 presentation.
F-10
<PAGE> 42
(3) ACQUISITIONS:
The following acquisitions have been accounted for under the purchase
method of accounting. Accordingly, the results of operations of these
entities have been included in the consolidated financial statements of
the Company since the date of acquisition.
Turnkey Services, Inc.-
In May 1995, the Company, through its subsidiary, DSI Staff
ConnXions-Southwest, purchased certain assets of a PEO company
located in El Paso, Texas, Turnkey Services, Inc. The assets acquired
included the customer lists and all owned and leased assets utilized
by Turnkey in its business operations, subject to interest of
equipment lessors. In consideration for the assets, the Company paid
to Turnkey $784,000 in cash and a note payable (see Note 8) and
issued common stock in the amount of $166,000. In addition, the
Company incurred approximately $200,000 in transaction costs and
recorded goodwill of approximately $989,000 associated with this
acquisition.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1995, the effect
would not have been significant.
Staff Rx, Inc.-
In November 1994, the Company acquired certain assets of several
affiliated contract staffing firms through the Company's wholly-owned
subsidiary DSI-Staff Rx, Inc. in exchange for $200,000 in cash and a
promissory note for $1,300,000. In addition, the Company incurred
approximately $266,000 in transaction costs and recorded goodwill of
approximately $1,766,000, associated with this acquisition.
In March 1995, the Company issued 360,000 shares of its common stock
which was valued at $743,000. This was used to satisfy part of the
aforementioned promissory note. The balance was paid in cash.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1995, the effect
would not have been significant.
M & B Staff Management, Inc.-
In September 1994, the Company completed the acquisition of certain
assets of an employee leasing business, M & B Staff Management, Inc.
("M & B"). Pursuant to the terms of the acquisition, the Company also
entered into noncompete agreements with certain shareholders and
employees of M & B. The business assets of M & B and the noncompete
agreements were acquired for 205,128 shares of the Company's common
stock. The Company recorded goodwill of approximately $740,000
associated with this acquisition.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1994, the effect
would not have been significant.
F-11
<PAGE> 43
The Alternative Source, Inc.,
MLB Medical Staffing, Inc.,
and RAM Technical Services, Inc.-
In January 1994, the Company through its wholly-owned subsidiary
corporations, acquired the assets of The Alternative Source, Inc.
("TAS") and the shares of MLB Medical Staffing, Inc. ("MLB") and RAM
Technical Services, Inc., three affiliated companies based in
Houston, Texas. TAS is engaged in the PEO business, MLB is engaged in
the nurse staffing business and RAM is engaged in contract employee
staff leasing business. In consideration of the foregoing, DSI paid
the sellers $200,000 in cash, issued a note for $25,000 and issued an
aggregate of 416,221 shares of the Company's stock, of which a
portion was held in escrow pending the fulfillment of certain sales
and performance criteria by the sellers.
As of the closing date of acquisition, the Company recorded goodwill
of approximately $1,201,000. In accordance with the earn-out
provisions of the purchase agreement, in May 1995, the Company
retired 112,714 shares held in escrow and reduced the purchase price
and amount of goodwill by $254,000.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1994, the effect
would not have been significant.
DSI Staff Leasing of Mississippi, Inc.-
In November 1993, the Company purchased certain assets of Staff
Leasing of Mississippi, Inc., a PEO company, in exchange for cash, a
two-year promissory note and 50,000 shares of the Company's common
stock. In connection with this acquisition, the Company recorded
goodwill of approximately $244,000 and a covenant not to compete in
the amount of $25,000.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1994, the effect
would not have been significant.
(4) NOTES DUE FROM OFFICERS:
<TABLE>
<CAPTION>
Notes due from officers at September 30, 1996 and 1995 consists of following-
1996 1995
---- ----
<S> <C> <C>
Notes receivable, bearing interest at 8% per annum, with interest
and principal due March, 1996. The notes are secured by
523,532 shares of the Company's common stock.(A) $ 0 $578,000
Notes receivable, bearing interest at 8% and 10% per annum,
respectively, with interest and principal due December, 1996
The note is collateralized by 100,000 shares of common stock 92,000 82,000
Notes receivable bearing interest at 8% per annum, with
principal and interest due January, 1997. The notes are
collateralized by 35,000 shares of the Company's common stock 44,000 38,000
-------- --------
$136,000 $698,000
======== ========
</TABLE>
(A) During 1996, notes due from officers amounting to $679,000,
including accrued interest, were settled through the officers'
remittance of 107,130 shares of the Company's common stock to the
Company. The number of shares exchanged was based upon the fair
market value of the shares remitted on the date of the settlement.
F-12
<PAGE> 44
(5) INCOME TAXES:
At September 30, 1996, the Company had available net operating loss
carryforwards of approximately $4,827,000 to reduce future periods'
taxable income. The Company's deductible temporary differences are not
significant. The carryforwards expire in various years beginning in 2005
and extending through 2011.
The Company has recorded a $760,000 deferred tax asset at September 30,
1996 and 1995. This represents management's estimate of the income tax
benefits to be realized upon utilization of a portion of its net
operating losses for which management believes utilization to be more
likely than not. In order for the Company to realize a $760,000 tax
benefit, the Company would have to generate approximately $2,000,000 in
future taxable income. Management believes the Company's operations can
generate sufficient taxable income to realize this tax asset as a result
of recent business developments, its ability to meet its operating plan
as well as the resolution of significant past problems which had
adversely affected the Company in prior years.
The income tax benefit reflected in the consolidated statement of
operations for 1995 and 1994 represents a portion of the recorded
deferred tax asset described above.
At September 30, 1996 an analysis of the Company's deferred income tax
asset is as follows-
<TABLE>
<S> <C>
Net operating loss carryforwards available at September 30, 1995 $4,858,000
Net operating loss carryforwards generated during 1996 0
Net operating loss carryforwards utilized for the year ended
September 30, 1996 (31,000)
---------------
Net operating loss carryforwards available at
September 30, 1996 4,827,000
Average combined Federal and State income tax rate 36%
---------------
Gross deferred income tax asset 1,738,000
Less, valuation allowance (978,000)
---------------
Deferred income tax asset $760,000
===============
</TABLE>
(6) SHORT-TERM BORROWINGS:
In February 1995, the Company entered into a one year revolving line
facility (the "Line") with a bank which was subsequently extended and
modified. Under the terms of the current agreement, the Company may
borrow up to the lesser of $3,500,000 (including letters of credit -- see
Note 9), or 75% 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 two and one-half percent
(13.25% at September 30, 1996). As of September 30, 1996, the Company had
$138,000 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 September 30, 1996, the Company was in compliance with these
financial covenants, however, the line has matured. The Company is
presently negotiating with the bank to develop mutually agreeable terms
F-13
<PAGE> 45
and conditions in response to the Company's request for extending the
line. 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 is
pursuing other financing alternatives.
During 1995, the Company issued approximately $1,975,000 of Subordinated
Bridge Notes to various investors. The notes bore interest at a rate of
12% per annum (which was increased to 16% in November, 1995 in
consideration for extending the maturity date) and were repaid in full in
1996. In connection with the issuance of these notes, the Company also
granted these investors warrants to purchase the Company's common stock
(see Note 10).
Other information with respect to short term borrowings for 1996 and 1995
is as follows-
<TABLE>
<CAPTION>
1996 1995
----------------- ----------------
<S> <C> <C>
Balance at end of period $2,907,000 $5,019,000
Maximum amount outstanding during period 5,019,000 5,065,000
Weighted average balance outstanding during the
period 3,382,000 3,277,000
Weighted average interest rate during the period 12.31% 10.98%
</TABLE>
(7) ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 1996 and
1995 consist of the following-
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Payroll and payroll taxes $1,888,000 $808,000
Worker's compensation insurance reserves 631,000 785,000
Legal and financing costs 100,000 400,000
Other 298,000 1,193,000
------- ---------
$2,917,000 $3,186,000
========== ==========
</TABLE>
(8) LONG-TERM DEBT:
Long-term debt at September 30, 1996 and 1995 consists of the following-
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Note payable due to sellers as a result of the acquisition of
Turnkey Services, Inc. (see Note 3) $ 0 $ 391,000
Note payable with a financing company dated July 1995
The note bears interest at 7.9% and is payable in equal
monthly installments through March 1996 0 385,000
Note payable with a financing company dated September
1995. The note bears interest of 5.7% and is payable in
equal monthly installments through November 1995 0 90,000
Other 188,000 225,000
----------- -----------
188,000 1,091,000
Less-Current portion (88,000) (958,000)
----------- -----------
$ 100,000 $ 133,000
=========== ===========
</TABLE>
F-14
<PAGE> 46
Maturities of long-term debt as of September 30, 1996 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
- ------------------
<S> <C>
1997 $ 88,000
1998 72,000
1999 16,000
2000 12,000
--------
$188,000
========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES:
Leases-
In November 1991, the Company entered into a lease for its corporate
headquarters facility. The lease term extends 69 months with fixed
monthly payments of $18,000. The Company recognized rent expense of
$253,000 under this lease in 1996, 1995 and 1994. Rent expense under
all operating leases was $627,000 in 1996, $384,000 in 1995 and
$290,000 in 1994.
Minimum payments under noncancellable lease obligations at September 30,
1996 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
- ------------
<S> <C>
1997 $388,000
1998 106,000
1999 110,000
2000 40,000
2001 24,000
--------
$668,000
========
</TABLE>
Workers' Compensation Policy-
The Company maintains a large deductible insurance policy with a
national insurance carrier for claims under its workers' compensation
plan. In addition to administering all the claims for the Company, the
insurance carrier also develops reserve factors on each claim (that may
or may not materialize after the claim is fully investigated). As of
September 30, 1996, the Company had reserved approximately $631,000 for
the settlement of future claims as well as $97,000 for current claims
and recognized approximately $1,332,000 as its share of premiums
collected in excess of claims and fees paid and established reserves
for the year ended September 30, 1996.
Currently, the Company establishes its reserves for workers
compensation claims in accordance with generally accepted accounting
principles (GAAP). Under GAAP, there are two acceptable methods of
establishing reserves. A company may establish reserves based upon all
incurred, but not reported claims, as well as an estimate for claims
incurred, but not reported (IBNR), or the Company may establish
reserves based upon an actuarial determination of the ultimate cost of
settling those claims (fully developed claims). The Company currently
establishes its
F-15
<PAGE> 47
reserves using an IBNR methodology. Based upon an actuarial assumption
of fully developed claims, if the Company were to establish its
reserves under that methodology, the Company's reserves at September
30, 1996 would have amounted to approximately $1,260,000.
The Company has outstanding letters of credit as of September 30, 1996
amounting to approximately $1,600,000. These 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 amounting
to $1,155,000 and utilizing approximately $445,000 of amounts available
under its line of credit.
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
engaged in preliminary discovery and the defendants have not yet
answered the complaint.
At September 30, 1996 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.
During 1996, the Company resolved several matters in its favor. As a
result, approximately $515,000 in reserves established in prior years
were reversed and reflected as a reduction of selling, general and
administrative expenses.
F-16
<PAGE> 48
(10) SHAREHOLDERS' EQUITY
Private Placements-
In November, 1995, the Company issued in a private placement 500
Shares of $.10 par value Series B Convertible Preferred Stock.
Holders of the preferred stock were entitled to dividends of $60 per
annum, payable semiannually and had the right to convert up to 50% of
their shares at any time after 41 days from the date of issuance of
the Series B Preferred Stock and 100% after 60 days after issuance
into the Company's common stock at a conversion price equaled to 75%
of the average closing price at the date of conversion. In January
1996, holders of the Company's preferred stock exercised their
conversion privilege and received 421,792 shares of the Company's
common stock. The Company realized net proceeds of $437,000 from the
proceeds of this offering.
Additionally, during 1996 the Company raised an additional
$4,089,000, net of expenses through a private placement of 1,882,228
shares of its common stock. The proceeds from these offerings were
used in part to pay down the balance on the Subordinated Bridge
Notes, collateralize letters of credit issued to secure the Company's
workers' compensation program (see Note 9) and for working capital
needs.
Stock Warrants -
The following is a summary of the outstanding warrants to purchase the
Company's common stock at September 30, 1996 as a result of various
debt and equity offerings that have occurred since the Company's
inception:
<TABLE>
<CAPTION>
Exercise Price Per Number of Shares of
Exercise Period From Exercise Period Common Share Common Stock Reserved
To
---------------------- ---------------------- --------------------- -------------------------
<S> <C> <C> <C>
September 1991 October 2001 0.75 100,000
October 1991 October 1996 1.00 50,000
October 1991 October 1996 2.25 14,500
June 1993 June 1998 0.75 206,965
August 1993 August 1998 0.75 800
September 1993 September 1998 1.06 50,000
November 1993 November 1998 1.19 5,000
January 1995 January 2000 2.59 196,850
April 1995 April 2000 2.50 5,000
December 1995 December 2000 1.56 15,000
June 1996 June 2001 2.70 164,513
-------------
808,628
=============
</TABLE>
Stock Option Plans -
In April 1990 the Company adopted three stock option plans, the 1990
Employees Stock Option Plan, the Non-Executive Director Stock Option
Plan, and the Senior Management Incentive Plan (collectively the "1990
Plans"). The 1990 Plans will remain in effect until April 2000 or
unless terminated sooner by the Board of Directors.
F-17
<PAGE> 49
The 1990 Employees Stock Option Plan (the "Employee Plan") provides for
options to be granted to employees, including certain officers of the
Company, for the purchase of up to 1,000,000 shares of common stock.
Some of the options granted under the 1990 Plan are intended to qualify
as incentive stock options under the Internal Revenue Code. The
exercise price of incentive stock options granted may not be less than
the fair market value of the shares on the date of grant, or in certain
circumstances, an option price at least equal to 110% of the fair
market value of the stock at the time the option is granted. Options
granted under the plan may not be exercised more than ten years from
the date of the grant (or in certain circumstances, five years from the
date of grant).
The Non-Executive Director Stock Option Plan (the "Director Plan"),
provides for the issuance of options for the purchase of up to 500,000
shares of common stock. Eligible participants are directors of the
Company who are also not employees of the Company and nonemployee
directors of any advisory board established by the Company. Under the
terms of the Director Plan, the exercise price of options granted will
equal 100% of the fair market value of the common stock at the date the
options are granted. Options will be granted to eligible participants
as follows: 5,000 upon becoming nonexecutive directors and 5,000 each
September 1, commencing September 1, 1990 provided such person had been
eligible for the preceding 12 months. Directors of advisory boards will
receive on each September 1 an option to purchase 10,000 shares of
common stock, providing such director has served as a director of the
advisory board for the previous 12 month period. The term of each
option commences on the date it is granted and expires five years from
grant date unless terminated sooner as provided in the Director Plan.
The Senior Management Incentive Plan (the "Management Plan") provides
for the issuance of stock, options and other stock rights to executive
officers and other key employees who render significant services to the
Company. Under the terms of the Management Plan, the exercise price of
options granted will equal 100% of the fair market value of the common
stock at the date the options are granted. A total of 5,000,000 shares
of common stock have been reserved for issuance under the Management
Plan. Awards made under the Management Plan are generally subject to
three-year vesting periods (subject to the discretion of the Board of
Directors), but may become exercisable in full upon certain "change of
control" events as defined in the Management Plan.
The following tables summarizes the activity in the Company's stock
option plans for the year ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1995 Granted Canceled Exercised 1996
------------------- ----------------- -------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Employee Plan 186,964 131,500 6,655 63,251 248,558
Director Plan 70,000 31,250 0 30,000 71,250
Management
Plan 1,451,500 350,000 123,054 700,906 977,540
----------------- -------------- --------------- --------------- -----------------
1,708,464 512,750 129,709 794,157 1,297,348
================= ============== =============== =============== =================
</TABLE>
F-18
<PAGE> 50
<TABLE>
<CAPTION>
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1994 Granted Canceled Exercised 1995
------------------- ----------------- -------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Employee Plan 287,765 36,500 2,500 134,801 186,964
Director Plan 100,000 20,000 0 50,000 7,000
Management
Plan 2,439,625 482,500 50,000 1,420,625 1,451,500
----------------- -------------- --------------- --------------- -----------------
2,827,390 539,000 52,500 1,605,426 1,708,464
================= ============== =============== =============== =================
</TABLE>
During 1996, certain individuals exercised options by delivering to the
Company shares previously purchased in consideration for the option
price. The amounts reflected in additional paid in capital are net of
the value of the shares redeemed by the Company.
Options outstanding as of September 30, 1996 become exercisable as
follows-
<TABLE>
<CAPTION>
Exercise
Plan Price Total 1996 1997 1998 Thereafter
----------------- ------------- ------------- -------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Employee $0.75- 248,558 116,541 46,497 52,480 33,040
Plan $6.50
Director $0.81- 71,250 40,000 31,250 0 0
Plan $2.6875
Management $.875- 977,540 600,040 151,499 119,000 107,001
Plan $5.8125
------------- -------------- ----------- ------------ ---------------
1,297,348 756,581 229,246 171,480 140,040
============= ============== =========== ============ ===============
</TABLE>
In 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." The new standard specifies permissible methods for
valuing compensation attributable to stock options, as well as certain
required disclosures. The Company is required to adopt the new standard
no later than October 1, 1996. The Company intends to continue to
follow the current method used to measure compensation cost
attributable to stock options which is one of the permissible methods
under the new standard. A result, while additional disclosures will be
required in subsequent years, adoption of the new standard will not
have an effect on the consolidated financial statements.
F-19
<PAGE> 51
SCHEDULE II
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(c) Additions (d)
(b) Balance Charged to Deductions -
at Beginning Costs and Net (e) Other (f) Balance
(a) Description of Year Expenses Write-Offs Adjustment at End of Year
- ------------------------------ --------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts, year ended-
September 30, 1996 $150,000 $462,000 ($273,000) $0 $339,000
============= ============== ============== =============== =============
September 30, 1995 $99,000 $153,000 ($102,000) $0 $150,000
============= ============== ============== =============== =============
September 30, 1994 $43,000 $56,000 $0 $0 $99,000
============= ============== ============== =============== =============
</TABLE>
S-1
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/George J. Eklund
------------------------------------
George J. Eklund
Chief Executive Officer and Director
Dated: January 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/George J. Eklund Chief Executive Officer January 13, 1997
- ---------------------------------- and Director
George J. Eklund
/s/Karl W. Dieckmann Chairman of the Board January 13, 1997
- --------------------------------
Karl W. Dieckmann
/s/John H. Ewing Director January 13, 1997
- --------------------------------
Senator John H. Ewing
/s/Alfred C. Koeppe Director January 13, 1997
- --------------------------------
Alfred C. Koeppe
/s/William J. Marino Director January 13, 1997
- --------------------------------
William J. Marino
/s/Steven B. Sands Director January 13, 1997
- --------------------------------
Steven B. Sands
/s/Raymond J. Skiptunis Director January 13, 1997
- --------------------------------
Raymond J. Skiptunis
/s/Kenneth P. Brice Chief Financial Officer January 13, 1997
- --------------------------------
Kenneth P. Brice
</TABLE>
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1 -- Agreement for purchase of Temp-Staff, Inc. (Exhibit 3 to Form 8-K dated May
17, 1990)
2.2 -- Agreement for purchase of X-L Technical Corp. (Exhibit 2a to Form 8-K dated
October 3l, 1990)
2.3 -- Agreement for the purchase of the business and assets of Anne Christine Clark, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3.2 -- Certificate of Designation of Series A Preferred Stock (Exhibit 3.2 to form
10-K for fiscal year ended September 30, 1991)
3.3 -- Certificate of Amendment changing the name of TSI to SCI (Exhibit 3.3 to form 10-
K for fiscal year ended September 30, 1991)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.2 -- Employment Agreement with Donald Kappauf (Exhibit 3 to Form 8-K dated May 17,
1990)
10.4 -- Agreement between Registrant and First Fidelity Bank, N.A. (Exhibit 10.4 to
form 10-K for fiscal year ended September 30, 1991)
10.5 -- Agreement between Registrant and Midlantic Banks, Inc. dated October 11, 1991
(Exhibit 10.5 to form 10-K for fiscal year ended September 30, 1991)
10.6 -- Lease dated 10/15/91 for office space at 4041 Hadley Road,
South Plainfield, New Jersey (Exhibit 10.6 to form 10-K for
fiscal year ended September 30, 1991)
10.7 -- Employment Agreement between Karl Dieckmann and the Company dated
November 1, 1991 (Exhibit 10.7 to form 10-K for fiscal year ended September
30,1991)
10.10 -- Employment Contract between David L. Clark and the Company dated January 1,
1993
10.11 -- Bridge financing between Katie and Adam Bridge Partners, L.P. and the Company
in June 1993.
10.12 -- Sales representation agreement between Sid A. Robinson, III and the Company
dated April 14, 1993.
10.13 -- Agreement between Staff Leasing of Mississippi, Inc. and the Company for
purchase of business and assets dated November 4, 1993.
10.15 -- Employment agreement between George J. Eklund and the Company dated
September 19, 1994.
10.15.1* - Employment agreement between George J. Eklund and the Company dated March
12, 1996
10.16 -- Agreement between Registrant and United Jersey Bank Central, NA on the revolving
loan facility
11.0 -- Computation of Earnings per Share
21.0 * -- Subsidiaries
23.1 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-85526.
23.2 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-70928.
23.3 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-91700.
23.4 * -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1996 into the Company's registration Statement on
form S-3 file number 33-09313.
27. * -- Financial Data Schedule.
- -----------------------------------------------
*Filed Herewith.
</TABLE>
<PAGE> 1
EXHIBIT 10.15.1
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 12th day of March, 1996, by and between George
J. Eklund, residing at 60 Gordon Road, Essex Fells, New Jersey 07021
(hereinafter referred to as the "Employee") and DIGITAL SOLUTIONS, INC., a New
Jersey corporation with principal offices located at 4041 Hadley Road, South
Plainfield, New Jersey 07080 (hereinafter referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company and its subsidiaries are engaged in the business
of providing Human Resource Administrative Services; and
WHEREAS, the Company employs and desires to continue the employment of
the Employee for the purpose of securing for the Company the experience, ability
and services of the Employee; and
WHEREAS, the Employee desires to continue employment with the Company,
pursuant to the terms and conditions herein set forth, superseding all prior
agreements between the Company, its subsidiaries and/or predecessors and
Employee;
NOW, THEREFORE, it is mutually agreed by and between the parties hereto
as follows:
ARTICLE I
EMPLOYMENT
Subject to and upon the terms and conditions of this Agreement, the
Company hereby employs and agrees to continue the
<PAGE> 2
employment of the Employee, and the Employee hereby accepts such continued
employment in his capacity as President and Chief Executive Officer.
ARTICLE II
DUTIES
(A) The Employee shall, during the term of his employment with the
Company, and subject to the direction and control of the Company's Board of
Directors, perform such duties and functions as he may be called upon to perform
by the Company's Board of Directors during the term of this Agreement.
(B) The Employee agrees to devote full business time and his best
efforts in the performance of his duties for the Company and any subsidiary
corporation of the Company.
(C) The Employee shall perform, in conjunction with the Company's
Executive Management, to the best of his ability the following services and
duties for the Company and its subsidiary corporations (by way of example, and
not by way of limitation):
(i) Those duties attendant to the position with the Company
for which he is hired;
(ii) Establish and implement current and long range
objectives, plans, and policies, subject to the approval of the Board of
Directors;
(iii) Financial planning including the development of, liaison
with, financing sources and investment bankers;
(iv) Managerial oversight of the Company's business;
2
<PAGE> 3
(v) Shareholder's relations;
(vi) Ensure that all Company activities and operations are
carried out in compliance with local, state and federal regulations and laws
governing business operations.
(vii) Business expansion of the Company including
acquisitions, joint ventures, and other opportunities; and
(viii) Promotion of the relationships of the Company and its
subsidiaries with their respective employees, customers, suppliers and others in
the business community.
(D) Employee shall be based in the New Jersey area, and shall undertake
such occasional travel, within or without the United States as is or may be
reasonably necessary in the interests of the Company.
ARTICLE III
COMPENSATION
(A) Commencing the date hereof and during the term hereof, Employee
shall be compensated initially at the rate of $210,000 per annum subject to such
increases as the Board of Directors shall determine as of each October 1 during
the term of this Agreement (the "Base Salary") which shall be paid to Employee
as in accordance with the Company's regular payroll periods.
(B) Employee shall be entitled to receive a bonus (the "Bonus") in
accordance with the Company's Senior Management Incentive Program to be
determined at the commencement of each fiscal year; provided, however, for the
fiscal year ended September
3
<PAGE> 4
30, 1996, Employee shall be entitled to participate in the Senior Management
Incentive Program as previously established for Fiscal Year 1996 and attached
hereto as Exhibit A.
(C) Employee may receive such other additional compensation as may be
determined from time to time by the Board of Directors. Nothing herein shall be
deemed or construed to require the Board to award any bonus or additional
compensation.
(D) The Company shall deduct from Employee's compensation all federal,
state and local taxes which it may now or may hereafter be required to deduct.
ARTICLE IV
BENEFITS
(A) During the term hereof, the Company shall (i) provide Employee with
group health care and insurance benefits as generally made available to the
Company's senior management; (ii) provide such other insurance benefits obtained
by the Company, and made generally available to the Company's senior management;
(iii) reimburse Employee for expenses associated with an annual physical
examination; (iv) reimburse the Employee, upon presentation of appropriate
vouchers, for all reasonable business expenses incurred by the Employee on
behalf of the Company upon presentation of suitable documentation; and (v) pay
to Employee the sum of $700 per month as and for an automobile allowance.
(B) In the event the Company wishes to obtain Key Man life insurance on
the life of Employee, Employee agrees to
4
<PAGE> 5
cooperate with the Company in completing any applications necessary to obtain
such insurance and promptly submit to such physical examinations and furnish
such information as any proposed insurance carrier may request.
(C) For each year of the term hereof, Employee shall be entitled to
four weeks paid vacation.
ARTICLE V
NON-DISCLOSURE
The Employee shall not, at any time during or after the termination of
his employment hereunder except when acting on behalf of and with the
authorization of the Company, make use of or disclose to any person,
corporation, or other entity, for any purpose whatsoever, any trade secret or
other confidential information concerning the Company's business, finances,
marketing, computerized payroll, accounting and information business, personnel
and/or employee leasing business of the Company and its subsidiaries including
information relating to any customer of the Company or pool of temporary
employees, or any other nonpublic business information of the Company and/or its
subsidiaries learned as a consequence of Employee's employment with the Company
(collectively referred to as the "Proprietary Information"). For the purposes of
this Agreement, trade secrets and confidential information shall mean
information disclosed to the Employee or known by him as a consequence of his
employment by the Company, whether or not pursuant to this Agreement, and not
5
<PAGE> 6
generally known in the industry. The Employee acknowledges that trade secrets
and other items of confidential information, as they may exist from time to
time, are valuable and unique assets of the Company, and that disclosure of any
such information would cause substantial injury to the Company.
ARTICLE VI
RESTRICTIVE COVENANT
(A) In the event of the voluntary termination of employment with the
Company prior to the expiration of the term hereof, or Employee's discharge in
accordance with Article IX, or the expiration of the term hereof, Employee
agrees that he will not, for a period of one year following such termination (or
expiration, as the case may be) directly or indirectly enter into or become
associated with or engage in any other business (whether as a partner, officer,
director, shareholder, employee, consultant, or otherwise), which business is
located in the states of New Jersey, New York and Texas and is involved in the
professional employer organization business, or is otherwise engaged in the same
or similar business as the Company shall be engaged and is in direct competition
with the Company, or which the Company is in the process of developing, during
the tenure of Employee's employment by the Company.
(B) In furtherance of the foregoing, Employee shall not during the
aforesaid period of non-competition, directly or indirectly, in connection with
any computerized payroll, employee
6
<PAGE> 7
leasing, accounting or information service business or permanent or temporary
personnel business, or any business similar to the business in which the Company
was engaged, or in the process of developing during Employee's tenure with the
Company, solicit any customer or employee of the Company who was a customer or
employee of the Company during the tenure of his employment.
(C) If any court shall hold that the duration of non-competition or any
other restriction contained in this paragraph is unenforceable, it is our
intention that same shall not thereby be terminated but shall be deemed amended
to delete therefrom such provision or portion adjudicated to be invalid or
unenforceable or in the alternative such judicially substituted term may be
substituted therefor.
ARTICLE VII
TERM
(A) This Agreement shall be for a term of three (3) years
commencing March 12, 1996 and terminating on March 11, 1999 unless sooner
terminated as provided for herein (the "Expiration Date".
(B) Unless this Agreement is earlier terminated pursuant to
the terms hereof, the Company agrees to notify Employee in writing whether it
intends to negotiate a renewal of this Agreement by notice three months prior to
the Expiration Date (the "Three Month Notice"). In the event the Company fails
to so notify the Employee, the term of this Agreement shall be extended for an
7
<PAGE> 8
additional one year.
(C) If the Company elects not to seek to renegotiate a renewal
as provided in paragraph (B) above, or if the Company fails to reach agreement
with Employee as to the terms of renewal, upon the termination of Employee's
employment with the Company for any reason after the Expiration Date, the
Company shall pay to Employee, in addition to any other payments due hereunder,
a severance payment equal to twelve months of Employee's Base Salary ("Severance
Payments") payable in twelve equal monthly installments commencing on the first
day of the first month following the date of such termination; provided,
however, if Employee secures alternate employment within such twelve month
period payments will continue only through the month in which such new
employment begins.
ARTICLE VIII
DISABILITY DURING TERM
In the event Employee becomes totally disabled so that he is unable or
prevented from performing any one or all of his usual duties hereunder for a
period of four (4) consecutive months, and the Company elects to terminate this
agreement in accordance with Article IX, paragraph (B) then, and in that event,
Employee shall receive his Base Salary as provided under Article III of this
Agreement for a period of twelve (12) months commencing from the date of such
total disability. The obligation of the Company to make the aforesaid payments
shall be modified and reduced and the
8
<PAGE> 9
Company shall receive a credit for all disability insurance payments which
Employee may receive from insurance policies provided by the Company.
ARTICLE IX
TERMINATION
The Company may terminate this Agreement:
(A) Upon the death of Employee during the term hereof, except that the
Employee's legal representatives, successors, assigns and heirs shall have those
rights and interests as otherwise provided in this Agreement, including the
right to receive accrued but unpaid incentive compensation and special bonus
compensation.
(B) Subject to the terms of Article VIII herein, upon written notice
from the Company to the Employee, if Employee becomes totally disabled and as a
result of such total disability, has been prevented from and unable to perform
all of his duties hereunder for a consecutive period of four (4) months.
(C) Upon written notice from the Company to the Employee, at any time
for "Cause". For purposes of this Agreement "Cause" shall be defined as: (i)
willful disobedience by the Employee of a material and lawful instruction of the
Chairman of the Board or the Board of Directors of the Company; or (ii)
conviction of the Employee of any misdemeanor involving fraud or embezzlement or
similar crime, or any felony; (iii) breach by the Employee of any material
provision of this Agreement; or (iv)
9
<PAGE> 10
conduct amounting to fraud, dishonesty, negligence, willful misconduct,
recurring insubordination, inattention to or unsatisfactory performance of
duties which adversely affects operations of the Company, or excessive absences
from work; provided that the Company shall not have the right to terminate the
employment of Employee pursuant to the foregoing clause (i) or clause (iii)
unless written notice specifying such breach shall have been given to the
Employee and, in the case of breach which is capable of being cured, the
Employee shall have failed to cure such breach within twenty (20) days after his
receipt of such notice.
(D) In the event the Company demotes, substantially reduces
the duties of or reduces the salary or benefits of the employee, the employee
may elect to treat this Agreement as terminated for "good reason." In the event
of termination of this Agreement for good reason, the employee shall be entitled
to payment of the greater of all salary, benefits and stock grants or options
due for the remaining term of the Agreement or the severance payments as defined
in Article VII(C) herein, in addition to any rights or remedies available to the
employee at law or in equity.
(E) In the event of the termination of this Agreement and the
discharge of Employee by the Company in breach and violation of this Agreement,
Employee shall not be obligated to mitigate damages by seeking or obtaining
alternate employment.
10
<PAGE> 11
ARTICLE X
STOCK OPTIONS
As an inducement to Employee to enter into this Agreement the Company
hereby grants to Employee options to purchase shares of the Company's Common
Stock, $.001 par value, upon and subject to the following conditions:
(a) Subject to the terms and conditions of the Company's Senior
Management Incentive Plan (the "Plan"), a copy of which is attached hereto as
Exhibit B, and the terms and conditions set forth in the Stock Option
Certificate which are incorporated herein by reference, the Employee is hereby
granted options to purchase 85,713 shares of the Company's Common Stock of which
options to purchase 28,571 shares shall be vested on the first anniversary
hereof, options to purchase an additional 28,571 shares shall be vested on the
second anniversary hereof, and the remaining options to purchase 28,571 shares
shall be vested on the third anniversary hereof. The option shall contain such
other terms and conditions as set forth in the stock option agreement. The
exercise price of the options shall be $3.50. The foregoing options are
qualified as incentive stock options.
(b) Subject to the terms and conditions of the Company's Senior
Management Incentive Plan (the "Plan"), a copy of which Employee acknowledges
having been received, and the terms and conditions set forth in the Stock Option
Certificate which are incorporated herein by reference, the Employee is hereby
granted options to purchase 214,287 shares of the Company's Common Stock of
11
<PAGE> 12
which options to purchase 31,429 shares shall be vested as of the first
anniversary hereof, options to purchase an additional 91,429 shares shall be
vested as of the second anniversary hereof and the remaining options to purchase
91,429 shares shall be vested on the third anniversary hereof. The option shall
contain such other terms and conditions as set forth in the stock option
agreement. The exercise price of the options shall be $3.50. The foregoing
options are not qualified as incentive stock options.
The Options provided for herein are not transferable by Employee and
shall be exercised only by Employee, or by his legal representative or executor,
as provided in the Plan. Such Option shall terminate as provided in the Plan.
ARTICLE XI
EXTRAORDINARY TRANSACTIONS
The Company's Board of Directors has determined that it is appropriate
to reinforce and encourage the continued attention and dedication of members of
the Company's management, including the Employee, to their assigned duties
without distraction in potentially disturbing circumstances arising from the
possibility of a change in control of the Company. A "Change in Control" of the
Company shall be deemed to have occurred if there shall be consummated (i)(x)
any consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
Common Stock would be converted into cash, securities or other property, other
than a
12
<PAGE> 13
merger of the Company in which the holders of the Company's Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company approved any plan or proposal
for the liquidation or dissolution of the Company, or (iii) any person (as such
term is used in Sections 13(d) and l3(d)(2) of the Securities Exchange Act of
l934, as amended (the "Exchange Act")), shall become the beneficial owner
(within the meaning of Rule l3d-3 under the Exchange Act) of 20% or more of the
Company's outstanding Common Stock, or (iv) during any period of two consecutive
years, individuals who at the beginning of such period constituted the entire
Board of Directors shall cease for any reason to constitute a majority thereof
unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
The Company agrees that, if during the term hereof, or during such
time as the Employee is otherwise employed by the Company, a Change in Control
shall occur, all options to purchase Common Stock of the Company held by
Employee, either pursuant to this Agreement or otherwise, shall immediately vest
and become exercisable on the first day following a Change in Control. Further,
the options shall be deemed amended to provide that in the event of termination
after
13
<PAGE> 14
an event enumerated in this Article X, the options shall remain exercisable for
the duration of their term; and further, at the Employee's option, an amount
equal to three times the aggregate annual compensation paid to the Employee
during the calendar year preceding the Change in Control shall be credited
against the exercise price of any options held by Employee at the time Employee
elects to exercise such options; provided, however, that if the lump sum
severance payment under this Article XI, either alone or together with other
payments which the Employee has the right to receive from the Company, would
constitute a "parachute payment" (as defined in Section 280G of the Internal
Revenue Code of l954, as amended (the "Code")), such credit shall be reduced to
the largest amount as will result in no portion of the credit under this Article
XI being subject to the excise tax imposed by Section 4999 of the Code.
ARTICLE XII
TERMINATION OF PRIOR AGREEMENTS
This Agreement sets forth the entire agreement between the parties and
supersedes all prior agreements between the parties, whether oral or written,
without prejudice to Employee's right to all accrued compensation prior to the
effective date of this Agreement.
ARTICLE XIII
ARBITRATION AND INDEMNIFICATION
(a) Any dispute arising out of the interpretation,
14
<PAGE> 15
application and/or performance of this Agreement with the sole exception of any
claim, breach or violation arising under Articles V or VI hereof shall be
settled through final and binding arbitration before a single arbitrator in the
State of New Jersey in accordance with the rules of the American Arbitration
Association. The arbitrator shall be selected by the Association and shall be an
attorney at law experienced in the field of corporate law. Any judgment upon any
arbitration award may be entered in any court, federal or state, having
competent jurisdiction of the parties.
(b) The Company hereby agrees to indemnify, defend and hold
harmless the employee for any and all claims arising from or related to his
employment by the Company at any time asserted, at any place asserted and to the
fullest extent permitted by law. The Company shall maintain such insurance as is
necessary and reasonable to protect the employee from any and all claims arising
from or in connection with his employment by the Company; provided such
insurance can be obtained without unreasonable effort and expense.
ARTICLE XIV
SEVERABILITY
If any provision of this Agreement shall be held invalid and
unenforceable, the remainder of this Agreement shall remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall remain in full force and effect in all other
circumstances.
15
<PAGE> 16
ARTICLE XV
NOTICE
All notices required to be given under the terms of this Agreement
shall be in writing and shall be deemed to have been duly given only if
delivered to the addressee in person, with written acknowledgment received, or
mailed by certified mail, return receipt requested, as follows:
IF TO THE COMPANY: Digital Solutions, Inc.
4041 Hadley Road
South Plainfield, NJ 07080
IF TO THE EMPLOYEE: George J. Eklund
60 Gordon Road
Essex Fells, New Jersey 07021
or to any such other address as the party to receive the notice shall advise by
due notice given in accordance with this paragraph. Notice shall be effective
three (3) days after delivery or mailing.
ARTICLE XVI
BENEFIT
This Agreement shall inure to, and shall be binding upon, the parties
hereto, the successors and assigns of the Company, and the heirs and personal
representatives of the Employee.
ARTICLE XVII
WAIVER
The waiver by either party of any breach or violation of any provision
of this Agreement shall not operate or be construed
16
<PAGE> 17
as a waiver of any subsequent breach of construction and validity.
ARTICLE XVIII
GOVERNING LAW
This Agreement has been negotiated and executed in the State of New
Jersey, and New Jersey law shall govern its construction and validity.
ARTICLE XIX
JURISDICTION
Any or all actions or proceedings which may be brought by the Company
or Employee under this Agreement shall be brought in courts having a situs
within either the State of New Jersey, and Employee and the Company each hereby
consent to the jurisdiction of any local, state or federal court located within
the State of New Jersey.
ARTICLE XX
ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties
hereto. No change, addition or amendment shall be made hereto, except by written
agreement signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
and affixed their hands and seals the day and year first
17
<PAGE> 18
above written.
(Corporate Seal) DIGITAL SOLUTIONS, INC.
By /s/Karl W. Dieckmann
------------------------
Karl W. Dieckmann
Chairman of the Board
/s/George J. Eklund
---------------------------
George J. Eklund (Employee)
18
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
1. DIGITAL SOLUTIONS OF BALTIMORE INC. (100%)
2. AMERICAN PAYROLL SYSTEMS, INC. (80%)
3. DIGITAL SOLUTIONS, INC. OF NEW YORK (100%)
4. AMERICAN PAYROLL SERVICES LICENSING CORP. (100%)
5. STAFF CONNXIONS, INC. (100%)
6. DSI CONTRACT STAFFING, INC. (100%)
7. DIGITAL INSURANCE SERVICES, INC. (100%)
8. DSI STAFF CONNXIONS OF MISSISSIPPI, INC. (100%)
9. DSI STAFF CONNXIONS SOUTHWEST, INC. (100%)
10. MLB MEDICAL STAFFING, INC. (100%)
11. RAM TECHNICAL SERVICES, INC. (100%)
12. DSI STAFF-RX, INC. (100%)
13. STAFF CONNXIONS-NORTHEAST, INC.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE INCORPORATION
OF OUR REPORTS INCLUDED IN THIS FORM 10-K, INTO THE COMPANY'S PREVIOUSLY FILED
REGISTRATION STATEMENT ON FORM S-3 (FILE NO. 33-85526).
ARTHUR ANDERSEN LLP
ROSELAND, NEW JERSEY
JANUARY 13, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE INCORPORATION
OF OUR REPORTS INCLUDED IN THIS FORM 10-K, INTO THE COMPANY'S PREVIOUSLY FILED
REGISTRATION STATEMENT ON FORM S-3 (FILE NO. 33-70928).
ARTHUR ANDERSEN LLP
ROSELAND, NEW JERSEY
JANUARY 13, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE INCORPORATION
OF OUR REPORTS INCLUDED IN THIS FORM 10-K, INTO THE COMPANY'S PREVIOUSLY FILED
REGISTRATION STATEMENT ON FORM S-3 (FILE NO. 33-91700).
ARTHUR ANDERSEN LLP
ROSELAND, NEW JERSEY
JANUARY 13, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE INCORPORATION
OF OUR REPORTS INCLUDED IN THIS FORM 10-K, INTO THE COMPANY'S PREVIOUSLY FILED
REGISTRATION STATEMENT ON FORM S-3 (FILE NO. 33-09313).
ARTHUR ANDERSEN LLP
ROSELAND, NEW JERSEY
JANUARY 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,155,000
<SECURITIES> 0
<RECEIVABLES> 6,474,000
<ALLOWANCES> 339,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,818,000
<PP&E> 3,063,000
<DEPRECIATION> 2,226,000
<TOTAL-ASSETS> 14,800,000
<CURRENT-LIABILITIES> 7,532,000
<BONDS> 0
0
0
<COMMON> 19,000
<OTHER-SE> 7,149,000
<TOTAL-LIABILITY-AND-EQUITY> 14,800,000
<SALES> 100,927,000
<TOTAL-REVENUES> 100,927,000
<CGS> 92,490,000
<TOTAL-COSTS> 92,490,000
<OTHER-EXPENSES> 9,034,000<F1>
<LOSS-PROVISION> 462,000
<INTEREST-EXPENSE> 422,000
<INCOME-PRETAX> (563,000)
<INCOME-TAX> 34,000
<INCOME-CONTINUING> (597,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (597,000)
<EPS-PRIMARY> ($0.04)
<EPS-DILUTED> ($0.04)
<FN>
<F1>IF ALL EXPENSES - $8,116,000 if excludes items detailed on next pages.
</FN>
</TABLE>
