<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of
the Commission only (as
permitted by Rule
14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
DIGITAL SOLUTIONS, INC.
________________________________________________________________________________
(Name of the Corporation as Specified in Charter)
Donald T. Kelly, Secretary
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box)
[ ] No Fee required
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
Common Stock
________________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
9,383,334
________________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
$1.60
________________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
$15,014,000
________________________________________________________________________________
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or form or schedule and the date of filing.
(1) Amount previously paid:
$3,003
________________________________________________________________________________
(2) Form schedule or registration number:
________________________________________________________________________________
(3) Filing party:
________________________________________________________________________________
(4) Dated filed:
________________________________________________________________________________
<PAGE> 2
DIGITAL SOLUTIONS, INC.
300 ATRIUM DRIVE, SOMERSET, NEW JERSEY 08873
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of Digital
Solutions, Inc., a New Jersey corporation (the "Company") will be held on
Thursday, December 17, 1998 at 9:30 A.M., Eastern Time, at the Somerset
Marriott, 110 Davidson Avenue, Somerset, New Jersey 08873 for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt two
separate agreements entitled Plan and Agreement of Merger and
Reorganization, dated as of October 29, 1998 (together, the "Merger
Agreement") entered into among the Company, ten specially formed
subsidiaries of the Company (the "Merger Corporations"), ten affiliated
entities operating under the tradename the TeamStaff Companies (the
"TeamStaff Entities") and the shareholders of the TeamStaff Entities
providing for the acquisition by way of mergers (collectively referred to
as the "Merger") of the TeamStaff Entities with the Merger Corporations,
the result of which the TeamStaff Entities will become wholly-owned
subsidiaries of the Company and pursuant to which Merger the Company may
issue up to an aggregate of 9,383,334 shares of Common Stock; and
2. If the Merger Agreement is approved, to consider and approve a
proposal to amend the Company's Certificate of Incorporation to change the
name of the Company from Digital Solutions, Inc. to "TeamStaff, Inc."; and
to transact such other business as may properly be brought before the Special
Meeting or any adjournment thereof.
The accompanying Proxy Statement dated November 12, 1998 describes the
proposed Merger and the terms of the Merger Agreement in detail. Shareholders of
record holding shares of the Company's Common Stock as of October 30, 1998 (the
"Record Date") are entitled to attend and vote at the Special Meeting.
YOUR VOTE IS IMPORTANT. You are cordially invited to attend the Special
Meeting. Whether or not you plan to attend, please complete, date and sign the
accompanying proxy and return it promptly in the enclosed envelope to assure
that your shares are represented at the Special Meeting. If you do attend, you
may revoke any prior proxy and vote your shares in person if you wish to do so.
Any prior proxy will automatically be revoked if you execute the accompanying
proxy or if you notify the Secretary of the Company, in writing, prior to the
Special Meeting.
By Order of the Board of Directors
Donald T. Kelly
Secretary
Dated: November 12, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES.
<PAGE> 3
DIGITAL SOLUTIONS, INC.
300 ATRIUM DRIVE
SOMERSET, NEW JERSEY 08873
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 17, 1998
This Proxy Statement and the accompanying form of proxy have been mailed on
or about November 12, 1998 to the holders of the Common Stock, par value $.001
per share ("Common Stock") of DIGITAL SOLUTIONS, INC., a New Jersey corporation
(the "Company" or "Digital") on October 30, 1998 (the "Record Date") in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Special Meeting of shareholders to be held on December
17, 1998 at 9:30 A.M. at the Somerset Marriott, 110 Davidson Avenue, Somerset,
New Jersey 08873 and at any adjournment thereof.
At the Special Meeting, the shareholders of the Company will:
1. Consider and vote upon a proposal to approve and adopt two separate
agreements entitled Plan and Agreement of Merger and Reorganization, dated
as of October 29, 1998 (together, the "Merger Agreement") among the
Company, ten specially formed subsidiaries (the "Merger Corporations"), ten
affiliated entities operating under the name the TeamStaff Companies (the
"TeamStaff Entities") and the shareholders of the TeamStaff Entities
providing for the acquisition by way of mergers (collectively referred to
as the "Merger") of the TeamStaff Entities with the Merger Corporations,
the result of which the TeamStaff Entities will become wholly-owned
subsidiaries of the Company and pursuant to which Merger the Company may
issue up to an aggregate of 9,383,334 shares of Common Stock; and
2. If the Merger Agreement is approved, to consider and approve a
proposal to amend the Company's Certificate of Incorporation to change the
name of the Company from Digital Solutions, Inc. to "TeamStaff, Inc."; and
to transact such other business as may properly be brought before the
Special Meeting or any adjournment thereof.
The Merger Agreement and the transactions contemplated thereby are complex
and are discussed in detail in this Proxy Statement and accompanying Exhibits.
Shareholders are urged to read the contents of this Proxy Statement in its
entirety.
The TeamStaff Entities are privately owned companies engaged in the
professional employer services business similar to the business operations of
the Company. The Board of Directors believes that the Merger is in the best
interests of the Company because (i) as a result of the Merger the Company's
revenues will be increased by approximately 86% (based upon the fiscal year
ended September 30, 1997), (ii) the combined entities will have approximately
11,000 worksite employees (iii) the Merger is expected to allow the Company to
enjoy opportunities for operating efficiencies and synergies from the combined
entities and (iv) the Merger provides the Company with an avenue of expansion
into the southeastern United States. The shareholders of Digital will not be
receiving any consideration as a result of the Merger, but will continue to be
shareholders of Digital and will therefore benefit from the combination of the
TeamStaff Entities with the Company.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, HAS
DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY
AND ITS SHAREHOLDERS, AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF
THE MERGER AGREEMENT AND THE MERGER.
SOLICITATION, VOTING AND REVOCABILITY OF PROXY
Shares of the Company's Common Stock represented by an effective proxy in
the accompanying form will, unless contrary instructions are specified in the
proxy, be voted (i) FOR the approval and adoption of the
<PAGE> 4
Merger Agreement and the Merger and the issuances of the Company's Common Stock
as contemplated in the Merger Agreement and (ii) FOR the proposal to change the
Company's name to "TeamStaff, Inc." Each share of Common Stock is entitled to
one vote. Voting is on a noncumulative basis.
Under the New Jersey Business Corporation Act, shareholders entitled to
cast a majority of the votes at the Special Meeting must be present, either in
person or by proxy, to have a quorum for the Special Meeting. Any proxy may be
revoked at any time before it is voted. A shareholder may revoke a proxy by
submitting a proxy bearing a later date or by notifying the Secretary of the
Company either in writing prior to the Special Meeting or in person at the
Special Meeting. Revocation is effective only upon receipt of such notice by the
Secretary. Approval and adoption of the Merger Agreement and the change of
corporate name requires the affirmative vote of a majority of the votes cast at
the Special Meeting. Accordingly, abstentions will not count as yes or no votes
but will be counted for quorum purposes.
The Company will bear the cost of the solicitation of proxies by the Board
of Directors. The Board of Directors may use the services of its executive
officers, employees and directors to solicit proxies from shareholders in person
and by mail, telegram and telephone. In addition, the Company expects to retain
the services of Hill & Knowlton, Inc., a proxy solicitation firm to assist it in
the solicitation of votes for a fee not to exceed approximately $8,000. The
Company will also reimburse Hill & Knowlton, Inc. for its reasonable expenses
and indemnify it against certain liabilities, including certain liabilities
under the federal securities laws. Arrangements may also be made with brokers,
fiduciaries, custodians, and nominees to send proxies, proxy statements and
other material to the beneficial owners of the Company's Common Stock held of
record by such persons, and the Company may reimburse them for reasonable
out-of-pocket expenses incurred by them in so doing.
Representatives of the Company's independent public accountants, Arthur
Andersen LLP, are expected to be present at the Special Meeting, will have the
opportunity to make a statement if they so desire, and will be available to
respond to appropriate questions.
The principal executive offices of the Company are located at 300 Atrium
Drive, Somerset, New Jersey 08873; the Company's telephone number is (732)
748-1700.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
herewith files reports and other information with the Securities and Exchange
Commission (the "SEC"). These reports and other information can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N. W., Washington, D.C. 20549, and at the
following Regional Offices of the SEC: Seven World Trade Center, New York, New
York 10048, and Northwestern Atrium Center, 800 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC also maintains a World Wide Web Site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of that site is
http://www.sec.gov.
2
<PAGE> 5
EXHIBITS
The following documents are annexed hereto and are incorporated by
reference in this Proxy Statement:
<TABLE>
<S> <C>
Exhibit A: Plan and Agreement of Merger and Reorganization dated as of
October 29, 1998 among the Company, the Merger Corporations,
the TeamStaff Entities and certain individuals and trusts as
shareholders of the TeamStaff Entities;
Exhibit B: Report on Form 10-K of Digital Solutions, Inc. for the
fiscal year ended September 30, 1997;
Exhibit C: Quarterly Report on Form 10-Q of Digital Solutions, Inc. for
the quarter ended June 30, 1998;
Exhibit D: Audited Financial Statements of the TeamStaff Entities for
the years ended December 31, 1995, 1996 and December 31,
1997;
Exhibit E: Management's Discussion and Analysis of Financial Condition
and Results of Operations of the TeamStaff Entities for the
fiscal years ended December 31, 1997, 1996 and 1995 and the
six months ended June 30, 1998 and June 30, 1997.
Exhibit F: Unaudited Financial Statements of the TeamStaff Entities for
the six months ended June 30, 1998 and 1997.
Exhibit G: Form of Amendment to the Amended and Restated Certificate of
Incorporation.
Exhibit H: Consent of Arthur Andersen LLP
Exhibit I: Consent of KPMG Peat Marwick LLP
Exhibit J: Consent of Grant Thornton LLP
</TABLE>
3
<PAGE> 6
VOTING SECURITIES AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The securities entitled to vote at the Special Meeting are the Company's
Common Stock. Each share of Common Stock entitles its holder to one vote on each
matter submitted to shareholders. The close of business on October 30, 1998 has
been fixed as the record date for the determination of shareholders entitled to
notice of and to vote at the Special Meeting and any adjournment thereof. As of
October 30, 1998, 19,356,833 shares of Common Stock were issued and outstanding.
Voting of the shares of Common Stock is on a noncumulative basis.
The following table sets forth certain information as of October 30, 1998
with respect to (i) each director and executive officer of the Company (ii) the
persons (including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act) known by the Company to be the beneficial owner of more than five
percent of any class of the Company's voting securities and (iii) officers and
directors as a group. The only class of voting securities of the Company is the
Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF COMPANY'S
NAME OF SHAREHOLDER AND ADDRESS PRESENTLY OWNED(1) COMMON STOCK
------------------------------- ------------------ --------------------
<S> <C> <C>
Karl W. Dieckmann(2) 315,743 1.63%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
George J. Eklund(3) 495,545 2.52%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Senator John H. Ewing(4) 126,125 *
76 Claremont Road
Barnardsville, NJ 07924
William J. Marino(5) 93,617 *
c/o Blue Cross/Blue Shield
of New Jersey
3 Penn Plaza East
Newark, NJ 07105
Donald W. Kappauf(6) 551,248 2.84%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Donald T. Kelly(7) 53,850 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Charles R. Dees Jr. Ph.D.(8) 5,000 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Martin J. Delaney(9) 63,823 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
All officers and directors as a group %
(8) persons(2,3,4,5,6,7,8,9) 1,699,951 8.48
</TABLE>
- ---------------
* Less than 1 percent.
(1) Ownership consists of sole voting and investment power except as otherwise
noted.
(2) Includes options to purchase 15,000 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
<PAGE> 7
(3) Includes options to purchase 380,100 shares of the Company's Common Stock,
and excludes unvested options to purchase 120,000 shares of Common Stock.
(4) Includes options to purchase 40,000 shares of Common Stock, Warrants to
purchase 2,500 shares and excludes unvested options to purchase 5,000 shares
of Common Stock.
(5) Includes options to purchase 10,000 shares of the Company's Common Stock,
and excludes unvested options to purchase 5,000 shares of Common Stock.
(6) Includes options to purchase 175,000 shares of the Company's Common Stock,
and excludes unvested options to purchase 125,000 shares of Common Stock.
(7) Includes options to purchase 45,000 shares of Common Stock, and excludes
unvested options to purchase 35,000 shares of Common Stock.
(8) Excludes unvested options to purchase 1,250 shares of Common Stock and
includes vested options to purchase 5,000 shares of Common Stock.
(9) Excludes unvested options to purchase 1,250 shares of Common Stock and
includes vested options to purchase 5,000 shares of Common Stock.
CERTAIN REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own, directly or
indirectly, more than 10% of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission (SEC) reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on review of the copies of such
reports received by the Company, the Company believes that all Section 16(a)
filing requirements applicable to officers, directors and 10% shareholders were
complied with during the 1997 fiscal year.
5
<PAGE> 8
PROPOSAL I
APPROVAL OF THE MERGER AGREEMENT
AMONG THE COMPANY AND THE TEAMSTAFF ENTITIES
PROPOSAL
The Board of Directors have submitted for shareholder approval a proposal
to approve the Merger Agreement dated as of October 29, 1998 among the Company,
the Merger Corporations, the TeamStaff Entities and the shareholders of the
TeamStaff Entities. The following describes certain aspects of the proposed
Merger, including material provisions of the Merger Agreement. The following
description of the Merger does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, which is attached as Exhibit
A to this Proxy Statement and is incorporated herein by reference. Shareholders
are urged to read the Merger Agreement carefully. Capitalized terms used in this
section or elsewhere in this Proxy Statement but not defined in this Proxy
Statement shall have the meanings attributed to them in the Merger Agreement.
Approval of the Merger Agreement by the Company's shareholders is not
required by the Company's Certificate of Incorporation, its Bylaws or under the
New Jersey Business Corporation Act. The Company's Common Stock is listed for
trading on the SmallCap Market of the Nasdaq Stock Market, Inc. and under its
rules a listed company must obtain shareholder approval for any transaction
which will result in the issuance of securities by the listed company equal to
or exceeding 20% of the listed company's outstanding securities. On October 30,
1998, the Company had outstanding 19,356,833 shares of Common Stock. The Merger
Agreement provides that the Company will issue a minimum of 8,233,334 shares of
its Common Stock which represents approximately 42.5% of its currently
outstanding Common Stock, thereby requiring shareholder approval under the
Nasdaq SmallCap Market rules. Upon consummation of the transaction, assuming the
Company issues 8,233,334 shares to the shareholders of the TeamStaff Entities,
such shareholders will own approximately 29.8% of the outstanding shares of
Common Stock of the Company. Under certain circumstances, the Company may be
required to issue up to 750,000 additional shares (an additional 2.7%) in order
to consummate the transaction. In addition, the Company has agreed to issue to
its investment banker approximately 400,000 shares of its Common Stock.
SUMMARY OF THE TERMS OF MERGER AGREEMENT
General
The Company has entered into two separate agreements entitled Plan and
Agreement of Merger and Reorganization, dated as of October 29, 1998, with the
TeamStaff Entities and the shareholders owning all of the shares of the
TeamStaff Entities. The TeamStaff Entities are privately owned. The Company
intends to acquire the TeamStaff Entities through a merger of 10 newly formed
subsidiaries of the Company (sometimes referred to as the "Merger Corporations")
with the 10 entities which comprise the TeamStaff Entities. After the Merger,
assuming approval by shareholders, the 10 TeamStaff Entities will be
wholly-owned subsidiaries of the Company.
THE CORPORATE EXISTENCE OF THE COMPANY WILL NOT BE AFFECTED BY THE MERGER.
The TeamStaff Entities are comprised of the following corporations:
TeamStaff Holding Company, Inc. ("THC"), The TeamStaff Companies, Inc. ("TSC"),
Employer Support Services, Inc, ("ESS"), TeamStaff U.S.A., Inc. ("TUSA"),
TeamStaff, Inc. ("TSI"), TeamStaff II, Inc. ("TSI II"), TeamStaff III, Inc.
("TSI III"), TeamStaff IV, Inc. ("TSIV"), TeamStaff V, Inc. ("TSV") and
TeamStaff Insurance Services, Inc. ("TIS"). Each of the entities are Florida
corporations with its principal address at 1211 N. Westshore Blvd., Suite 806,
Tampa, Florida 33607.
The parties have entered into two separate agreements solely to preserve
the "tax free exchange " status of the merger of nine of the TeamStaff Entities
under Section 368 of the Internal Revenue Code. The second merger agreement will
provide for the acquisition of TSV. The terms and conditions of this separate
merger
6
<PAGE> 9
agreement for the TSV merger are exactly the same as the other merger agreement
for the nine TeamStaff Entities except for certain tax free language which has
been deleted from this second agreement. For purposes of this Proxy Statement,
all of the Mergers are deemed one transaction and approval of the Merger
Agreement includes approval of both agreements. See the discussion below
entitled "Federal Tax Consequences; Accounting Treatment of Merger."
The shareholders of the TeamStaff Entities and other parties to the Merger
agreement are: Warren M. Cason ("WC"), Dorothy C. Cason ("DC"), Kirk A. Scoggins
("KS"), Melissa C. Scoggins, as trustee of the Kirk Allan Scoggins 1997 Three
Year Grantor Retained Annuity Trust, dated 7/1/97 (the "KS Trust") and Warren M.
Cason, Jr., as trustee of the Dorothy C. Cason 1997 Three Year Grantor Retained
Annuity Trust, dated 7/1/97 (the "WC Trust"). The shareholders of the TeamStaff
Entities are collectively referred to in this Proxy Statement as the "Sellers").
Consideration Payable to the Sellers of the TeamStaff Entities
Pursuant to the terms of the Merger Agreement: (A) all of the shares of
common stock of the TeamStaff Entities shall be converted into the right to
receive 8,233,334 shares of Digital Solutions, Inc. Common Stock; (B) each share
of outstanding preferred stock of the TeamStaff Entities ("TeamStaff Preferred
Shares") shall be exchanged for the right to receive an amount equal to
$1,800,000 plus accrued dividends to the date of Closing (approximately $252,000
as of September 30, 1998) divided by the number of preferred shares issued and
outstanding (the "Preferred Share Payment") and (C) Digital shall cause to be
paid outstanding debt owed by the TeamStaff Entities to the Sellers in an amount
not to exceed $1,079,000 (the "Debt Payment"). The 8,233,334 shares, the Debt
Payment and the Preferred Share Payment are sometimes referred to as the "Merger
Consideration". The sole TeamStaff Entity with outstanding TeamStaff Preferred
Shares is TSV.
Pursuant to the terms of the Merger Agreement, the Company is not required
to close on the Merger unless the Company obtains financing of approximately
$4,500,000. In the event that the Company is unable to obtain financing from its
lender (as discussed below) in the amount of approximately $4,500,000, which
management believes is necessary to consummate the Merger and fund the combined
entities following the Merger, then the Company may be required to alter the
terms of the consideration payable to the Sellers or obtain alternative sources
of funds. The alternative terms may include the issuance of debt or debt
convertible into Common Stock or the sale of equity. As a result of the
uncertainty of its financing, the Company is also seeking approval, as part of
the approval of the Merger, to issue up to an additional 750,000 shares of
Common Stock. THEREFORE, APPROVAL OF THE MERGER WILL ALSO BE DEEMED TO BE
APPROVAL OF THE ISSUANCE TO THE SELLERS OF THE CONTEMPLATED 8,233,334 SHARES, UP
TO 750,000 ADDITIONAL SHARES AND 400,000 SHARES TO BE ISSUED TO THE COMPANY'S
INVESTMENT BANKER.
THE SHAREHOLDERS OF THE DIGITAL SOLUTIONS, INC. ARE NOT RECEIVING ANY
PAYMENTS OF ANY KIND (STOCK OR CASH OR OTHERWISE) AS A RESULT OF THE MERGER.
On August 10, 1998, the day prior to the announcement of the proposed
Merger, the high bid and low sales price of the Company's Common Stock on the
Nasdaq SmallCap Stock Market was $1.75 and $1.696. On October 28, 1998, the day
prior to execution of the Merger Agreement, the high bid and low sales price of
the Company's Common Stock on the Nasdaq SmallCap Stock Market was $1.1875 and
$1.125, respectively.
Conditions and Termination; Regulatory Approvals
The Merger is contingent upon several factors and events such as: (i)
approval of the Board of Directors and shareholders of each of the TeamStaff
Entities and the Company; (ii) termination of all waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; (iii) the Company
obtaining financing for the transaction in an amount of approximately $4,500,000
upon terms acceptable to the Company; and (iv) approval of the Florida
Department of Business and Professional Regulations for the contemplated change
in ownership of the TeamStaff Entities.
7
<PAGE> 10
All of the shareholders of the TeamStaff Entities have advised the Company
that they intend to vote in favor of the Merger.
Federal Tax Consequences; Accounting Treatment of Merger
The Company believes that there are no federal or other income tax
consequences of the Merger for the shareholders of the Company because the
shareholders are not receiving any form of payment as a result of the
transaction. The shareholders of the Company will continue to hold shares of
Common Stock of the Company.
The Company intends to utilize the "purchase" accounting method for the
acquisition of the TeamStaff Entities. The purchase price paid by the Company
will be allocated based upon the fair market value of assets acquired and
liabilities assumed. The parties will be providing a schedule to the Merger
Agreement setting forth such allocations. The excess of the purchase price over
the amounts so allocated will be treated as goodwill.
Related Agreements
If the Merger is consummated, the Company has agreed to pay up to $750,000
of the transaction costs (including accounting, legal and investment banker
fees) of the TeamStaff Entities and the Sellers. These fees include
approximately $300,000 of fees due to the Company's financial advisor, Raymond
James & Associates, Inc., which has also served as financial advisor to the Team
Staff Entities. The Company also is paying Raymond James & Associates, Inc. fees
for representing the Company.
The Company will enter into a two year employment agreement with Mr. Kirk
Scoggins, the President and a principal shareholder of the TeamStaff Entities
whereby Mr. Scoggins will be employed by the Company as the President of its
professional employer organization division. The Company has also agreed to
appoint Mr. Scoggins to its Board of Directors and to consider appointment of a
second person mutually acceptable to the Company and the Sellers. In addition to
the foregoing, the Company has agreed to forgive approximately $135,000 owed by
Mr. Scoggins to the TeamStaff Entities provided Mr. Scoggins is employed by the
Company for the next two years.
It is a condition to the Merger Agreement that the Company and certain key
employees of the TeamStaff Entities will also enter into non-competition
agreements which will provide that the key employees will not solicit customers
or employes of the Company during a period of two years following the Merger in
certain states where the TeamStaff Entities conduct business, including the
state of Florida.
In addition, pursuant to the Merger Agreement, the Sellers have agreed to
vote all shares owned by them during the two year period following the Merger,
in favor of management's nominees to the Board of Directors at all special or
annual meetings of the Company's shareholders.
The shares to be issued to the Sellers in the Merger will be "restricted
shares" under the Securities Act of 1933, as amended (the "Act"). "Restricted
shares" may not be sold by the holder unless (i) a registration statement is
filed with, and declared effective by, the SEC or (ii) pursuant to Rule 144
promulgated by the SEC or (iii) there exists an exemption from the registration
requirements of the Act. Pursuant to the terms of the Merger Agreement and a
related registration rights agreement to be entered into between the Company and
the Sellers, the Company has agreed to use its best efforts to have declared
effective by the SEC, on the first anniversary of the Merger, a registration
statement under the Act covering the resale by the Sellers of one-third of the
shares of the Company's Common Stock being issued to the Sellers. In addition,
the Company has agreed to use its best efforts to have registration statements
for one third of the shares declared effective by the SEC on each of the second
and third anniversary dates of the Merger.
Appraisal Rights
The Company's shareholders are not entitled to appraisal rights under the
New Jersey Business Corporation Act.
8
<PAGE> 11
THE MERGER AGREEMENT
General
The Plan of Agreement and Merger, a copy of which is annexed as Exhibit A
provides for the acquisition by the Company of the TeamStaff Entities. The
acquisition will be consummated through the merger of the Merger Corporations
into the TeamStaff Entities. The Merger Corporations have no operations and were
formed solely to consummate the Merger. As a result of the Merger of the newly
formed subsidiaries into the TeamStaff Entities, the TeamStaff Entities will be
the surviving entities and will be wholly-owned subsidiaries of the Company.
THE CORPORATE EXISTENCE OF THE COMPANY WILL NOT BE AFFECTED BY THE MERGER.
The Merger Agreement also sets forth certain representations and warranties
by the parties regarding their ownership, operations and financial status, as
well as conditions to be consummated prior to consummation of the Merger. The
Company has made representations regarding, among other things: (i) its
corporate and capital structure; (ii) its corporate authority to consummate the
transaction; (iii) the accuracy of its filings with the SEC and the financial
statements filed with its SEC reports; (iv) its business operations; and (v) the
absence of litigation which would materially affect the business of the Company.
The TeamStaff Entities have made similar representations to the Company
(excluding any representations or warranties regarding SEC filings since the
Team Staff Entities are private companies and do not file reports with the SEC),
as well as additional representations, including those regarding (i) contracts
and agreements to which the TeamStaff Entities are a party; (ii) the status of
leases to which the TeamStaff Entities are a party; (iii) insurance matters;
(iv) litigation matters; (v) tax filings and payments during the last three
years and (vi) ownership of intellectual property such as trademarks. The Merger
Agreement provides that the Sellers and Digital will each indemnify the other
party under certain circumstances for the breach of any representation or
warranty.
The Merger will be consummated as soon as possible following satisfaction
of the conditions to Closing, including approval by the shareholders of the
Company. The Company and the TeamStaff Entities expect to close on the
transactions contemplated by the Merger Agreement in December 1998, assuming the
conditions are satisfied.
Consideration Payable to the Sellers of the TeamStaff Entities
Pursuant to the terms of the Merger Agreement the Merger Consideration
consists of: (A) 8,233,334 shares of Digital Common Stock in exchange for all of
the shares of common stock of the TeamStaff Entities; (B) $1,800,000 plus
accrued dividends to closing (approximately $252,000 as of September 30, 1998)
in cash in exchange for all outstanding TeamStaff Preferred Shares and (C) an
amount not to exceed $1,079,000 to pay outstanding debt owed by the TeamStaff
Entities to the Sellers.
Pursuant to the terms of the Merger Agreement, the Company is not required
to consummate the Merger unless the Company obtains financing of approximately
$4,500,000. In the event that the Company is unable to obtain financing from its
lender (as discussed below) in the amount of approximately $4,500,000, which
management believes is necessary to consummate the Merger and fund the combined
entities following the Merger, then the Company may be required to alter the
terms of the consideration payable to the Sellers or obtain alternative sources
of funds. The alternatives terms may include the issuance of debt or debt
convertible into Common Stock or the sale of equity. As a result of the
uncertainty of its financing, the Company is also seeking approval from its
shareholders, as part of the approval of the Merger, to issue up to an
additional 750,000 shares of Common Stock. The Company will also be issuing
approximately 400,000 shares to its investment banker. THEREFORE, APPROVAL OF
THE MERGER WILL ALSO BE DEEMED TO BE APPROVAL OF BOTH THE ISSUANCE OF THE
CONTEMPLATED 8,233,334 SHARES, UP TO 750,000 ADDITIONAL SHARES AND THE 400,000
SHARES TO ITS INVESTMENT BANKER.
THE SHAREHOLDERS OF THE COMPANY ARE NOT RECEIVING ANY PAYMENTS (STOCK OR
CASH OR OTHERWISE) AS A RESULT OF THE MERGER.
9
<PAGE> 12
Description of the TeamStaff Entities
The TeamStaff Entities are 10 separate privately held Florida corporations
which operate as a group in the employment related service business. The
TeamStaff Entities have their principal office in Tampa, Florida and operate in
over 20 states. The TeamStaff Entities are members of both the National
Association of Professional Employer Organizations ("NAPEO") and the Florida
Association of Professional Employer Organization. The initial TeamStaff Entity
was founded in 1989 and additional corporations have joined the group from time
to time as the business has expanded. The principal address of the TeamStaff
Entities is 1211 N. Westshore Boulevard, Suite 806, Tampa, Florida and its
telephone number is (813)289-1981.
The TeamStaff Entities provide human resource management services such as
payroll administration, personnel administration, employee benefits
administration, workers' compensation, insurance coverage and claims management,
risk management and related services. The TeamStaff Entities offer their
services to businesses throughout the United States with a strong emphasis in
the southeastern United States. At present, target clients of the TeamStaff
Entities are involved light manufacturing, golf course management, resort
property management, educational and clerical operations, technical sales and
service and franchise operations. The TeamStaff Entities provide their services
through the following four customer care divisions, each of which is a distinct
yet interrelated service unit: workers' compensation and risk management
services; human resources services; employee benefits services; and payroll
administration services.
For the six months ended June 30, 1998, the TeamStaff Entities had
approximately 5,600 worksite employees servicing approximately 260 clients
located in over 20 states. During the same period, based upon the unaudited
financial statements of the TeamStaff Entities provided by the TeamStaff
Entities to the Company (which unaudited financial statements appear as Exhibit
F annexed hereto), the TeamStaff Entities had revenues of approximately
$53,800,000, gross profit of approximately $2,100,000 and net income of
approximately $95,000. For the fiscal year ended December 31, 1997, based upon
the audited financial statements of the TeamStaff Entities provided by the
TeamStaff Entities to the Company (which audited financial statements appear as
Exhibit D annexed hereto), the TeamStaff Entities had revenues of approximately
$105,246,000, gross profit of approximately $3,300,000 and a net loss of
approximately $352,000.
Reasons for the Merger; Background of Merger; Recommendation of the Board of
Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, HAS
DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY
AND ITS SHAREHOLDERS, AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF
THE MERGER AGREEMENT, THE MERGER AND THE ISSUANCE OF THE SHARES. Members of the
Board of Directors and officers hold 978,451 shares of Common Stock of the
Company as of October 30, 1998 and have advised the Company that they intend to
vote in favor of the Merger.
Approval of the Merger Agreement by the Company's shareholders is not
required by the Company's Certificate of Incorporation, its Bylaws or under the
New Jersey Business Corporation Act. The Company's Common Stock is listed for
trading on the SmallCap Market of the Nasdaq Stock Market, and under its rules a
listed company must obtain shareholder approval for any transaction which will
result in the issuance of securities by the listed company equal to or exceeding
20% of the Company's outstanding securities. On October 30, 1998, the Company
had outstanding 19,356,833 shares of Common Stock. The Merger Agreement provides
that the Company will issue an aggregate of 8,233,334 shares of its Common Stock
to the Sellers which represents approximately 42.5% of its outstanding Common
Stock, thereby requiring shareholder approval under the Nasdaq SmallCap rules.
In the event the Company were required to obtain additional alternative
financing, the Company may be required to issue up to an aggregate of 8,983,334
shares of Common Stock.
The Board of Directors believes that the TeamStaff Entities provide the
Company with an opportunity to expand its operations in one of the fastest
growing areas of the United States. The Board of Directors also believes that
the Merger will allow the Company to enjoy opportunities for operating
efficiencies and synergies
10
<PAGE> 13
from the combined entities. The TeamStaff Entities are engaged in the
professional employer services business similar to the business operations of
the Company. The TeamStaff Entities have operations centered in the southeastern
United States, with presences in Tampa, Florida; Raleigh/Durham, North Carolina;
Dallas, Texas; Atlanta, Georgia; and Jacksonville, Florida. The combined
entities will have approximately 11,000 worksite employees which will result in
savings from economies of scale such as allowing the Company to negotiate lower
costs with its insurance carriers for insurance, including workers compensation.
Additionally, the Board believes that the TeamStaff Entities have stronger sales
and marketing operations than the Company presently has and therefore the post
merger entities will be able to combine Digital's financial operations
capabilities with the sales and marketing operations of TeamStaff. Further,
acquisition of the TeamStaff Entities, whose business is concentrated in the
southeastern United States, will provide the Company with quicker access to this
market than were the Company to attempt to expand its operations on its own.
The shareholders of Digital will not be receiving any consideration as a
result of the Merger, but will continue to be shareholders of Digital and will
therefore benefit from the combination of the TeamStaff Entities with the
Company.
The management of the Company and the TeamStaff Entities commenced
negotiating the acquisition in June, 1998 and entered into a letter of intent on
August 11, 1998. The Board of Directors preliminarily approved the terms of the
letter of intent and the Merger Agreement at a meeting held by the Board of
Directors on September 16, 1998. In late September 1998, the parties agreed to
fix the number of shares payable to the Seller as of October 1, 1998 based upon
a price of $1.00 per share. The Board of Directors considered several factors in
determining that the terms of the Merger were fair to the Company and its
shareholders. Among the factors considered were the related business operations;
the potential savings from a combination of the two entities; the financial
condition of the two entities; the resources of the two entities; and the
potential revenues and earnings of the combined entities. The Board also
considered the market value of the Common Stock of the Company compared to other
companies which are competitors of the Company and are publicly held, as well as
prices paid by other entities for acquisitions of professional employer service
businesses in the last few years. On August 10, 1998, the day prior to the
announcement of the proposed Merger, the high bid and low sales price of the
Company's Common Stock on the Nasdaq SmallCap Stock Market was $1.75 and $1.696.
On October 28, 1998, the day prior to the Merger Agreement, the high bid and low
sales of the Company's Common Stock on the Nasdaq SmallCap Stock Market was
$1.1875, and $1.125, respectively.
The Board of Directors believes that the terms of the Merger are fair and
reasonable to the shareholders of the Company. The shareholders of the Company
will continue to hold shares of the Company's Common Stock, but management of
the Company believes that the revenues and operations of the combined entity
will be greater and stronger than prior to the Merger. The Board and the
Company's management believe that the Company's future prospects be enhanced by
increasing its revenues and extending its operations and believe that the
acquisition of the TeamStaff entities provide a positive avenue by which to
increase revenue. During the year ended December 31, 1997, the TeamStaff
Entities had revenues of approximately $105,246,000. The Company had revenues of
approximately $122,695,000 for its fiscal year ended September 30, 1997 and
revenues of approximately $102,122,000 for the nine month period ended June 30,
1998. The Company had a net loss of approximately $2,832,000 and net income of
approximately $2,496,000 respectively, for the fiscal year ended September 30,
1997 and nine months ended June 30, 1998. The TeamStaff Entities had a loss of
approximately $352,000 and net income of approximately $95,000 for the year
ended December 31, 1997 and the six months ended June 30, 1998. Although there
can be no assurances, the Board of Directors expects that the combined entities
will have annualized combined revenues for the next fiscal year in excess of
$240 million. With the anticipated level of revenues, the Company believes it
will rank within the top 15% of the professional employer organization revenues
in the United States.
No Opinion of Financial Advisor
The terms of the Merger Agreement and the Merger were negotiated at arm's
length between the management of the Company and the TeamStaff Entities. The
investment banking firm of Raymond James &
11
<PAGE> 14
Associates, Inc. has served as an advisor to both the Company and the TeamStaff
Entities and has not rendered an opinion with respect to the terms of the
transaction.
Conditions and Termination; Regulatory Approvals
The Merger is contingent upon several factors and events such as: (i)
approval of the shareholders of each of the TeamStaff Entities and the Company;
(ii) termination of all waiting periods under the Hart-Scott-Rodino Improvements
Act of 1976; (iii) the Company's lenders approving financing for the transaction
in an amount of approximately $4,500,000 upon terms acceptable to the Company;
and (iv) approval of the Florida Department of Business and Professional
Regulations for the contemplated change in ownership of the TeamStaff Entities.
All of the shareholders of the TeamStaff Entities have advised the Company
that they intend to vote in favor of the Merger. The shareholders of the
TeamStaff Entities do not own shares of Common Stock or other securities of the
Company.
Under the Hart-Scott-Rodino Improvements Act of 1976 and the rules
promulgated thereunder, by the Federal Trade Commission ("FTC"), the Merger
cannot be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice ("Antitrust Division") and specified waiting periods have
been satisfied. The parties intend to file their applications under the
Hart-Scott-Rodino Improvements Act of 1976 prior to the Special Meeting. At any
time before or after consummation of the Merger, the Antitrust Division or the
FTC or any state authority could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to enjoin
the consummation of the Merger or seeking divestiture of substantial assets of
the Company. Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
Pursuant to the laws of the State of Florida, the TeamStaff Entities hold
licenses to operate in the professional employer and employee leasing business.
Licensed entities such as the TeamStaff Entities are required to obtain approval
of the Florida Department of Business and Professional Regulations whenever
there is a change of ownership of the licensed entity such as the change
proposed by the Merger. The parties submitted their applications to the Florida
Department of Business and Professional Regulations in October 1998 have been
notified that the Department of Business and Professional Regulations has
scheduled a hearing on change in control for November 18, 1998.
There can be no assurance that the required approvals and consents,
including those of the FTC and the Florida Department of Business and
Professional Regulations, will be obtained.
The Company has received a proposal from its lender to provide financing
for the Merger. The Company has requested that the lender provide financing of
approximately $4,500,000 which funds will be used to consummate the Merger,
including the Debt Payment and Preferred Share Payment and expenses of the
transaction. As of the date of this Proxy Statement, no definitive agreements
with the lender have been negotiated or executed. The lender has advised the
Company that it is continuing its due diligence regarding the transaction,
including a review of the financial condition of the TeamStaff Entities. There
can be no assurance that the Company will be able to obtain financing from its
lender on terms acceptable to it. Pursuant to the terms of the Merger Agreement,
the Company is not required to close on the Merger unless the Company obtains
financing of approximately $4,500,000. In the event that the Company is unable
to obtain financing from its lender (as discussed below) in the amount of
approximately $4,500,000, which management believes is necessary to consummate
the Merger and fund the combined entities following the Merger, then the Company
may be required to alter the terms of the consideration payable to the Sellers
or obtain alternative sources of funds.
It is a condition to the Merger that the parties enter into one or more
escrow agreements to provide for the escrow of a certain number of shares to be
received by the Sellers as a result of the Merger. The escrow will be
established in order to provide for the payment by the Sellers of any breach of
representations or
12
<PAGE> 15
warranties made by them and for which the Company may be entitled to
indemnification under the terms of the Merger Agreement. The Merger Agreement
provides for two types of escrow funds, as described below.
The first escrow fund is intended for indemnification as a result the
breach by the Sellers of general representations and warranties. This first fund
is in the amount of $525,000 and provides for the escrow of such number of
Digital shares as may be determined by dividing $525,000 by the Escrow Market
Price. For purposes of the Merger Agreement, "Escrow Market Price" of the shares
of the Company's Common Stock means the average closing sale price of a share of
Common Stock on the Nasdaq SmallCap Market for the five trading days ending
three days prior to Closing. For example, if the Escrow Market Price were $1.00,
the Sellers would be required to place 525,000 shares into escrow. In order to
obtain payment from the first escrow fund, the Company must make a claim within
18 months of closing.
The second escrow fund is intended for indemnification for any payments
which Digital may be required to make, up to $600,000 in connection with (i)
litigation and settlement of potential liabilities emanating from the TeamStaff
Entities' past involvement with a workers' compensation self insurance fund in
Florida ("USEC") and (ii) amounts which the TeamStaff Entities may owe to CIGNA,
a former medical insurer of the TeamStaff Entities in excess of the amounts
reserved by the TeamStaff Entities. The Escrow fund will be utilized to provide
funds for amounts which may be paid for claims in excess of the amounts reserved
by the TeamStaff Entities prior to the acquisition. With respect to the CIGNA
and USEC matters, the TeamStaff Entities have established reserves of
approximately $456,000 in the aggregate. The Sellers have agreed to place into
escrow such number of Digital shares as may be determined by dividing $600,000
by the Escrow Market Price. For example, if the Escrow Market Price were $1.00
per share and were the closing to occur based upon such price the Sellers would
be placing into escrow 600,000 shares of the Company's Common Stock in order to
provide a fund for indemnification. In order to obtain payment from the second
escrow fund, the Company must make a claim within three years of the closing. In
the event the USEC litigation and CIGNA matters are settled prior to closing the
escrow will not be required. In the event that both matters are settled prior to
the end of the three year period, any shares remaining in escrow will be
returned to the Sellers.
Except in the event of fraud, the Company cannot collect any monies or
shares from the Sellers for the breach of any representation or warranty except
from the escrow funds and cannot collect more than the amount of shares in
escrow. The Company has agreed to indemnify the Sellers for the breach by the
Company of any representation or warranty made by it in an amount not to exceed
$525,000. The Company has agreed that it will not make any claims against the
escrow funds until payments made by it exceed a threshold of $100,000 and then
only for such excesses.
In addition to the foregoing conditions to closing, (i) counsel to both the
TeamStaff Entities and the Company must deliver legal opinions concerning the
transaction, ownership of the respective parties, due authorization and other
corporate matters (ii) there may be no governmental action or injunction or
other suit or proceeding related to the transaction or which materially effects
the businesses of either the Company or the TeamStaff Entities. Certain
conditions, as well as the breach of representations or warranties by either
party may be waived by the parties, except for those conditions involving
shareholder or governmental approvals and the requirement that the Company
obtain financing from its lenders.
It is a condition to closing that the Company enter into a registration
rights agreement with the Sellers providing for the registration under the Act
of the shares to be received by the Sellers under the Merger Agreement. The
shares to be issued to the Sellers in the Merger will be "restricted shares"
under the Act. The Company has agreed to use its best efforts to have declared
effective by the SEC a registration statement under the Act covering the resale
by the Sellers of one-third of the shares received by them as Merger
Consideration on each of the first, second and third anniversaries of the
Closing.
The Merger Agreement may be terminated: (i) prior to closing upon mutual
agreement of the parties; (ii) by the Company in the event it is unable to
secure the necessary funding from its lenders of at least $4,500,000; (iii) by
either party in the event the other party has caused a material breach of a
representation or warranty which is not timely cured or (iv) by either party if
closing has not occurred prior to March 31, 1999.
13
<PAGE> 16
Federal Tax Consequences; Accounting Treatment of Merger
The Company believes that there are no federal or other income tax
consequences of the Merger for the shareholders of the Company because the
shareholders are not receiving any form of payment as a result of the
transaction. The shareholders of the Company will continue to hold shares of
Common Stock of the Company.
The Company intends to utilize the "purchase" accounting method for the
acquisition of the TeamStaff Entities. The purchase price paid by the Company
will be allocated based upon the fair market value of assets acquired and
liabilities assumed. The parties will be providing a schedule to the Merger
Agreement setting forth such allocations. The excess of the purchase price over
the amounts so allocated will be treated as goodwill.
It is the parties' intention that except for the merger related to one of
the TeamStaff Entities, TSV, the transactions qualify as a "tax free exchange"
under Section 368 of the Internal Revenue Code. This tax free exchange does not
effect the shareholders of the Company but is solely for the benefit of the
Sellers. The parties have further agreed that the merger of TSV will not qualify
as a tax free exchange as a result of the payment by the Company of $1,800,000
plus accrued dividends (approximately $252,000 as of September 30, 1998) in cash
for the TeamStaff Preferred Shares which were issued by TSV. As a result, a
separate merger agreement has been entered into for the TSV merger. The terms
and conditions of this separate merger are exactly the same as the other merger
agreement except for certain tax free language which has been deleted from this
second agreement. For purposes of this Proxy Statement, all of the Mergers are
deemed one transaction and approval of the Merger Agreement includes approval of
both agreements.
Related Agreements;
The Company will enter into a two year employment agreement with Mr. Kirk
A. Scoggins, the President and a principal shareholder of the TeamStaff
Entities, whereby Mr. Scoggins will be employed by the Company as its President
of its professional employer organization business. The Company has also agreed
to appoint Mr. Scoggins to its Board of Directors and to consider appointment of
a second person mutually acceptable to the Company and the Sellers. The Company
has agreed to use its best efforts to obtain the election of Mr. Scoggins to its
Board of Directors for the two year period following the Closing. Under the
terms of his employment agreement, Mr. Scoggins will receive a base salary of
$175,000 and options to acquire 100,000 shares of the Company's Common Stock.
The options will vest over two years and have an exercise price equal to the
fair market value of the Company's Common Stock on the date of closing.
Additionally, the agreement will contain certain incentive bonus clauses which
will be based upon performance of the professional employer division. In
addition, debt in the amount of $135,000 owed by Mr. Scoggins to the Company
will be forgiven. The agreement with Mr. Scoggins will contain certain
non-compete and non-disclosure provisions upon terms acceptable to the parties
for a period of two years following termination of his employment.
It is a condition to the Merger Agreement that the Company and certain key
employees of the TeamStaff Entities will also enter into non-competition
agreements which will provide that the key employees will not solicit customers
or employees of the Company during a period of two years following the Merger in
certain states where the TeamStaff Entities conduct business, including the
state of Florida.
In addition, pursuant to the Merger Agreement, the Sellers have agreed to
vote all shares owned by them during the two year period following the Merger,
in favor of management's nominees to the Board of Directors at all special or
annual meetings of the Company's shareholders.
Agreement Not To Solicit Other Offers
Pursuant to the terms of the Merger Agreement, the Sellers have agreed that
they will not, and will not permit the TeamStaff Entities to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any offers or
the making of any proposal with respect to a merger, reorganization, share
exchange or similar
14
<PAGE> 17
transaction a sale of the securities or assets of the TeamStaff Entities to any
person other than the Company. The Sellers have also agreed not to vote any of
the shares held by them in favor of any other proposal or offer.
Expenses and Termination Fees
The Merger Agreement provides that the Company will pay up to $750,000 of
the legal, accounting and investment bankers fees of the TeamStaff Entities
incurred by them in connection with the Merger. In the event the Merger is not
consummated, the parties shall bear their own costs and expenses. These fees
include approximately $300,000 of fees due to Raymond James & Associates, Inc.
for representing the Sellers Raymond James & Associates, Inc. also served as
advisor to the Company, and will be receiving approximately 400,000 shares of
Common Stock. Approval of the Merger will also be deemed approval of the
issuance of the 400,000 shares to Raymond James & Associates, Inc.
Directors and Officers of the TeamStaff Entities.
The directors and officers of the post Merger TeamStaff Entities shall be
as follows:
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
Donald Kappauf.......................... Chairman/Director
Kirk Scoggins........................... President
Chief Financial
Donald Kelly............................ Officer/Secretary/Treasurer
</TABLE>
Management of the Company
Pursuant to the terms of the Merger Agreement, the Company has agreed to
appoint Mr. Kirk Scoggins to the Board of Directors effective at the closing of
the Merger and to use its best efforts to obtain his election at subsequent
meetings of shareholders for a period of two years following the Closing. The
Company has also agreed to consider appointment of a second person mutually
acceptable as a nominee of the Sellers to the Company's Board of Directors.
Except for the election of Mr. Kirk Scoggins to the Company's Board of Directors
there are no anticipated changes to the current officers and directors of the
Company.
In addition, pursuant to the Merger Agreement, the Sellers have agreed to
vote all shares owned by them during the two year period following the Merger,
in favor of management's nominees to the Board of Directors at all special or
annual meetings of the Company's shareholders.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------------------------------------------
<S> <C> <C>
Karl W. Dieckmann 69 Chairman of the Board of Directors
George J. Eklund 54 Director
Donald T. Kelly 48 Vice President, Chief Financial Officer
and Corporate Secretary
Senator John H. Ewing 77 Director
William J. Marino 54 Director
Donald W. Kappauf 52 President, Chief Executive Officer and
Director
Charles R. Dees, Jr. 58 Director
Martin J. Delaney 55 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. Shareholders are not being requested to vote upon the election
of directors at the Special Meeting.
Amendment and Waiver
The provisions of the Merger Agreement and related agreements may be
amended by the parties at any time prior to the consummation of the Merger by
means of a written agreement executed and delivered by
15
<PAGE> 18
duly authorized officers or representatives of the respective parties. The
conditions of the Merger Agreement, including closing conditions, subject to
applicable law, may be waived by the party intended to be the beneficiary of
such condition.
Appraisal Rights
The Company's shareholders are not entitled to appraisal rights under the
New Jersey Business Corporation Act.
Vote Required for Approval
The approval of a majority of the votes cast at the special Meeting (in
person or by proxy) is required to approve the Merger Agreement and the Merger.
The approval of the Company's shareholders is required pursuant to the terms of
the Merger Agreement. Officers and directors of the Company own 928,451 shares
of Common Stock and have advised the Company that they intend to vote in favor
of the Merger.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER
AGREEMENT, HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS
OF, THE COMPANY AND ITS SHAREHOLDERS, AND RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
16
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data has been abstracted from, is
qualified in its entirety by, and should be read in conjunction with the
financial statements of the Company and the notes thereto appearing elsewhere in
this Proxy Statement or previously filed with the SEC. The statement of
operations data of the Company for the fiscal years ended September 30, 1993,
1994, 1995, 1996 and 1997, respectively, and the balance sheet data at September
30, 1993, 1994, 1995, 1996 and 1997 are derived from the audited financial
statements included in the Company's Form 10-K annexed hereto as Exhibit B, or
previously filed with the SEC. The statement of operations data of the Company
for the nine months ended June 30, 1998, and the balance sheet data at June 30,
1998 are derived from the unaudited financial statements included in the
Company's Form 10-Q annexed hereto as Exhibit C, as previously filed with the
SEC.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues............. $102,122,000 $122,695,000 $100,927,000 $73,821,000 $37,998,000 $14,681,000
Direct Expenses...... 94,588,000 113,894,000 92,490,000 68,530,000 34,939,000 12,459,000
Gross Profit......... 7,534,000 8,801,000 8,437,000 5,291,000 3,059,000 2,222,000
Selling, General &
Administrative
Expenses (includes
depreciation and
amortization....... 6,179,000 11,316,000 8,801,000 7,547,000 2,695,000 1,962,000
Income (Loss) From
Continuing
Operations......... 1,355,000 (2,515,000) (364,000) (2,256,000) 364,000 260,000
Net Income (Loss).... $ 2,496,000 $ (2,832,000) $ (597,000) $(3,316,000) $ 720,000 $ 301,000
Basic Earnings (Loss)
Per Common
Share(1)........... $ 0.13 $ (0.15) $ (0.04) $ (0.24) $ 0.06 $ 0.03
Weighted Average
Shares
Outstanding........ 19,263,097 19,070,349 16,840,371 13,595,382 10,597,537 5,484,353
Diluted Earnings
(Loss) Per Common
Share(1)........... $ 0.13 $ (0.15) $ (0.04) $ (0.24) $ 0.05 $ 0.03
Diluted Shares
Outstanding........ 19,504,058 19,070,349 16,840,371 13,595,382 12,867,027 6,339,255
Dividends Paid Per
Preferred Stock.... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 3.30 $ 4.00
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assets............... $ 15,784,000 $ 14,163,000 $ 14,800,000 $13,816,000 $ 7,727,000 $ 4,264,000
Liabilities.......... 8,166,000 9,291,000 7,632,000 10,967,000 2,671,000 1,079,000
Long-Term Debt....... 3,096,000 89,000 100,000 175,000 107,000 241,000
Working Capital
(Deficiency)....... 3,299,000 (1,401,000) 286,000 (4,771,000) 1,146,000 1,920,000
Shareholders'
Equity............. $ 7,618,000 $ 4,872,000 $ 7,168,000 $ 2,849,000 $ 5,056,000 $ 3,195,000
</TABLE>
- ---------------
(1) Basic and diluted earnings per share have replaced primary and fully diluted
earnings per share in accordance with Statement on Financial Accounting
Standards No. 128.
17
<PAGE> 20
PRO FORMA CONSOLIDATED FINANCIAL DATA
OF DIGITAL SOLUTIONS AND THE TEAMSTAFF ENTITIES
The unaudited pro forma condensed combined financial data as of June 30,
1998 and for the twelve months ended September 30, 1997 and the nine months
ended June 30, 1998 give effect to the Merger, accounted for under the
"purchase" accounting method. The unaudited pro forma condensed combined
financial data is based upon the historical consolidated financial statements of
Digital and the TeamStaff Entities under the assumptions and adjustments set
forth in the notes to such proforma financial data.
The unaudited pro forma condensed combined balance sheet data assumes that
the Merger was consummated on June 30, 1998, and the unaudited pro forma
condensed combined statement of operations data assumes that the Merger was
consummated on October 1, 1996. The fiscal year of Digital ends on September 30,
and the fiscal year of the TeamStaff Entities ends on December 31. For purposes
of presenting the unaudited pro forma condensed combined statement of operations
data, the historical financial statements of the TeamStaff Entities for the year
ended December 31, 1997 were combined with the historical financial statements
of Digital for the year ended September 30, 1997. The historical financial
statements of Digital for the nine months ended June 30, 1998 have been combined
with the compiled historical financial statements of the TeamStaff Entities for
the compiled nine months ended June 30, 1998.
For purposes of presenting the unaudited pro forma condensed combined
balance sheet data, TeamStaff's assets and liabilities have been recorded at
their estimated fair market values and the excess purchase price has been
assigned to goodwill, which is being amortized over a 20-year period. The fair
value of the TeamStaff Entities assets and liabilities is based on preliminary
estimates. Upon completion of a detailed review of assets and liabilities,
including intangibles, certain adjustments may be required to finalize the
purchase accounting adjustments. The unaudited pro forma condensed combined
statement of operation data excludes any benefits that may result due to
synergies that may be derived and the elimination of duplicative efforts in
connection with the acquisition of the TeamStaff Entities.
The unaudited pro forma condensed combined financial statement data may not
be indicative of the results that actually would have occurred if the
acquisition of the TeamStaff Entities had been consummated on the dates
indicated or which may be obtained in the future. The unaudited pro forma
condensed combined financial statement data should be read in conjunction with
the historical consolidated financial statements for Digital and the TeamStaff
Entities.
18
<PAGE> 21
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA
JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- --------------------------------------
DIGITAL TEAMSTAFF ADJUSTMENTS COMBINED
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................... $ 1,806,000 $ -- $ 1,364,000(1),(3),(4),(8) $ 3,170,000
Restricted Cash......... 738,000 -- -- 738,000
Accounts receivable, net
of allowance......... 4,924,000 2,886,000 -- 7,810,000
Notes Receivable........ -- 2,182,000 (2,182,000)(3) --
Other current assets.... 901,000 244,000 -- 1,145,000
----------- ----------- ------------ -----------
Total current
assets........ 8,369,000 5,312,000 (818,000) 12,863,000
EQUIPMENT AND
IMPROVEMENTS............ 766,000 230,000 -- 996,000
DEFERRED TAX ASSET........ 1,916,000 -- -- 1,916,000
GOODWILL, net of
amortization............ 4,158,000 -- 11,354,000(2) 15,512,000
OTHER ASSETS.............. 575,000 394,000 -- 969,000
----------- ----------- ------------ -----------
TOTAL ASSETS.... $15,784,000 $ 5,936,000 $ 10,536,000 $32,256,000
=========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-
term debt............ $ 541,000 $ 3,203,000 $ (1,203,000)(1),(3),(4) $ 2,541,000
Accounts payable........ 1,680,000 795,000 -- 2,475,000
Accrued expenses and
other................ 2,849,000 3,602,000 1,100,000(5) 7,551,000
----------- ----------- ------------ -----------
Total current
liabilities... 5,070,000 7,600,000 (103,000) 12,567,000
LONG-TERM DEBT............ 3,096,000 65,000 2,435,000(4) 5,596,000
----------- ----------- ------------ -----------
Total
Liabilities... 8,166,000 7,665,000 2,332,000 18,163,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock............ 19,000 47,000 (39,000)(6),(7) 27,000
Preferred Stock......... -- 1,800,000 (1,800,000)(8) --
Additional paid-in
capital.............. 13,643,000 1,776,000 4,691,000(2),(5),(6),(7) 20,110,000
Accumulated deficit..... (6,044,000) (5,352,000) 5,352,000(6) (6,044,000)
----------- ----------- ------------ -----------
Total
shareholders'
equity
(deficit)..... 7,618,000 (1,729,000) 8,204,000 14,093,000
----------- ----------- ------------ -----------
TOTAL
LIABILITIES
AND EQUITY.... $15,784,000 $ 5,936,000 $ 10,536,000 $32,256,000
=========== =========== ============ ===========
</TABLE>
- ---------------
(1) Includes $4,500,000 of borrowings from a financial institution required to
effect the merger.
(2) Represents the adjustment to record estimated goodwill related to the
TeamStaff acquisition and adjustments to reflect the estimated fair value of
the intangibles. The estimated fair value of the Digital common stock to be
issued was based on the October 1, 1998 closing price of the stock as listed
on the SmallCap Market System of the NASDQ, discounted for the restrictions
of trading to be placed on the
19
<PAGE> 22
common stock and the fact that the stock is thinly traded (a total discount
of 25% of the listed price). The consideration to be issued by Digital has
been adjusted to include direct costs of the merger payable by Digital and
the TeamStaff shareholders' deficit.
(3) Represents the settlement of TeamStaff shareholders' notes payable
($3,147,000) and notes receivable ($2,182,000) at the date of merger.
(4) Includes the repayment of the TeamStaff bank debt of $121,000 at the closing
of the merger.
(5) Represents estimated acquisition costs.
(6) Represents the elimination of TeamStaff's historical equity accounts.
(7) Includes the issuance of 8,633,334 shares of Digital common stock to
TeamStaff shareholders (8,233,334 shares) and the Company's investment
banker (400,000 shares) at an estimated fair market value of $6,475,000
($8,000 par value common stock and $6,467,000 additional paid-in capital).
(8) Includes the redemption of the preferred stock for $1,800,000 in cash and
dividends of $250,000 not declared but required to be paid as part of the
merger agreement.
20
<PAGE> 23
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
TEAMSTAFF TEAMSTAFF PRO FORMA
6 MONTHS ENDED CONFORMING 9 MONTHS ENDED ----------------------------
DIGITAL 30-JUN-98 ADJUSTMENTS(3) 30-JUN-98 ADJUSTMENTS COMBINED
------------ -------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......................... $102,122,000 $53,796,000 $30,516,000 $84,312,000 $ -- $186,434,000
DIRECT EXPENSES.................. 94,588,000 51,677,000 29,481,000 81,158,000 -- 175,746,000
------------ ----------- ----------- ----------- ------------ ------------
Gross profit................. 7,534,000 2,119,000 1,035,000 3,154,000 -- 10,688,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 5,677,000 1,925,000 1,284,000 3,209,000 -- 8,886,000
DEPRECIATION AND AMORTIZATION.... 502,000 45,000 39,000 84,000 426,000(1) 1,012,000
------------ ----------- ----------- ----------- ------------ ------------
Income from operations....... 1,355,000 149,000 (288,000) (139,000) (426,000) 790,000
------------ ----------- ----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense, net........ (329,000) (57,000) 26,000 (31,000) (304,000)(2) (664,000
Other income................. -- 3,000 (29,000) (26,000) (26,000
------------ ----------- ----------- ----------- ------------ ------------
(329,000) (54,000) (3,000) (57,000) (304,000) (690,000
------------ ----------- ----------- ----------- ------------ ------------
Income before tax.......... 1,026,000 95,000 (291,000) (196,000) (730,000) 100,000
INCOME TAX BENEFIT............... 1,470,000 -- -- -- -- 1,470,000
------------ ----------- ----------- ----------- ------------ ------------
NET INCOME/(LOSS)................ $ 2,496,000 $ 95,000 $ (291,000) $ (196,000) $ (730,000) $ 1,570,000
============ =========== =========== =========== ============ ============
BASIC EARNINGS PER COMMON
SHARE.......................... $ 0.13 $ 0.06
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING.................... 19,263,097 8,633,334(4) 27,896,431
============ ============ ============
DILUTED EARNINGS PER COMMON
SHARE.......................... $ 0.13 $ 0.06
============ ============
DILUTED SHARES OUTSTANDING....... 19,504,058 8,633,334(4) 28,137,392
============ ============ ============
</TABLE>
- ---------------
(1) Represents the amortization of additional goodwill over 20 years.
(2) Represents the increase in interest expense resulting from the financing of
the merger.
(3) Represents the results from operations of TeamStaff for the three months
ended December 31, 1997.
(4) Includes 8,233,334 common shares to be issued to TeamStaff shareholders and
400,000 common shares to Digital's investment bankers.
21
<PAGE> 24
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------- ---------------------------
DIGITAL TEAMSTAFF ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues......................................... $122,695,000 $105,246,000 $ -- $227,941,000
Direct Expenses.................................. 113,894,000 101,948,000 -- 215,842,000
------------ ------------ ----------- ------------
Gross profit................................... 8,801,000 3,298,000 -- 12,099,000
Selling, General and Administrative Expenses..... 10,306,000 3,703,000 -- 14,009,000
Depreciation and Amortization.................... 1,010,000 84,000 568,000(1) 1,662,000
------------ ------------ ----------- ------------
Loss from operations........................... (2,515,000) (489,000) (568,000) (3,572,000)
------------ ------------ ----------- ------------
Other Income (Expense)
Interest expense, net.......................... (317,000) (47,000) (919,000)(2) (1,283,000)
Other income................................... -- 184,000 -- 184,000
------------ ------------ ----------- ------------
(317,000) 137,000 (919,000) (1,099,000)
------------ ------------ ----------- ------------
Net Loss......................................... $ (2,832,000) $ (352,000) $(1,487,000) $ (4,671,000)
============ ============ =========== ============
Basic and Diluted Loss Per Common Share.......... $ (0.15) $ (0.17)
============ ============
Weighted Average Shares Outstanding.............. 19,070,349 8,633,334 27,703,683
============ =========== ============
</TABLE>
- ---------------
(1) Represents the amortization of additional goodwill over 20 years.
(2) Represents the increase in interest expense from additional debt as a result
of the acquisition of the TeamStaff Entities offset by interest expense
eliminated as a result of historical debt of the TeamStaff Entities to be
paid at the time of merger.
22
<PAGE> 25
PROPOSAL II
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
The Board of Directors has also submitted for shareholder approval its
proposal to change the name of the Company from Digital Solutions, Inc. to
TeamStaff, Inc. THE NAME CHANGE WILL NOT BE CONSUMMATED UNLESS SHAREHOLDERS
APPROVE THE MERGER AGREEMENT AND THE MERGER AS DISCUSSED IN PROPOSAL I.
The Board of Directors believes that the Company's present name does not
reflect the Company's present business and intended future business direction.
The Company is engaged in the professional employer services, temporary employee
staffing and payroll business. The Board has determined that its current name
has no connection to these businesses. In addition, the Board believes that the
TeamStaff Entities have created goodwill in its name and that the Company should
utilize this goodwill after the acquisition.
A form of the Amendment to the Company's Amended and Restated Certificate
of Incorporation is annexed to this Proxy Statement as Exhibit G reflecting the
name change.
Shareholders will be requested to submit their share certificates to the
Company Stock Transfer Agent for exchange, and following adoption of Proposal II
and filing of an Amendment to the Company's Amended and Restated Certificate of
Incorporation with the Secretary of State of New Jersey changing the name of the
Company, all new share certificates issued by the Company will be printed with
the Company's new name. The Company estimates that the costs of this change of
name, including printing expenses, license modifications, various state
regulatory and local filings and other related costs, will not exceed $125,000.
The Company has conducted a limited search for the availability of the new name
in the states where it and the TeamStaff Entities conduct business. In the event
that the Company determines that the costs of changing the name will exceed its
expectations or a conflict in the use of the name arises, the name change may
not be implemented.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the votes cast at the
Special Meeting, is required for the approval of this Proposal II. The directors
and officers of the Company and other shareholders owning of record and
beneficially, directly and indirectly, an aggregate of approximately 978,451
shares of Common Stock, constituting approximately 5% of such shares outstanding
on the Record Date, have agreed to vote in favor of Proposal II.
THE BOARD OF DIRECTORS DEEMS PROPOSAL II TO BE IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
FINANCIAL INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1997, INCLUDING FINANCIAL STATEMENTS, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS ANNEXED HERETO AS EXHIBIT B.
A COPY OF THE COMPANY'S REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED
JUNE 30, 1998 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS ANNEXED
HERETO AS EXHIBIT C.
A COPY OF THE AUDITED FINANCIAL STATEMENTS FOR THE TEAMSTAFF ENTITIES FOR
THE FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 IS ANNEXED HERETO AS
EXHIBIT D.
A COPY OF THE UNAUDITED FINANCIAL STATEMENTS FOR THE TEAMSTAFF ENTITIES FOR
THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 IS ANNEXED HERETO AS
EXHIBIT F.
23
<PAGE> 26
III. OTHER BUSINESS
As of the date of this Proxy Statement, the only business which the Board
of Directors intends to present, and knows that others will present, at the
Special Meeting is that above. If any other matter or matters are properly
brought before the Special Meeting, or any adjournments thereof, it is the
intention of the persons named in the accompanying form of proxy to vote the
proxy on such matters in accordance with their judgment.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Corporation's
1999 Annual Meeting of Stockholders must be received by the Corporation on or
before November 20, 1998 to be eligible for inclusion in the Corporation's proxy
statement and form of proxy to be used in connection with the l999 Annual
Meeting of Shareholders.
By Order of the Board of Directors
Donald T. Kelly
Secretary
November 12, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE
AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED
IF IT IS MAILED IN THE UNITED STATES OF AMERICA.
24
<PAGE> 27
EXHIBIT A
TO
PROXY STATEMENT OF
DIGITAL SOLUTIONS, INC.
PLAN AND AGREEMENT OF MERGER AND REORGANIZATION
<PAGE> 28
PLAN AND AGREEMENT
OF
MERGER AND REORGANIZATION
AMONG
DIGITAL SOLUTIONS, INC.,
DGAC I,INC., DGAC II, INC., DGAC III, INC., DGAC IV, INC., DGAC VI, INC.,
DGAC VII, INC., DGAC VIII, INC., DGAC IX, INC., DGAC X, INC.
AND
TEAMSTAFF, INC.,
TEAMSTAFF II, INC.,
TEAMSTAFF III, INC.,
TEAMSTAFF IV, INC.,
THE TEAMSTAFF COMPANIES, INC.,
TEAMSTAFF HOLDING COMPANY, INC.,
EMPLOYER SUPPORT SERVICES, INC.,
TEAMSTAFF USA., INC.,
TEAMSTAFF INSURANCE SERVICES, INC.,
AND
WARREN M. CASON,
DOROTHY C. CASON,
KIRK A. SCOGGINS,
MELISSA C. SCOGGINS, AS TRUSTEE OF THE
KIRK ALLAN SCOGGINS 1997 THREE YEAR
GRANTOR RETAINED ANNUITY TRUST, DATED 7/1/97,
WARREN M. CASON, JR., AS TRUSTEE OF THE
DOROTHY C. CASON 1997 THREE YEAR
GRANTOR RETAINED ANNUITY TRUST, DATED 7/1/97,
Dated as of October 29, 1998
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions ................................................................
2. Basic Transaction ..........................................................
(a) The Merger ............................................................
(b) The Closing ...........................................................
(c) Deliveries at the Closing .............................................
(d) Effect of the Merger ..................................................
(e) Closing of Transfer Records ...........................................
3. Representations and Warranties Concerning the Transaction ...................
(a) Representations and Warranties of the Sellers .........................
(b) Representations and Warranties of Digital and the Merger
Corporations ..........................................................
4. Representations and Warranties Concerning the TeamStaff Entities ...........
(a) Organization, Qualification, and Corporate Power ......................
(b) Capitalization ........................................................
(c) Noncontravention ......................................................
(d) Brokers' Fees .........................................................
(e) Title to Assets .......................................................
(f) Financial Statements ..................................................
(g) Events Subsequent to Most Recent Fiscal Year End ......................
(h) Undisclosed Liabilities ...............................................
(i) Legal Compliance ......................................................
(j) Tax Matters ...........................................................
(k) Real Property Interests ...............................................
(l) Intellectual Property .................................................
(m) Tangible Assets .......................................................
(n) Contracts .............................................................
(o) Notes and Accounts Receivable .........................................
(p) Powers of Attorney ....................................................
(q) Insurance .............................................................
(r) Litigation ............................................................
(s) Employees .............................................................
(t) Employee Benefits .....................................................
(u) Guaranties ............................................................
(v) Environment, Health, and Safety .......................................
(w) Certain Business Relationships with the TeamStaff Entities ............
(x) USEC Litigation .......................................................
(y) CIGNA Medical Program Claims ..........................................
(z) Disclosure ............................................................
</TABLE>
-ii-
<PAGE> 30
<TABLE>
<CAPTION>
Page
<S> <C>
5. Pre-Closing Covenants ......................................................
(a) General ...............................................................
(b) Notices and Consents ..................................................
(c) Operation of Business .................................................
(d) Preservation of Business ..............................................
(e) Full Access ...........................................................
(f) Notice of Developments ................................................
(g) Exclusivity ...........................................................
6. Post-Closing Covenants ......................................................
(a) General ...............................................................
(b) Litigation Support ....................................................
(c) Transition ............................................................
(d) Confidentiality .......................................................
(e) Covenant Not to Compete ...............................................
7. Conditions to Obligation to Close ...........................................
(a) Conditions to Obligation of Digital ...................................
(b) Conditions to Obligation of the Sellers ...............................
8. Remedies for Breaches of This Agreement .....................................
(a) Survival of Representations and Warranties ............................
(b) Indemnification Provisions for Benefit of Digital .....................
(c) Indemnification Provisions for Benefit of the Sellers .................
(d) Matters Involving Third Parties .......................................
(e) Determination of Adverse Consequences .................................
(f) Other Indemnification Provisions ......................................
9. Termination ................................................................
(a) Termination of Agreement ..............................................
(b) Effect of Termination .................................................
10. Miscellaneous ..............................................................
(a) Press Releases and Public Announcements ...............................
(b) No Third-Party Beneficiaries ..........................................
(c) Entire Agreement ......................................................
(d) Succession and Assignment .............................................
(e) Counterparts ..........................................................
(f) Headings ..............................................................
</TABLE>
-iii-
<PAGE> 31
<TABLE>
<CAPTION>
Page
<S> <C>
(g) Notices ...............................................................
(h) Governing Law .........................................................
(i) Amendments and Waivers ................................................
(j) Severability ..........................................................
(k) Expenses ..............................................................
(l) Construction ..........................................................
(m) Incorporation of Exhibits, Appendices, and Schedules ..................
(n) Specific Performance ..................................................
(o) Section 338(h)(10) Tax Election .......................................
</TABLE>
EXHIBITS AND SCHEDULES
Exhibit A Form of Scoggins Employment Agreement
Exhibit B TeamStaff Financial Statements
Exhibit C Form of Non-Competition Agreement
Exhibit D Form of Opinion of Counsel to TeamStaff Entities and the Sellers
Exhibit E Form of Opinion of Counsel to Digital
Exhibit F Form of Articles of Merger
Exhibit G Form of Registration Rights Agreement
Exhibit H Form of Escrow Agreement
Exhibit I Seller's Debt Repayment Schedule
Exhibit J List of Employees to Execute Non-Competition Agreements
Exhibit K Form of Voting Agreement
Sellers' Disclosure Schedule Exceptions to the Sellers' Representation and
Warranties
Digital Disclosure Schedule Exceptions to Digital's Representations and
Warranties
TeamStaff Disclosure Schedule Exceptions to Representations and Warranties
Concerning the TeamStaff Entities
Appendix I Allocation of Merger Consideration, Debt Payment and Preferred
Share Payment
Appendix II List of Sellers' Expenses to be paid by Digital
-iv-
<PAGE> 32
PLAN AND AGREEMENT OF
MERGER AND REORGANIZATION
This Plan and Agreement of Merger and Reorganization (the "Agreement")
is entered into as of October 29, 1998, by and among Digital Solutions, Inc., a
New Jersey corporation with its principal address at 300 Atrium Drive, Somerset,
New Jersey 08873 ("Digital"), DGAC I, Inc. ("DGACI"), DGAC II, Inc., ("DGACII"),
DGAC III, Inc., ("DGACIII"), DGAC IV, Inc., ("DGACIV"), DGAC VI, Inc.,
("DGACVI"), DGAC VII, Inc., ("DGACVII"), DGAC VIII, Inc., ("DGACVIII"), DGAC IX,
Inc., ("DGACIX"), and DGAC 10, Inc., ("DGACX"), each a Florida corporation and a
direct wholly-owned subsidiary of Digital with its principal address at 300
Atrium Drive, Somerset, New Jersey 08873 (collectively, DGACI, DGACII, DGACIII,
DGACIV, DGACVI, DGACVII, DGACVIII, DGACIX and DGACX are referred to as the
"Merger Corporations"), TeamStaff Holding Company, Inc. ("THC"), The TeamStaff
Companies, Inc. ("TSC"), Employer Support Services, Inc. ("ESS"), TeamStaff
U.S.A., Inc. ("TUSA"), TeamStaff, Inc. ("TSI"), TeamStaff II, Inc. ("TSI II"),
TeamStaff III, Inc. ("TSI III"), TeamStaff IV, Inc. ("TSIV") and TeamStaff
Insurance Services, Inc. ("TIS"), each a Florida corporation with its principal
address at 1211 S. Westshore Blvd., Suite 806, Tampa, Florida 33607
(collectively, THC, TSC, ESS, TUSA, TSI, TSII, TSIII and TSIV are referred to as
the "TeamStaff Entities"), Warren M. Cason ("WC"), Dorothy C. Cason ("DC"),
Kirk A. Scoggins ("KS"), Melissa C. Scoggins, as trustee of the Kirk Allan
Scoggins 1997 Three Year Grantor Retained Annuity Trust, dated July 1, 1997 (the
"WC Trust") and Warren M. Cason, Jr., as trustee of the Dorothy C. Cason 1997
Three Year Grantor Retained Annuity Trust, dated July 1,1997 (the "DC Trust")
WC, DC, KS, the KS Trust and the DC Trust are collectively referred to in this
Agreement as the "Sellers"). Digital, the Merger Corporations, the TeamStaff
Entities and the Sellers are referred to collectively in this Agreement as the
"Parties."
WITNESSETH
WHEREAS, the Sellers own all of the issued and outstanding capital
stock of each of the TeamStaff Entities and are desirous of selling such capital
stock to Digital and Digital is desirous of purchasing said capital stock;
WHEREAS, the respective boards of directors of Digital, each of the
Merger Corporations and each of the TeamStaff Entities have approved the
transactions contemplated by this Agreement, as applicable, and have determined
that it is desirable and in their respective best interests to consummate the
Mergers described in Section 2(a) below;
WHEREAS, the Merger Corporations are wholly-owned subsidiaries of
Digital which were formed to merge with and into the TeamStaff Entities;
WHEREAS, upon the terms and conditions contained herein, Digital will
acquire all of the outstanding capital stock of the TeamStaff Entities for a
combination of shares of Common Stock
1
<PAGE> 33
of Digital and cash through separate reverse subsidiary mergers of the Merger
Corporations with and into the TeamStaff Entities;
WHEREAS, it is the intention of the Parties that the Mergers
contemplated herein qualify as tax free reorganizations within the meaning of
Section 368 (a)(2)(E) of the Code (as defined below);
WHEREAS, the parties have agreed that in the event the transactions
contemplated herein do not qualify as a "tax free" reorganization within the
meaning of Section 368 of the Code, Digital shall have the right to make, at its
option, an election under Section 338 (h)(10) of the Code and the Sellers shall
cooperate with Digital in such election.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. Definitions.
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of
Code Sec. 1504 or any similar group defined under a similar provision of state,
local or foreign law.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Closing" has the meaning set forth in Section 2(b) below.
"Closing Date" has the meaning set forth in Section 2(b) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the
operations, businesses and affairs of either TeamStaff and its Subsidiaries or
Digital, as the context may require, that is not already generally available to
the public. Without limiting the foregoing, "Confidential Information" shall
include marketing and sales information, customer and account lists and pricing
information, internal forecasts and projections and employee information.
"Controlled Group of Corporations" has the meaning set forth in Code
Sec. 1563.
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"Debt Payment" has the meaning set forth in Section 2(d)(v) below.
"Deferred Intercompany Transaction" has the meaning set forth in Treas.
Reg. Section 1.1502-13.
"Digital Authorizations" has the meaning set forth in Section 3(b)(ii)
below.
"Digital Balance Sheet" has the meaning set forth in Section 3(b)(viii)
below.
"Digital Disclosure Schedule" has the meaning set forth in Section 3(b)
below.
"Digital Financial Statements" has the meaning set forth in Section
3(b)(vi)(B) below.
"Digital Preferred Shares" has the meaning set forth in Section
3(b)(xii) below.
"Digital SEC Documents" has the meaning set forth in Section
3(b)(vi)(A) below.
"Digital Shares" means the Common Stock of Digital, par value $.001 per
share.
"DGAC I" has the meaning set forth in the preface above.
"DGAC II" has the meaning set forth in the preface above.
"DGAC III" has the meaning set forth in the preface above.
"DGAC IV" has the meaning set forth in the preface above.
"DGAC VI" has the meaning set forth in the preface above.
"DGAC VII" has the meaning set forth in the preface above.
"DGAC VIII" has the meaning set forth in the preface above.
"DGAC IX" has the meaning set forth in the preface above.
"DGAC X" has the meaning set forth in the preface above.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any
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<PAGE> 35
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec.
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec.
3(1).
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreements" has the meaning set forth in Section 7(a)(xi)
below.
"Escrow Market Price" means the average closing sales price of a
Digital Share on the SmallCap Market of the Nasdaq Stock Market, Inc. for the
five trading days ending three business days prior to Closing.
"ESS" has the meaning set forth in the preface above.
"Excess Loss Account" has the meaning set forth in Treas. Reg. Section
1.1502-19.
"Expense Payment" has the meaning set forth in Section 10(k) below.
"Extremely Hazardous Substance" has the meaning set forth in Sec. 302
of the Emergency Planning and Community Right-to-Know Act of 1986, as amended.
"Fiduciary" has the meaning set forth in ERISA Sec. 3(21).
"Financial Statement" has the meaning set forth in Section 4(f) below.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
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<PAGE> 36
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Indemnified Party" has the meaning set forth in Section 8(d) below.
"Indemnifying Party" has the meaning set forth in Section 8(d) below.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
"Knowledge" means actual knowledge after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Material Adverse Effect" means any event on or with respect to any
entity which, is materially adverse to the condition (financial or otherwise),
of the properties, assets (including intangible assets), Liabilities, business,
results of operations or prospects of such entity.
"Merger Consideration" has the meaning set forth in Section 2(d)(v)
below.
"Merger Corporations" has the meaning set forth in the preface above.
"Most Recent Balance Sheet" means the balance sheet contained within
the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in Section
4(f) below.
"Most Recent Fiscal Month End" has the meaning set forth in Section
4(f) below.
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<PAGE> 37
"Most Recent Fiscal Year End" has the meaning set forth in Section 4(f)
below.
"Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37).
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Preferred Share Payment" has the meaning set forth in Section 2(d)(v)
below.
"Prohibited Transaction" has the meaning set forth in ERISA Sec. 406
and Code Sec. 4975.
"Reportable Event" has the meaning set forth in ERISA Sec. 4043.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Sellers" has the meaning set forth in the preface above.
"Seller's Debt Schedule" means the schedule of outstanding debt annexed
hereto as Exhibit I which schedule sets forth the name of the debtholder and the
amount of debt owned by each of the TeamStaff Entities to the debtholder.
"Sellers' Disclosure Schedule" has the meaning set forth in Section
3(a) below.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
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<PAGE> 38
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Sec. 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"TeamStaff Disclosure Schedule" has the meaning set forth in Section 4
below.
"TeamStaff Entities" has the meaning set forth in the preface above.
"TeamStaff Plan" has the meaning set forth in Section 4(t) below.
"TeamStaff Preferred Shares" means the 1800 issued and outstanding
shares of Preferred Stock of TSV.
"TeamStaff Shares" means the issued and outstanding shares of the
Common Stock of the TeamStaff Entities.
"THC" has the meaning set forth in the preface above.
"Third Party Claim" has the meaning set forth in Section 8(d) below.
"Threshold" has the meaning set forth in Section 8(b) below.
"TIS" has the meaning set forth in the preface above.
"TSC" has the meaning set forth in the preface above.
"TSI" has the meaning set forth in the preface above.
"TSII" has the meaning set forth in the preface above.
"TSIII" has the meaning set forth in the preface above.
"TSIV" has the meaning set forth in the preface above.
"TSV" has the meaning set forth in Section 7 (a) below.
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<PAGE> 39
"TUSA" has the meaning set forth in the preface above.
"USEC" has the meaning set forth in Section 4(x) below.
2. Basic Transaction.
(a) The Mergers. Subject to the terms and conditions of this Agreement, the
Merger Corporations will merge with and into the TeamStaff Entities (each such
separate merger is referred to as a "Merger" and all of the Mergers collectively
as the "Mergers") at the Effective Time. The TeamStaff Entities shall be the
corporations surviving the Mergers (sometimes referred to individually as the
"Surviving Corporation" and collectively as the "Surviving Corporations").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Goldstein & DiGioia
LLP at 369 Lexington Avenue in New York, New York, commencing at 9:00 a.m. local
time on the second business day following the satisfaction or waiver of all
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions the
respective Parties will take at the Closing itself) or such other date as
Digital and the Sellers may mutually determine (the "Closing Date").
(c) Deliveries at the Closing. At the Closing, (i) the Sellers will
deliver to Digital the various certificates, instruments, and documents referred
to in Section 7(a) below, (ii) Digital will deliver to the Sellers the various
certificates, instruments, and documents referred to in Section 7(b) below,
(iii) each of the Sellers will deliver to Digital stock certificates
representing all of his or its TeamStaff Shares and TeamStaff Preferred Shares,
endorsed in blank or accompanied by duly executed stock powers, (iv) Digital
will deliver to each of the Sellers the consideration specified in Section
2(d)(v) below and (v) the TeamStaff Entities and the Merger Corporations will
file with the Secretary of State of Florida articles of merger in the form
attached hereto as Exhibit F (the "Articles of Merger").
(d) Effect of Mergers.
(i) General. The Mergers shall become effective at the time
(the "Effective Time") the TeamStaff Entities and the Merger
Corporations file the Articles of Merger with the Secretary of State of
the State of Florida. The Mergers shall have the effect set forth in
the Florida Business Corporation Act. The Surviving Corporations may,
at any time after the Effective Time, take any action (including
executing and delivering any document) in the name and on behalf of
either the TeamStaff Entities or the Merger Corporations in order to
carry out and effectuate the transactions contemplated by this
Agreement.
(ii) Articles of Incorporation. The Articles of Incorporation
of the Surviving Corporations shall be amended and restated at and as
of the Effective Time to read as did
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<PAGE> 40
the Articles of Incorporation of the Merger Corporations immediately
prior to the Effective Time (except that the name of the Surviving
Corporations will remain unchanged).
(iii) Bylaws. The Bylaws of the Surviving Corporations shall
be amended and restated at and as of the Effective Time to read as did
the Bylaws of the Merger Corporations immediately prior to the
Effective Time (except that the name of the Surviving Corporations will
remain unchanged).
(iv) Directors and Officers. (A) The directors and officers of
the Surviving Corporations at and as of the Effective Time shall be as
follows:
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
Donald Kappauf Chairman/Director
Kirk Scoggins President
Donald Kelly Chief Financial Officer/Secretary/
Treasurer
</TABLE>
(B) The current directors of Digital will continue to
serve in such capacity after the Closing. In addition, Digital shall
nominate and use its best efforts to cause KS to be elected to the
Digital Board of Directors for a period of two years from the Closing.
The Sellers further agree to vote all of the Digital Shares held by
Sellers, their nominees, affiliates and transferees, in favor of the
election of all nominees for election to the Digital Board of Directors
proposed by a majority of the Board of Directors, for a period of two
years from the Closing. This provision shall not be binding upon
Digital Shares that are sold by the Sellers either pursuant to a
registration statement or Rule 144 promulgated by the SEC. In addition,
Digital hereby agrees that its Board of Directors shall consider in
good faith the appointment and/or election of a second nominee of the
sellers to its Board of Directors during such two year period.
(v) Merger Consideration and Debt Payment. At and as of the
Effective Time, (A) all of the TeamStaff Shares shall be converted into
the right to receive 8,233,334 Digital Shares (the "Merger
Consideration"); and (B) Digital shall cause to be paid outstanding
debt owed by the TeamStaff Entities to the Sellers in an amount
(including principal and interest up to the date of Closing) not to
exceed $1,050,000 (the "Debt Payment") in accordance with the Seller's
Debt Schedule. No TeamStaff Share or TeamStaff Preferred Share shall be
deemed to be outstanding or to have any rights other than those set
forth above in this Section 2(d)(v) after the Effective Time.
The Merger Consideration and Debt Payment shall be allocated
in accordance with Appendix I annexed hereto.
(vi) At and as of the Effective Time, each share of common
stock, $.001 par value per share of: (A) DGAC I shall be converted into
one share of common stock, $1.00 par value per share of THC; (B) DGAC
II shall be converted into one share of common stock, $1.00 par value
per share of TSC; (C) DGAC III shall be converted into one share of
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<PAGE> 41
common stock, $1.00 par value per share of ESS; (D) DGAC IV shall be
converted into one share of common stock, $1.00 par value per share of
TUSA; (E) DGAC VI shall be converted into one share of common stock,
$1.00 par value per share of TSII; (F) DGAC VII shall be converted into
one share of common stock, $1.00 par value per share of TSIII; (G) DGAC
VIII shall be converted into one share of common stock, $1.00 par value
per share of TSIV: (H) DGAC IX shall be converted into one share of
common stock $1.00 par value per share of TSI; and (I) DGAC X shall be
converted into one share of common stock, $1.00 par value per share of
TIS.
(e) Closing of Transfer Records. After the close of business on the
Closing Date, transfers of TeamStaff Shares and TeamStaff Preferred Shares
outstanding prior to the Effective Time shall not be made on the stock transfer
books of the Surviving Corporations.
3. Representations and Warranties Concerning the Transaction.
(a) Representations and Warranties of the Sellers. Each of the Sellers
jointly and severally represents and warrants to Digital that the statements
contained in this Section 3(a) are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 3(a)) with respect to himself or itself,
except as set forth in the disclosure schedule delivered by the Sellers to
Digital and attached hereto (the "Sellers' Disclosure Schedule"). Nothing in the
Sellers' Disclosure Schedule shall be deemed adequate to disclose an exception
to a representation or warranty made herein, however, unless the Sellers'
Disclosure Schedule identifies the exception with reasonable particularity and
describes the relevant facts in reasonable detail. The Sellers' Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 3(a).
(i) Authorization of Transaction. The Seller has full power
and authority (including, if the Seller is a corporation, full
corporate power and authority) to execute and deliver this Agreement
and to perform his or its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Seller,
enforceable in accordance with its terms and conditions. The Seller
need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental
agency in order to consummate the transactions contemplated by this
Agreement other than notice and filings pursuant to (A) the Hart-Scott
Rodino Act and (B) the Florida Department of Business and Professional
Regulations and any other required state filings where the TeamStaff
Entities conduct or are registered to conduct business.
(ii) Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions
contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court
to which the Seller is subject or, if the Seller is a corporation, any
provision of its charter or bylaws or (B)
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<PAGE> 42
conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under
any agreement, contract, lease, license, instrument, or other
arrangement to which the Seller is a party or by which he or it is
bound or to which any of his or its assets is subject.
(iii) Brokers' Fees. The Seller has no Liability or obligation
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
Digital could become liable or obligated other than fees payable to
Raymond James & Associates, Inc. and SunTrust Equitable Securities
Corporation.
(iv) Investment. The Seller (A) understands that the Digital
Shares have not been registered under the Securities Act, or under any
state securities laws, and are being offered and sold in reliance upon
federal and state exemptions for transactions not involving any public
offering, (B) is acquiring the Digital Shares solely for his or its own
account for investment purposes, and not with a view to the
distribution thereof, (C) is a sophisticated investor with knowledge
and experience in business and financial matters, (D) has received
certain information concerning Digital and has had the opportunity to
obtain additional information as desired in order to evaluate the
merits and the risks inherent in holding the Digital Shares, and (E) is
able to bear the economic risk and lack of liquidity inherent in owning
and holding the Digital Shares.
(v) Ownership of TeamStaff Shares and TeamStaff Preferred
Shares. The Seller holds of record and owns beneficially the number of
TeamStaff Shares and/or TeamStaff Preferred Shares set forth next to
his or its name in Section 4(b) of the TeamStaff Disclosure Schedule,
free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws),
Taxes, Security Interests, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands. Except as set
forth on Section 3(a)(v) of the Sellers' Disclosure Schedule, the
Seller is not a party to any option, warrant, purchase right, or other
contract or commitment that could require the Seller to sell, transfer,
or otherwise dispose of any capital stock of TeamStaff Entities (other
than this Agreement). Except as set forth on Section 3(a)(v) of the
Sellers' Disclosure Schedule, the Seller is not a party to any voting
trust, proxy, or other agreement or understanding with respect to the
voting of any capital stock of TeamStaff.
(b) Representations and Warranties of Digital and the Merger
Corporations. Digital and the Merger Corporations each represent and warrant to
the Sellers that the statements contained in this Section 3(b) are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3(b)), except
as set forth in the disclosure schedule delivered to the Sellers by Digital and
attached hereto. Nothing in the Digital Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or
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<PAGE> 43
warranty made herein, however, unless the Digital Disclosure Schedule identifies
the exception with reasonable particularity and describes the relevant facts in
reasonable detail. The Digital Disclosure Schedule will be arranged in
paragraphs corresponding to the lettered and numbered paragraphs contained in
this Section 3(b).
(i) Organization of Digital and the Merger Corporations. Each
of Digital and the Merger Corporations is a corporation duly
incorporated, validly existing, and in good standing under the laws of
the jurisdiction of its incorporation.
(ii) Authorization of Transaction. Each of Digital and the
Merger Corporations has full power and authority (including full
corporate power and authority) to execute and deliver this Agreement
and to perform its obligations hereunder, except for the approval of
the shareholders and Board of Directors of Digital which approvals
shall be a condition to Closing. This Agreement constitutes the valid
and legally binding obligation of each of Digital and the Merger
Corporations, enforceable in accordance with its terms and conditions.
Neither Digital nor any of the Merger Corporations need give any notice
to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement other than
notice and filings pursuant to (A) the Hart-Scott Rodino Act (B) the
Florida Department of Business and Professional Regulations (C) the
Nasdaq SmallCap Stock Market with respect to the issuance of the
Digital Shares and (D) the Securities Exchange Act.
(iii) Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions
contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court
to which Digital or any of the Merger Corporations is subject or any
provision of its charter or bylaws or (B) other than the required
approval of FINOVA Capital Corporation conflict with, result in a
breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which Digital or the
Merger Corporations are a party or by which they are bound or to which
any of their respective assets are subject.
(iv) Brokers' Fees. Digital has no Liability or obligation to
pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
any Seller could become liable or obligated other than fees payable to
Raymond James & Associates, Inc. and SunTrust Equitable Securities
Corporation.
(v) Investment. Digital is not acquiring the TeamStaff Shares
or TeamStaff Preferred Shares with a view to or for sale in connection
with any distribution thereof within the meaning of the Securities Act.
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<PAGE> 44
(vi) SEC Documents: Financial Statements. (A) Digital has
furnished to the Sellers a true and complete copy of each statement,
report, registration statement (with the prospectus in the form filed
pursuant to Rule 424 (b) of the Securities Act), definitive proxy
statement, and other filing filed with the SEC by Digital since January
1, 1996, and prior to the Effective Time, Digital will have furnished
the Sellers with true and complete copies of any additional documents
filed with the SEC by Digital after the date hereof and prior to the
Effective Time (collectively, the "Digital SEC Documents"). In
addition, Digital has made available to the Sellers all Exhibits to the
Digital SEC Documents filed prior to the date of this Agreement and
will promptly make available to the Sellers all exhibits to any
additional Digital SEC Documents filed prior to the Effective Time.
(B) All documents required to be filed as exhibits to the
Digital SEC Documents have been so filed, and all material contracts so
filed as exhibits are in full force and effect except those which have
expired in accordance with their terms and neither Digital nor any of
its Subsidiaries is in material default under such material contracts
except where such default would not have a Material Adverse Effect upon
Digital and its Subsidiaries taken as a whole. As of their respective
filing dates, the Digital SEC Documents complied in all material
respects with the requirements of the Securities Exchange Act and the
Securities Act and none of the Digital SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently filed
Digital SEC Document prior to the date of this Agreement. The financial
statements of Digital, including the notes thereto, included in the
Digital SEC Documents (the "Digital Financial Statements") were
complete and correct in all material respects as of their respective
dates, completed as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of
the SEC with respect thereto as of their respective dates, and have
been prepared in accordance with GAAP applied on a basis consistent
throughout the periods indicated and consistent with each other (except
as may be indicated in the notes thereto or, in the case of unaudited
statements included in Quarterly Reports on Form 10-Qs, as permitted by
Form 10-Q promulgated by the SEC). The Digital Financial Statements
fairly present the consolidated financial condition and operating
results of Digital and its Subsidiaries at the dates and during the
periods indicated therein (subject, in the case of unaudited
statements, to normal, recurring year-end adjustments). There has been
no change in Digital's accounting policies except as described in the
notes to the Digital Financial Statements.
(vii) No Adverse Changes. Since October 1, 1997, Digital has
conducted its business in the ordinary course consistent with past
practice and there has not occurred except as may be described in the
Digital SEC Documents: (i) any change, event condition (whether or not
covered by insurance) that has resulted in, or might reasonably be
expected to result in, a Material Adverse Effect to Digital and its
Subsidiaries taken as a whole; (ii) any acquisition, sale or transfer
of any material asset of Digital or any of its
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<PAGE> 45
Subsidiaries other than in the ordinary course of business and
consistent with past practice; (iii) any change in accounting methods
or practices (including any change in depreciation or amortization
policies or rates) by Digital or any revaluation by Digital of any of
its assets; (iv) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the Digital Shares or
any direct or indirect redemption, purchase or other acquisition by
Digital of any of its shares of capital stock; (v) any material
contract entered into by Digital, other than in the Ordinary Course of
Business and as provided to the TeamStaff Entities or any material
amendment or termination of, or default under, any material contract to
which Digital is a party or by which it is bound; (vi) any amendment or
change to Digital's Certificate of Incorporation or Bylaws; or (vii)
any agreement by Digital or any of its Subsidiaries to do any of the
things described in the preceding clauses (i) through (vi) (other than
negotiations with the TeamStaff Entities and its representatives
regarding the transactions contemplated by this Agreement).
(viii) Absence of Undisclosed Liabilities. Except as set forth
on Section 3(b)(viii) of the Digital Disclosure Schedule to the
Knowledge of Digital, Digital has no material obligations or
liabilities of any nature (matured or unmatured, fixed or contingent)
other than (i) those set forth or adequately provided for in the
Balance Sheet included in Digital's quarterly Report on Form 10-Q for
the period ended June 30, 1998 (the "Digital Balance Sheet"), (ii)
those incurred in the Ordinary Course of Business and not required to
be set forth in the Digital Balance Sheet in accordance with GAAP, and
(iii) those incurred in the Ordinary Course of Business since the
Digital Balance Sheet Date and consistent with past practice.
(ix) Governmental Authorization. Digital and each of its
Subsidiaries have obtained each federal, state, county, local or
foreign governmental consent license; permit grant, or other
authorization of any government, government agency or court to which
Digital is subject (i) pursuant to which Digital or any of its
Subsidiaries currently operates or holds any interest in any of its
properties or (ii) that is required for the operation of Digital of any
of its Subsidiaries business or the holding of any such interest ((i)
and (ii) herein collectively called Digital Authorizations"), and all
of such Digital Authorizations are in full force and effect, except
where the failure to obtain or have any of such Digital Authorizations
could not reasonably be expected to have a Material Adverse Effect on
Digital and its Subsidiaries, taken as a whole.
(x) Compliance With Laws. To Digital's Knowledge, each of
Digital and its Subsidiaries has complied with, are not in violation
of, and have not received any notices of violation with respect to any
federal, state, local or foreign statute, law or regulation with
respect to the conduct of its business, or the ownership or operation
of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on
Digital and its Subsidiaries, taken as a whole.
(xi) Litigation. Except as set forth on Section 3(b)(xi) of
the Digital Disclosure Schedule, there is no private or governmental
action, suit, proceeding, claim, arbitration
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<PAGE> 46
or investigation pending before any agency, court or tribunal, foreign
or domestic, or, to the Knowledge of Digital or any of its
Subsidiaries, threatened against Digital or any of its Subsidiaries or
any of their respective properties or any of their respective officers
or directors (in their capacities as such) that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect on Digital. Except as set forth on Section 3(b)(xi) of the
Digital Disclosure Schedule, there is no judgment, decree or order
against Digital or any of its Subsidiaries or, to the Knowledge of
Digital or any of its Subsidiaries, any of their respective directors
or officers (in their capacities as such) that could prevent, enjoin or
materially alter or delay any of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material
Adverse Effect on Digital.
(xii) Capitalization of Digital and the Merger Corporations.
The entire authorized capital stock of Digital consists of 40,000,000
Digital Shares and 5,000,000 shares of preferred stock, par value $10
per share (the "Digital Preferred Shares"). As of October 28, 1998
there were 19,356,833 Digital Shares issued and outstanding and no
Digital Preferred Shares issued and outstanding. The entire authorized
capital stock of each of the Merger Corporations consists of 100 shares
of common stock, par value $.001 per share, all of which are issued and
outstanding and are owned, legally and beneficially by Digital. All
outstanding shares of Digital and each of the Merger Corporations have
been duly authorized and validly issued and are fully paid and
nonassessable. Digital also has issued and outstanding warrants and
options as fully described in the Digital's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997, and Proxy Statement dated
February 16, 1998 for its Annual Meeting of Shareholders held on March
18, 1998. Except for options (i) issued or issuable from time to time
to employees and directors under the Digital option plans, (ii) options
which may be issued to the Equity Group and options and (iii) 28,000
options issued to Raymond Jones & Associates, Inc., there are no other
options, warrants, calls, rights, commitments, or agreements of any
character to which Digital or any of the Merger Corporations is or by
which any of them is bound, obligating Digital or any of the Merger
Corporations to issue, deliver, sell, repurchase or redeem or cause to
be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of Digital or any of the Merger Corporations or
obligating Digital or any of the Merger Corporations to grant, extend
or enter into any such option, warrant, call, right, commitment or
agreement. The Digital Shares to be issued pursuant to the Merger will
be duly authorized, validly issued, fully paid and nonassessable.
(xiii) Disclosure. The representations and warranties
contained in this Section 3(b) do not contain any untrue statement of a
material fact or fail to state any material fact necessary in order to
make the statements and information contained in this Section 3(b) not
misleading.
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<PAGE> 47
4. Representations and Warranties Concerning the TeamStaff Entities.
The Sellers represent and warrant to Digital that the statements
contained in this Section 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 4), except as set forth in the disclosure
schedule delivered by the Sellers to Digital on the date hereof and initialed by
the Parties (the "TeamStaff Disclosure Schedule"). Nothing in the TeamStaff
Disclosure Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein, however, unless the TeamStaff Disclosure
Schedule identifies the exception with reasonable particularity and describes
the relevant facts in reasonable detail. The TeamStaff Disclosure Schedule will
be arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Section 4.
(a) Organization, Qualification, and Corporate Power. Each of the
TeamStaff Entities is a corporation duly organized, validly existing, and in
good standing (or with active status) under the laws of the jurisdiction of its
incorporation. Each of the TeamStaff Entities is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where such
qualification is required. Each of the TeamStaff Entities has full corporate
power and authority and all licenses, permits, and authorizations necessary to
carry on the businesses in which it is engaged and in which it presently
proposes to engage and to own and use the properties owned and used by it.
Section 4(a) of the Disclosure Schedule lists the directors and officers of each
of the TeamStaff Entities. The Sellers have delivered to Digital correct and
complete copies of the charter and bylaws of each of the TeamStaff Entities (as
amended to date). The minute books (containing the records of meetings of the
shareholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of each of
the TeamStaff Entities are correct and complete in all material respects. None
of the TeamStaff Entities is in default under or in violation of any provision
of its charter or bylaws.
(b) Capitalization. The entire authorized capital stock of: (i) THC
consists of 10,000 shares of common stock, par value $1.00 per share, of which
200 shares are issued and outstanding; (ii) TSC consists of (A) 50,000 shares of
common stock, par value $1.00 per share, of which 29,000 shares are issued and
outstanding and (B) 10,000 shares of preferred stock, par value $1.00 per share,
of which no shares are issued and outstanding; (iii) ESS consists of (A) 10,000
shares of common stock, par value $1.00 per share, of which 3,800 shares are
issued and outstanding and (B) 10,000 shares of preferred stock, par value $1.00
per share, of which no shares are issued and outstanding; (iv) TUSA consists of
(A) 10,000 shares of common stock, par value $1.00 per share, of which 3,800
shares are issued and outstanding and (B) 10,000 shares of preferred stock, par
value $1.00 per share, of which no shares are issued and outstanding, (v) TSI
consists of (A) 10,000 shares of common stock, par value $1.00 per share, of
which 9,700 shares are issued and outstanding and (B) 10,000 shares of preferred
stock, par value $1.00 per share, of which no shares are issued and outstanding;
(vi) TSII consists of (A) 10,000 shares of common stock, par value $1.00 per
share, of which 100 shares are issued and outstanding and (B) 10,000 share of
preferred stock, par value 1.00 per share, of which no shares are issued and
outstanding;
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<PAGE> 48
(vii) TSIII consists of (A) 10,000 shares of common stock, par value $1.00 per
share, of which 100 shares are issued and outstanding and (B) 10,000 shares of
preferred stock, par value $1.00 per share, of which no shares are issued and
outstanding; (viii) TSIV consists of (A) 10,000 shares of common stock, par
value $1.00 per share, of which 100 shares are issued and outstanding and (B)
10,000 shares of preferred stock, par value $1.00 per share, of which no shares
are issued and outstanding; and (iv) TIS consists of (A) 10,000 shares of common
stock, par value $1.00 per share, of which 100 shares are issued and outstanding
and (B) 10,000 shares of preferred stock, par value $1.00 per share, of which no
shares are issued and outstanding.
All of the issued and outstanding TeamStaff Shares and Team Staff
Preferred Shares have been duly authorized, are validly issued, fully paid, and
nonassessable, and are held of record by the respective Sellers as set forth on
Section 4(b) of the TeamStaff Disclosure Schedule. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments that could require
any of the TeamStaff Entities to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to any such TeamStaff Entity. There are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of the capital
stock of the TeamStaff Entities, except as set forth on Section 4(b) of the
TeamStaff Disclosure Schedule.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of the TeamStaff Entities is subject
or any provision of the charter or bylaws of any of the TeamStaff Entities or
(ii) conflict with, result in a breach of, constitute a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which any of the TeamStaff Entities
is a party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets). None
of The TeamStaff Entities needs to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order for the Parties to consummate the transactions contemplated by
this Agreement other than notices and filings pursuant to the Hart-Scott Rodino
Act and (B) the Florida Department of Business and Professional Regulation and
any other required state filings where the TeamStaff Entities conduct or are
registered to conduct business, except where the failure to give notice, to
file, or to obtain any authorization, consent, or approval would not have a
Material Adverse Effect on the TeamStaff Entities take as a whole or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement.
(d) Brokers' Fees. None of the TeamStaff Entities has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement other than fees
payable to Raymond James & Associates, Inc. and Sun Trust Equitable Securities
Corporation.
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(e) Title to Assets. Except as set forth on Section 4(e) of the
TeamStaff Disclosure Schedule, the TeamStaff Entities have good and marketable
title to, or a valid leasehold interest in, the properties and assets used by
them, located on their premises, or shown on the Most Recent Balance Sheet or
acquired after the date thereof, free and clear of all Security Interests,
except for properties and assets disposed of in the Ordinary Course of Business
since the date of the Most Recent Balance Sheet.
(f) Financial Statements. Attached hereto as Exhibit B are the
following financial statements (collectively the "Financial Statements"): (i)
audited combined balance sheets and statements of income, changes in
shareholders' equity, and cash flow as of and for the fiscal years ended
December 31, 1996 and December 31, 1997 (the "Most Recent Fiscal Year End") for
the TeamStaff Entities; and (ii) unaudited combined balance sheets and
statements of income (the "Most Recent Financial Statements") as of and for the
8 months ended August 31, 1998 (the "Most Recent Fiscal Month End") for the
TeamStaff Entities. The Financial Statements (including the notes thereto) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, present fairly the financial condition of the
TeamStaff Entities as of such dates and the results of operations of the
TeamStaff Entities for such periods, are correct and complete, and are
consistent with the books and records of the TeamStaff Entities (which books and
records are correct and complete); provided, however, that the Most Recent
Financial Statements are subject to normal year-end adjustments (which will not
be material individually or in the aggregate) and lack footnotes and other
presentation items.
(g) Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End, there has not been any adverse change in the business,
financial condition, operations, results of operations, or future prospects of
the TeamStaff Entities taken as a whole. Without limiting the generality of the
foregoing, since that date:
(i) None of the TeamStaff Entities has sold, leased,
transferred, or assigned any of its assets, tangible or intangible,
other than for a fair consideration in the Ordinary Course of Business;
(ii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has entered into
any agreement, contract (including, without limitation, employment
agreements), lease, or license (or series of related agreements,
contracts, leases, and licenses) either involving more than $50,000 or
outside the Ordinary Course of Business;
(iii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, no party (including any of the TeamStaff Entities)
has accelerated, terminated, modified, or canceled any agreement,
contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) involving more than $50,000 to which
any of the TeamStaff Entities is a party or by which any of them is
bound;
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<PAGE> 50
(iv) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule none of the TeamStaff Entities has imposed any
Security Interest upon any of its assets, tangible or intangible;
(v) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule none of the TeamStaff Entities has made any capital
expenditure (or series of related capital expenditures) either
involving more than $50,000 or outside the Ordinary Course of Business;
(vi) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule none of the TeamStaff Entities has made any capital
investment in, any loan to, or any acquisition of the securities or
assets of, any other Person (or series of related capital investments,
loans, and acquisitions) either involving more than $20,000 or outside
the Ordinary Course of Business;
(vii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has issued any
note, bond, or other debt security or created, incurred, assumed, or
guaranteed any indebtedness for borrowed money or capitalized lease
obligation either involving more than $20,000 singly or $50,000 in the
aggregate;
(viii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has delayed or
postponed the payment of accounts payable and other Liabilities outside
the Ordinary Course of Business;
(ix) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has canceled,
compromised, waived, or released any right or claim (or series of
related rights and claims) either involving more than $50,000 or
outside the Ordinary Course of Business;
(x) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has granted any
license or sublicense of any rights under or with respect to any
Intellectual Property;
(xi) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, there has been no change made or authorized in the
charter or bylaws of any of TeamStaff and its Subsidiaries;
(xii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has issued, sold,
or otherwise disposed of any of its capital stock, or granted any
options, warrants, or other rights to purchase or obtain (including
upon conversion, exchange, or exercise) any of its capital stock;
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<PAGE> 51
(xiii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has declared, set
aside, or paid any dividend or made any distribution with respect to
its capital stock (whether in cash or in kind) or redeemed, purchased,
or otherwise acquired any of its capital stock or made any distribution
of any kind to its shareholders including, without limitation, any
distributions to shareholders for the purpose of paying such
shareholders for Subchapter S income Tax Liabilities; provided,
however, notwithstanding the foregoing, prior to the Closing the
TeamStaff Entities shall be permitted to make a bonus payment to KS in
the amount of $75,000;
(xiv) None of the TeamStaff Entities has experienced any
damage, destruction, or loss (whether or not covered by insurance) to
its property;
(xv) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has made any loan
to, or entered into any other transaction with, any of its directors,
officers, and employees outside the Ordinary Course of Business;
(xvi) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has entered into
any employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement;
(xvii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has granted any
increase in the compensation of any of its directors, officers, and
employees outside the Ordinary Course of Business;
(xviii) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule none of the TeamStaff Entities has adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of
any of its directors, officers, and employees (or taken any such action
with respect to any other Employee Benefit Plan);
(xix) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, none of the TeamStaff Entities has made any other
change in employment terms for any of its directors, officers, and
employees;
(xx) None of the TeamStaff Entities has made or pledged to
make any charitable or political contribution in excess of an aggregate
of $10,000;
(xxi) Except as set forth on Section 4(g) of the TeamStaff
Disclosure Schedule, there has not been any other material occurrence,
event, incident, action, failure to act, or transaction outside the
Ordinary Course of Business involving any of the TeamStaff Entities;
and
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(xxii) None of the TeamStaff Entities has committed to any of
the foregoing.
(h) Undisclosed Liabilities. To the Knowledge of the Sellers, except as
set forth on Section 4(h) of the TeamStaff Disclosure Schedule, none of the
TeamStaff Entities has any Liability (and there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against any of them giving rise to any Liability), except for
(i) Liabilities set forth on the face of the Most Recent Balance Sheet (or in
any notes thereto) or (ii) Liabilities which have arisen after the Most Recent
Fiscal Month End in the Ordinary Course of Business (none of which results from,
arises out of, relates to, is in the nature of, or was caused by any breach of
contract, breach of warranty, tort, infringement, or violation of law) or (iii)
expenditures within the Ordinary Course of Business or which do not exceed
$20,000 individually or $50,000 in the aggregate.
(i) Legal Compliance. To the Knowledge of the Sellers, each of the
TeamStaff Entities, has complied with all applicable laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) except where such non-compliance has not and would not have a
Material Adverse Effect upon the TeamStaff Entities or their respective
businesses or operations, taken as a whole, and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any failure so to comply. Each
of the TeamStaff Entities holds all licenses and permits required to be held by
it under the laws of the State of Florida and counties therein and all other
jurisdictions in which it operates in order to operate its business as currently
operated and none of the TeamStaff Entities has received any notice, written or
otherwise, of the initiation of proceedings to revoke any such license or
permit, except where such failure to hold any such licenses or permits would not
have a Material Adverse Effect on the TeamStaff Entities taken as a whole.
(j) Tax Matters. Except as set forth on Section 4(j) of the TeamStaff
Disclosure Schedule:
(i) Each of the TeamStaff Entities has filed all Tax Returns
that it was required to file , and has paid all Taxes shown on such Tax
Returns as owing, except where the failure to file Tax Returns or to
pay Taxes would not have a Material Adverse Effect on the TeamStaff
Entities taken as a whole. All such Tax Returns were correct and
complete in all material respects. All Taxes owed by any of the
TeamStaff Entities (or the Sellers as a result of the Subchapter S
status of any of the TeamStaff Entities) (whether or not shown on any
Tax Return) have been paid in all material respects. None of the
TeamStaff Entities currently is the beneficiary of any extension of
time within which to file any Tax Return. No claim has been made within
the last three (3) years by an authority in a jurisdiction where any of
the TeamStaff Entities or any Seller does not file Tax Returns that it
or he is or may be subject to taxation by that jurisdiction. There are
no Security Interests on any of the assets of any of the TeamStaff
Entities that arose in connection with any failure (or alleged failure)
to pay any Tax.
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<PAGE> 53
(ii) Each of the TeamStaff Entities has withheld and paid all
Taxes required to have been withheld (including payroll and related
taxes) and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder, or other third
party.
(iii) Except as set forth on Section 4(j)(iii) of the
TeamStaff Disclosure Schedule, no Seller or director or officer (or
employee responsible for Tax matters) of any of the TeamStaff Entities
has any Knowledge of any expected assessments of any additional Taxes
for any period for which Tax Returns have been filed. There is no
dispute or claim concerning any Tax Liability of any of the TeamStaff
Entities either (A) claimed or raised by any authority in writing or
(B) as to which any of the Sellers and the directors and officers (and
employees responsible for Tax matters) of the TeamStaff Entities has
Knowledge based upon personal contact with any agent of such authority.
Section 4(j) of the TeamStaff Disclosure Schedule lists all federal,
state, local, and foreign income Tax Returns filed with respect to any
of the TeamStaff Entities for taxable periods ended on or after
December 31, 1995, indicates those Tax Returns that have been audited,
and indicates those Tax Returns that currently are the subject of
audit. The Sellers have delivered to Digital correct and complete
copies of all federal income Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by any of the
TeamStaff Entities since December 31, 1995.
(iv) None of the TeamStaff Entities has waived any statute of
limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(v) None of the TeamStaff Entities has filed a consent under
Code Sec. 341(f) concerning collapsible corporations. None of the
TeamStaff Entities has made any payments, is obligated to make any
payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code Sec. 280G. None of the TeamStaff Entities has
been a United States real property holding corporation within the
meaning of Code Sec. 897(c)(2) during the applicable period specified
in Code Sec. 897(c)(1)(A)(ii). Each of the TeamStaff Entities has
disclosed on its federal income Tax Returns all positions taken therein
that could give rise to a substantial understatement of federal income
Tax within the meaning of Code Sec. 6662. None of the TeamStaff
Entities is a party to any Tax allocation or sharing agreement. None of
the TeamStaff Entities (A) has been a member of an Affiliated Group
filing a consolidated federal income Tax Return (other than a group
consisting of only the TeamStaff Entities) or (B) has any Liability for
the Taxes of any Person (other than any of the TeamStaff Entities)
under Treas. Reg. Section 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or
otherwise.
(vi) Section 4(j)(vi) of the TeamStaff Disclosure Schedule
sets forth the following information with respect to each of the
TeamStaff Entities as of the most recent practicable date: (A) the
basis of each TeamStaff Entity in its assets; (B) the amount of any net
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operating loss, net capital loss, unused investment or other credit,
unused foreign tax, or excess charitable contribution allocable to such
TeamStaff Entity; and (C) the amount of any deferred gain or loss
allocable to TeamStaff Entity arising out of any Deferred Intercompany
Transaction.
(vii) The unpaid Taxes of the TeamStaff Entities (A) did not,
as of the Most Recent Fiscal Month End, exceed the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on
the face of the Most Recent Balance Sheet (rather than in any notes
thereto) and (B) do not exceed that reserve as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the TeamStaff Entities in filing their Tax Returns.
(k) Real Property Interests. Section 4(k) of the TeamStaff
Disclosure Schedule lists and describes briefly all real property leased or
subleased to any of the TeamStaff Entities. The Sellers have delivered to
Digital correct and complete copies of the leases and subleases listed on
Section 4(k) of the TeamStaff Disclosure Schedule (as amended to date). With
respect to each lease and sublease listed in Section 4(k) of the TeamStaff
Disclosure Schedule, except for matters that do not have a Material Adverse
Effect on the TeamStaff Entities taken as a whole:
(A) as regards the TeamStaff Entities the lease or
sublease is legal, valid, binding, enforceable, and in full
force and effect;
(B) as regards the TeamStaff Entities the lease or
sublease will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms
following the consummation of the transactions contemplated
hereby;
(C) to the Seller's Knowledge, no party to the lease
or sublease is in material breach or default, and no event has
occurred which, with notice or lapse of time, would constitute
a material breach or default or permit termination,
modification, or acceleration thereunder;
(D) to the Seller's Knowledge, no party to the lease
or sublease has repudiated any provision thereof;
(E) there are no material disputes, oral agreements,
or forbearance programs in effect as to the lease or sublease;
(F) as regards the TeamStaff Entities with respect to
each sublease, the representations and warranties set forth in
subsections (A) through (E) above are true and correct with
respect to the underlying lease;
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<PAGE> 55
(G) none of the TeamStaff Entities has assigned,
transferred, conveyed, mortgaged, deeded in trust, or
encumbered any interest in the leasehold or subleasehold;
(H) to the Seller's Knowledge, all facilities leased
or subleased thereunder have received all approvals of
governmental authorities (including licenses and permits)
required in connection with the operation thereof and have
been operated and maintained in accordance with applicable
laws, rules, and regulations;
(I) all facilities leased or subleased thereunder are
supplied with utilities and other services necessary for the
operation of said facilities; and
(J) to the Seller's Knowledge, the owner of the
facility leased or subleased has good and marketable title to
the parcel of real property, free and clear of any Security
Interest, easement, covenant, or other restriction, except for
installments of special easements not yet delinquent and
recorded easements, covenants, and other restrictions which do
not impair the current use, occupancy, or value, or the
marketability of title, of the property subject thereto.
(l) Intellectual Property.
(i) The TeamStaff Entities own or have the right to use
pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary for the operation of the businesses of
the TeamStaff Entities as presently conducted and as presently proposed
to be conducted. Each item of Intellectual Property owned or used by
any of the TeamStaff Entities immediately prior to the Closing
hereunder will be owned or available for use by such TeamStaff Entity
on identical terms and conditions immediately subsequent to the Closing
hereunder, except as set forth on Section 4(l). Each of the TeamStaff
Entities has taken all reasonably necessary action to maintain and
protect each item of Intellectual Property that it owns or uses.
(ii) To the Knowledge of the Sellers, except as set forth in
Section 4(l) of the TeamStaff Disclosure Schedule none of the TeamStaff
Entities has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of
third parties, and none of the Sellers and the directors and officers
(and employees with responsibility for Intellectual Property matters)
of the TeamStaff Entities has ever received any charge, complaint,
claim, demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that any of the
TeamStaff Entities must license or refrain from using any Intellectual
Property rights of any third party). To the Knowledge of any of the
Sellers and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the TeamStaff
Entities, except as set forth in Section 4(l) of the TeamStaff
Disclosure Schedule no third
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party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of
any of the TeamStaff Entities.
(iii) Section 4(l)(iii) of the TeamStaff Disclosure Schedule
identifies each patent or registration which has been issued to any of
the TeamStaff Entities with respect to any of its Intellectual
Property, identifies each pending patent application or application for
registration which any of the TeamStaff Entities has made with respect
to any of its Intellectual Property, and identifies each license,
agreement, or other permission which any of the TeamStaff Entities has
granted to any third party with respect to any of its Intellectual
Property (together with any exceptions). The Sellers have delivered to
Digital correct and complete copies of all such patents, registrations,
applications, licenses, agreements, and permissions (as amended to
date) and have made available to Digital correct and complete copies of
all other written documentation evidencing ownership and prosecution
(if applicable) of each such item. Section 4(l)(iii) of the TeamStaff
Disclosure Schedule also identifies each trade name or unregistered
trademark used by any of the TeamStaff Entities in connection with any
of its businesses. With respect to each item of Intellectual Property
required to be identified in Section 4(l)(iii) of the TeamStaff
Disclosure Schedule and except for matters which would not have a
Material Adverse Effect on the TeamStaff Entities taken as a whole:
(A) The TeamStaff Entities possess all right, title,
and interest in and to the item, free and clear of any
Security Interest, license, or other restriction;
(B) The item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
(C) No action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending
or, to the Knowledge of the Sellers is threatened which
challenges the legality, validity, enforceability, use, or
ownership of the item; and
(D) None of the TeamStaff Entities has ever agreed to
indemnify any Person for or against any interference,
infringement, misappropriation, or other conflict with respect
to the item.
(iv) Section 4(l) of the TeamStaff Disclosure Schedule
identifies each item of Intellectual Property that any third party owns
and that any of the TeamStaff Entities uses pursuant to license,
sublicense, agreement, or permission. The Sellers have delivered to
Digital correct and complete copies of all such licenses, sublicenses,
agreements, and permissions (as amended to date). With respect to each
item of Intellectual Property required to be identified in Section
4(l)(iv) of the TeamStaff Disclosure Schedule and except for matters
which would not have a Material Adverse Effect on the TeamStaff
Entities taken as a whole:
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(A) the license, sublicense, agreement, or permission
covering the item is legal, valid, binding, enforceable, and
in full force and effect;
(B) the license, sublicense, agreement, or permission
will continue to be legal, valid, binding, enforceable, and in
full force and effect on identical terms following the
Closing;
(C) no party to the license, sublicense, agreement,
or permission is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a
breach or default or permit termination, modification, or
acceleration thereunder;
(D) no party to the license, sublicense, agreement,
or permission has repudiated any provision thereof;
(E) with respect to each sublicense, the
representations and warranties set forth in subsections (A)
through (D) above are materially true and correct with respect
to the underlying license;
(F) the underlying item of Intellectual Property is
not subject to any outstanding injunction, judgment, order,
decree, ruling, or charge;
(G) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending
or, to the Knowledge of the Sellers and the directors and
officers (and employees with responsibility for Intellectual
Property matters) of the TeamStaff Entities, is threatened
which challenges the legality, validity, or enforceability of
the underlying item of Intellectual Property; and
(H) none of the TeamStaff Entities has granted any
sublicense or similar right with respect to the license,
sublicense, agreement, or permission.
(v) To the Knowledge of the Sellers, the use by the TeamStaff
Entities of their respective Intellectual Property does not interfere
with, infringe upon, misappropriate, or otherwise come into conflict
with, any Intellectual Property rights of third parties as a result of
the continue operation of its business as presently conducted.
(m) Tangible Assets. Except as set forth on Section 4(m) of the
TeamStaff Disclosure Schedule, the TeamStaff Entities own or lease all
buildings, machinery, equipment, and other tangible assets necessary for the
conduct of their businesses as presently conducted. Each such tangible asset is
free from defects (patent and latent), has been maintained in accordance with
normal industry practice, is in good operating condition and repair (subject to
normal wear and tear), and is suitable for the purposes for which it presently
is used with such exceptions as would not have a Material Adverse Effect upon
the TeamStaff Entities.
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(n) Contracts. Section 4(n) of the TeamStaff Disclosure Schedule lists
the following contracts and other agreements to which any of the TeamStaff
Entities is a party:
(i) any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease
payments in excess of $30,000 per annum;
(ii) any agreement (or group of related agreements) for the
furnishing or receipt of services, the performance of which will extend
over a period of more than one year, result in a loss to any of the
TeamStaff Entities in excess of $30,000, or involve consideration in
excess of $30,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under
which it has created, incurred, assumed, or guaranteed any indebtedness
for borrowed money, or any capitalized lease obligation, in excess of
$30,000 or under which it has imposed a Security Interest on any of its
assets, tangible or intangible;
(v) any agreement concerning confidentiality or
noncompetition;
(vi) any agreement with any of the Sellers and their
Affiliates (other than the TeamStaff Entities);
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors,
officers, and employees;
(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $30,000 or providing severance benefits;
(x) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xi) any agreement under which the consequences of a default
or termination could have an adverse effect on the business, financial
condition, operations, results of operations, or future prospects of
any of the TeamStaff Entities; or
(xii) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $30,000.
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The Sellers have delivered to Digital a correct and complete copy of each
written agreement listed in Section 4(n) of the TeamStaff Disclosure Schedule
(as amended to date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 4(n) of the TeamStaff
Disclosure Schedule. With respect to each such agreement and except for matters
which would not have a Material Adverse Effect on the TeamStaff Entities taken
as a whole: (A) as regards the TeamStaff Entities the agreement is legal, valid,
binding, enforceable, and in full force and effect; (B) as regards the TeamStaff
Entities the agreement will continue to be legal, valid, binding, enforceable,
and in full force and effect on identical terms following the consummation of
the transactions contemplated hereby; (C) to the Knowledge of the Sellers, no
party is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification, or acceleration, under the agreement; and (D) to the Knowledge of
the Sellers, no party has repudiated any provision of the agreement.
(o) Notes and Accounts Receivable. All notes and accounts receivable of
the TeamStaff Entities are reflected properly on their books and records, are
valid receivables subject to no setoffs or counterclaims, are current and
collectible, and to the Knowledge of the Sellers will be collected in accordance
with their terms at their recorded amounts subject only to the reserve for bad
debts set forth on the face of the Most Recent Balance Sheet (rather than in any
notes thereto) as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of the TeamStaff Entities.
(p) Powers of Attorney. Section 4(p) of the TeamStaff Disclosure
Schedule sets forth outstanding powers of attorney executed on behalf of any of
the TeamStaff Entities.
(q) Insurance. Section 4(q) of the TeamStaff Disclosure Schedule
contains each insurance policy (including policies providing property, casualty,
liability, and workers' compensation coverage and bond and surety arrangements)
to which any of the TeamStaff Entities has been a party, a named insured, or
otherwise the beneficiary of coverage at any time within the past three (3)
years.
With respect to each such insurance policy and except for matters which
would not have a Material Adverse Effect on the TeamStaff Entities taken as a
whole, to the Knowledge of the Sellers: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
none of the TeamStaff Entities or any other party to the policy is in material
breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse of
time, would constitute such a breach or default, or permit termination,
modification, or acceleration, under the policy; and (D) no party to the policy
has repudiated any provision thereof. Each of the TeamStaff Entities has been
covered during the past three (3) years by insurance in scope and amount
customary and reasonable for the businesses in which it has engaged during the
aforementioned period.
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(r) Litigation. Section 4(r) of the TeamStaff Disclosure Schedule sets
forth each instance in which any of the TeamStaff Entities (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a
party or to the Knowledge of the Sellers and the directors and officers (and
employees with responsibility for litigation matters) of any of the TeamStaff
Entities is threatened to be made a party to any action, suit, proceeding,
hearing, or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator. Except where the injunction, order, decree, ruling,
action, suit, proceeding, hearing, or investigation would not have a Material
Adverse Effect on the TeamStaff Entities taken a whole, none of the actions,
suits, proceedings, hearings, and investigations set forth in Section 4(r) of
the TeamStaff Disclosure Schedule could result in any adverse change in the
business, financial condition, operations, results of operations, or future
prospects of any of the TeamStaff Entities. None of the Sellers and the
directors and officers (and employees with responsibility for litigation
matters) of the TeamStaff Entities has Knowledge of any circumstances that might
reasonably be expected to result in any such action, suit, proceeding, hearing,
or investigation which may be brought or threatened against any of the TeamStaff
Entities.
(s) Employees. To the Knowledge of any of the Sellers and the directors
and officers (and employees with responsibility for employment matters) of the
TeamStaff Entities, no executive, key employee, or group of employees has any
plans to terminate employment with any of the TeamStaff Entities. None of the
TeamStaff Entities is a party to or bound by any collective bargaining
agreement, nor has any of them experienced any strikes, grievances, claims of
unfair labor practices, or other collective bargaining disputes. To the
Knowledge of the Sellers, none of the TeamStaff Entities has committed any
unfair labor practice. None of the Sellers and the directors and officers (and
employees with responsibility for human resource matters) has any Knowledge of
any organizational effort presently being made or threatened by or on behalf of
any labor union with respect to employees of any of the TeamStaff Entities.
(t) Employee Benefits.
(i) Section 4(t) of the TeamStaff Disclosure Schedule lists each
Employee Benefit Plan that any TeamStaff Entity has established and
maintains for the benefit of the employees of such TeamStaff Entity or
to which any TeamStaff Entity contributes on behalf of the employee of
such TeamStaff Entity (collectively, the "TeamStaff Plan"), and except
as set forth on Section 4(t) of the TeamStaff Disclosure Schedule:
(A) Each TeamStaff Plan (and each related trust,
insurance contract, or fund) complies in form and in operation
in all material respects with the applicable requirements of
ERISA, the Code, and other applicable laws.
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(B) All required reports and descriptions (including
Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's,
and Summary Plan Descriptions) have been filed or distributed
appropriately with respect to each such Employee Benefit Plan.
The requirements of Part 6 of Subtitle B of Title I of ERISA
and of Code Sec. 4980B have been met with respect to each such
TeamStaff Plan that is an Employee Welfare Benefit Plan.
(C) All contributions (including all employer
contributions and employee salary reduction contributions)
which are due have been paid to each such TeamStaff Plan which
is an Employee Pension Benefit Plan and all contributions for
any period ending on or before the Closing Date which are not
yet due have been paid to each such Employee Pension Benefit
Plan or accrued in accordance with the past custom and
practice of the TeamStaff Entities. All premiums or other
payments for all periods ending on or before the Closing Date
have been paid with respect to each such TeamStaff Plan which
is an Employee Welfare Benefit Plan.
(D) Each TeamStaff Plan which is an Employee Pension
Benefit Plan has received, within the last two years, a
favorable determination letter from the Internal Revenue
Service to the effect that it meets the requirements of Code
Sec. 401 (a).
(E) None of the TeamStaff Entities or the Controlled
Group of Corporations which included any of the TeamStaff
Entities currently sponsors or contributes to or has ever
sponsored or contributed to any Employee Benefit Plan that is
subject to Title IV of ERISA.
(F) The Sellers have delivered to Digital correct and
complete copies of the plan documents and summary plan
descriptions, the most recent determination letter received
from the Internal Revenue Service, the most recent Form 5500
Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each
TeamStaff Plan.
(ii) To the Knowledge of any of the Sellers, no Prohibited
Transactions have occurred with respect to any TeamStaff Plan
and no Fiduciary has any Liability for breach of fiduciary
duty or any other failure to act or comply in connection with
the administration or investment of the assets of any
TeamStaff Plan. No action, suit, proceeding, hearing or
investigation with respect to the administration or the
investment of the assets of any TeamStaff Plan (other than
routine claims for benefits) is pending or, to the Knowledge
of the Sellers, threatened. None of the Sellers (or any
officer with responsibility for ERISA matters) has any
Knowledge
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of any Basis for any such action, suit,
proceeding, hearing or investigation.
(A) No such TeamStaff Plan which is an Employee
Pension Benefit Plan (other than any Multiemployer Plan) has
been completely or partially terminated or been the subject of
a Reportable Event as to which notices would be required to be
filed with the PBGC. No proceeding by the PBGC to terminate
any such Employee Pension Benefit Plan (other than any
Multiemployer Plan) has been instituted or to the Knowledge of
the Sellers threatened.
(B) There have been no Prohibited Transactions with
respect to any such TeamStaff Plan. No Fiduciary has any
Liability for breach of fiduciary duty or any other failure to
act or comply in connection with the administration or
investment of the assets of any such TeamStaff Plan. No
action, suit, proceeding, hearing, or investigation with
respect to the administration or the investment of the assets
of any such TeamStaff Plan (other than routine claims for
benefits) is pending or to the Knowledge of the Sellers,
threatened.
(C) None of the TeamStaff Entities has incurred, and
none of the Sellers (or any officer with responsibility for
ERISA matters) has Knowledge of any circumstances that might
reasonably be expected to result in any of the TeamStaff
Entities incurring, any Liability to the PBGC (other than PBGC
premium payments) or otherwise under Title IV of ERISA
(including any withdrawal Liability) or under the Code with
respect to any such TeamStaff Plan which is an Employee
Pension Benefit Plan.
(iii) Other than the Multiemployer Plans set forth on Section
4(t)(iii) of the TeamStaff Disclosure Schedule, none of the TeamStaff
Entities, and the other members of the Controlled Group of Corporations
that includes the TeamStaff Entities contributes to, ever has
contributed to, or ever has been required to contribute to any
Multiemployer Plan or has any Liability (including withdrawal
Liability) under any Multiemployer Plan.
(iv) None of the TeamStaff Entities maintains, or ever has
maintained or contributes, ever has contributed, or ever has been
required to contribute to any Employee Welfare Benefit Plan providing
medical, health, or life insurance or other welfare-type benefits for
current or future retired or terminated employees, their spouses, or
their dependents (other than in accordance with Code Sec. 4980B).
(u) Guaranties. None of the TeamStaff Entities is a guarantor or
otherwise is liable for any Liability or obligation (including indebtedness) of
any other Person.
(v) Environment, Health, and Safety.
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(i) To the Knowledge of the Sellers, each of the TeamStaff
Entities, and their respective predecessors and Affiliates has complied
with all Environmental, Health, and Safety Laws, and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand,
or notice has been filed or commenced against any of them alleging any
failure to so comply. Without limiting the generality of the preceding
sentence, each of the TeamStaff Entities, and their respective
predecessors and Affiliates has obtained and been in compliance with
all of the terms and conditions of all permits, licenses, and other
authorizations which are required under, and has complied with all
other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules, and timetables which are
contained in, all Environmental, Health, and Safety Laws.
(ii) To the Knowledge of the Sellers, none of the TeamStaff
Entities has any Liability (and none of the TeamStaff Entities, and
their respective predecessors and Affiliates has handled or disposed of
any substance, arranged for the disposal of any substance, exposed any
employee or other individual to any substance or condition, or owned or
operated any property or facility in any manner that could form the
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against any of the
TeamStaff Entities giving rise to any Liability) for damage to any
site, location, or body of water (surface or subsurface), for any
illness of or personal injury to any employee or other individual, or
for any reason under any Environmental, Health, and Safety Law.
(iii) To the Knowledge of the Sellers, except as set forth in
Section 4(v) of the TeamStaff Disclosure Schedule, all properties and
equipment used in the business of the TeamStaff Entities, and their
respective predecessors and Affiliates have been free of asbestos,
PCB's, methylene chloride, trichloroethylene,
1,2-trans-dichloroethylene, dioxins, dibenzofurans, and Extremely
Hazardous Substances.
(w) Certain Business Relationships with the TeamStaff Entities. Except
as set forth on Section 4(w) of the TeamStaff Disclosure Schedule, none of the
Sellers and their Affiliates has been involved in any business arrangement or
relationship with any of the TeamStaff Entities within the past 12 months, and
none of the Sellers and their Affiliates owns any asset, tangible or intangible,
which is used in the business of any of the TeamStaff Entities.
(x) USEC Litigation. The Sellers have delivered to Digital true and
correct copies of all material documents related to the United States Employer
Consumer Self Insurance Fund of Florida and the United States Employer Consumer
Self Insurance Fund of Georgia, (collectively "USEC") including agreements among
the participants in USEC, complaints in any litigation or administrative
proceedings, answers, motions and rulings and reports of consultants to the
TeamStaff Entities, related to the USEC litigation. The ultimate liability of
the TeamStaff Entities with respect to USEC will not exceed $391,000, which is
the amount of the reserve appearing in the Financial Statements of the TeamStaff
Entities delivered to Digital.
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(y) CIGNA Medical Program Claims. The Sellers have delivered to Digital
all material documents related to the CIGNA medical insurance program. The
ultimate liability of the TeamStaff Entities with respect to the CIGNA medical
insurance program will not exceed $79,384 which is the amount of the reserve for
such liability appearing in the Financial Statements of the TeamStaff Entities
delivered to Digital.
(z) Disclosure. The representations and warranties contained in this
Section 4 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 4 not misleading.
5. Pre-Closing Covenants. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use his or its reasonable best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 7 below).
(b) Notices and Consents. The Sellers will use their reasonable best
efforts to cause each of the TeamStaff Entities to give any notices to third
parties, and will cause each of the TeamStaff Entities to use its reasonable
best efforts to obtain any third-party consents, that Digital may request in
connection with the matters referred to in Section 4(c) above. Each of the
Parties will (and the Sellers will cause each of the TeamStaff Entities to) give
any notices to, make any filings with, and use its reasonable best efforts to
obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in Section
3(a)(ii), Section 3(b)(ii), and Section 4(c) above. Without limiting the
generality of the foregoing, each of the Parties will file (and the Sellers will
cause each of the TeamStaff Entities to file) any (i) Notification and Report
Forms and related material that he or it may be required to file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice under the Hart-Scott-Rodino Act, will use his or its
reasonable best efforts to obtain (and the Sellers will cause each of the
TeamStaff Entities to use its reasonable best efforts to obtain) an early
termination of the applicable waiting period, and will make (and the Sellers
will cause each of the TeamStaff Entities to make) any further filings pursuant
thereto that may be necessary proper, or advisable in connection therewith and
(ii) any notices or applications to the Florida Department of Business and
Professional Regulation and any other required state filings where the TeamStaff
Entities conduct, or are registered or licensed to conduct, business.
(c) Operation of Business. The Sellers will not cause or permit any of
the TeamStaff Entities to engage in any practice, take any action, or enter into
any transaction outside the Ordinary Course of Business. Without limiting the
generality of the foregoing, the Sellers will not cause or permit any of the
TeamStaff Entities to (i) declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase, or otherwise
acquire any of its capital stock, (ii) otherwise engage in any practice, take
any action, or enter into any
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transaction of the sort described in Section 4(h) above, except repayment of any
third party loans outstanding in accordance with their terms (there being no
voluntary prepayment by the TeamStaff Entities) or (iii) make any distributions
(including without limitation, payments intended to fund Tax Liabilities of the
Sellers) to Sellers except for normal and ordinary payment of salary to KS and a
one time payment of $75,000 prior to Closing.
(d) Preservation of Business. The Sellers will cause each of the
TeamStaff Entities to keep its business and properties substantially intact,
including its present operations, physical facilities, working conditions, and
relationships with lessors, licensors, suppliers, customers and employees.
(e) Full Access. Each of the Sellers will permit, and the Sellers will
cause each of the TeamStaff Entities to permit, representatives of Digital to
have full access at all reasonable times, and in a manner so as not to interfere
with the normal business operations of the TeamStaff Entities to all premises,
properties, personnel, books, records (including Tax records), contracts, and
documents of or pertaining to each of the TeamStaff Entities.
(f) Notice of Developments. (i) The Parties shall notify the other
Parties in writing of any development causing a breach of any of the
representations and warranties contained in this Agreement. Unless the
non-breaching Party has the right to terminate this Agreement pursuant to
Section 9(a)(v) below by reason of the development and exercises that right
within the period of 10 business days referred to in Section 9(a) (v) below, the
written notice pursuant to this Section 5(f)(i) will be deemed to have amended
the applicable disclosure schedule, to have qualified the representations and
warranties contained in this Agreement, and to have cured any misrepresentation
or breach of warranty that otherwise might have existed under this Agreement by
reason of the development.
(ii) Each Party will give prompt written notice to the others
of any material adverse development causing a breach of any of his or its own
representations and warranties in Sections 3 and 4 above.
(g) Exclusivity. None of the Sellers will (and the Sellers will not
cause or permit any of the TeamStaff Entities to) (i) solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities, or any
substantial portion of the assets of, any of the TeamStaff Entities (including
any acquisition structured as a merger, consolidation, or share exchange) or
(ii) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. None of the Sellers will vote their TeamStaff Shares in favor of any
such acquisition structured as a merger, consolidation, or share exchange. The
Sellers will notify Digital in writing immediately if any Person makes any
proposal, offer, inquiry, or contact with respect to any of the foregoing.
6. Post-Closing Covenants. The Parties agree as follows with respect to the
period following the Closing.
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<PAGE> 66
(a) General. In case at any time after the Closing any further action
is necessary to carry out the purposes of this Agreement, each of the Parties
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party reasonably may request,
all at the sole cost and expense of the requesting Party (unless the requesting
Party is entitled to indemnification therefor under Section 8 below). The
Sellers acknowledge and agree that from and after the Closing Digital will be
entitled to possession of all documents, books, records (including Tax records),
agreements, and financial data of any sort relating to the TeamStaff Entities;
provided, however, that, after Closing, Digital shall provide the Sellers with
reasonable access to and the right to copy such documents, books, records
(including Tax records), agreements, and financia1 data where the Sellers have a
legitimate purpose including without limitation in the event of an Internal
Revenue Service audit.
(b) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving any of the TeamStaff Entities, each of the other
Parties will cooperate with him or it and his or its counsel in the contest or
defense, make available their personnel, and provide such testimony and access
to their books and records as shall be necessary in connection with the contest
or defense, all at the sole cost and expense of the contesting or defending
Party (unless the contesting or defending Party is entitled to indemnification
therefor under Section 8 below).
(c) Transition. None of the Sellers will take any action that is
designed or intended to have the effect of discouraging any lessor, licensor,
customer, supplier, or other business associate of any of the TeamStaff Entities
from maintaining the same business relationships with the TeamStaff Entities
after the Closing as it maintained with the TeamStaff Entities prior to the
Closing. Each of the Sellers will refer all customer inquiries relating to the
businesses of the TeamStaff Entities to Digital or the Surviving Corporation
from and after the Closing.
(d) Confidentiality. (i) Each of the Sellers will treat and hold as
such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and deliver
promptly to Digital or destroy, at the request and option of Digital, all
tangible embodiments (and all copies) of the Confidential Information which are
in his or its possession. In the event that any of the Sellers is requested or
required (by oral question or request for information or documents in any legal
proceeding, interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information, such Seller will notify
Digital promptly of the request or requirement so that Digital may seek an
appropriate protective order or waive compliance with the provisions of this
Section 6(d). If, in the absence of a protective order or the receipt of a
waiver hereunder, any of the Sellers is, on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, such Seller may disclose the Confidential Information to the tribunal;
provided, however, that the disclosing Seller shall use his or its reasonable
best efforts to obtain, at the
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reasonable request of Digital, (and at the expense of Digital) an order or other
assurance that confidential treatment will be accorded to such portion of the
Confidential Information required to be disclosed as Digital shall designate.
The foregoing provisions shall not apply to any Confidential Information which
is generally available to the public immediately prior to the time of
disclosure.
(ii) Digital and its Subsidiaries will treat and hold as such
all of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
the Sellers or destroy, at the request and option of the Sellers, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that Digital or any its Subsidiaries is requested or
required (by oral question or request for information or documents in any legal
proceeding, interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information, that Seller will notify
Digital promptly of the request or requirement so that the Sellers may seek an
appropriate protective order or waive compliance with the provisions of this
Section 6(d). If, in the absence of a protective order or the receipt of a
waiver hereunder, Digital or any of its Subsidiaries is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, that Digital and its Subsidiaries may disclose
the Confidential Information to the tribunal; provided, however, Digital and its
Subsidiaries shall use their reasonable best efforts to obtain, at the
reasonable request of the Sellers, (and at the expense of Sellers) an order or
other assurance that confidential treatment will be accorded to such portion of
the Confidential Information required to be disclosed as the Sellers shall
designate. The foregoing provisions shall not apply to any Confidential
Information which is generally available to the public immediately prior to the
time of disclosure.
(e) Covenant Not to Compete. For a period of three (3) years from and
after the Closing Date, WC will not engage directly or indirectly in any
business that any of the TeamStaff Entities conducts as of the Closing Date in
any geographic area in which any of the TeamStaff Entities conducts that
business as of the Closing Date; provided, however, that no owner of less than
1% of the outstanding stock of any publicly traded corporation shall be deemed
to engage solely by reason thereof in any of its businesses. If the final
judgment of a court of competent jurisdiction declares that any term or
provision of this Section 6(e) is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed. In
addition, certain key employees of TeamStaff listed on Exhibit J to this
Agreement shall enter into non-competition agreements substantially in form of
Exhibit C annexed hereto with Digital that for a period of two years from the
termination of their employment they will not engage directly or indirectly in
any business that any of the TeamStaff Entities conducts as of the Closing Date
in the states of Florida, Georgia, New Jersey, New York or Texas; provided,
however, that no owner of less than 1% of the
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outstanding stock of any publicly traded corporation shall be deemed to engage
solely by reason thereof in any of its businesses.
7. Conditions to Obligation to Close.
(a) Conditions to Obligation of Digital. The obligation of Digital to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section
3(a) and Section 4 above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) the Sellers shall have performed and complied with all of
their covenants hereunder in all material respects through the Closing;
(iii) the TeamStaff Entities shall have procured all of the
third party consents specified in Section 5(b) above;
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, (C) affect adversely the right of Digital to own
TeamStaff Shares and to control the TeamStaff Entities, or (D) affect
adversely the right of any of the TeamStaff Entities to own its assets
and to operate its businesses (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
(v) the Sellers shall have delivered to Digital a certificate
to the effect that each of the conditions specified above in Section
7(a)(i)-(iv) is satisfied in all respects;
(vi) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott - Rodino Act shall have expired or
otherwise been terminated and the Parties shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Section 3(a)(ii), Section 3(b)(iii), and
Section 4(c) above;
(vii) Digital and KS shall have entered into an employment
agreement substantially in the form annexed hereto as Exhibit A;
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(viii) Digital shall have received from counsel to the Sellers
an opinion in form and substance as set forth in Exhibit D attached
hereto, addressed to Digital, and dated as of the Closing Date;
(ix) Digital shall have received the resignations, effective
as of the Closing, of each director and officer of the TeamStaff
Entities other than those whom Digital shall have specified in writing
at least five business days prior to the Closing;
(x) Digital shall have obtained, on terms and conditions
satisfactory to it, all of the financing it needs in an amount of not
less than $4,500,000 in order to consummate the transactions
contemplated hereby and fund the working capital requirements of the
TeamStaff Entities after the Closing;
(xi) Digital shall have received from the Sellers one or more
duly executed escrow agreements (collectively the "Escrow Agreements"),
substantially in the form of Exhibit H annexed hereto, together with
stock certificates and stock powers properly executed, to effect the
following: (i) in order to provide security for payment by the Sellers
of any Adverse Consequences for which Digital is entitled to
indemnification for the breach of any representation or warranty other
than as set forth in clause (ii) below, such number of Digital Shares
received by the Sellers as Merger Consideration as shall equal the
quotient determined by dividing $525,000 by the Escrow Market Price of
the Digital Shares; and (ii) in order to provide security for payment
by the Sellers of any Adverse Consequences (except for the initial
$50,000 of legal fees incurred by Digital and the TeamStaff Entities
after the Closing for settlement of the USEC litigation) for which
Digital is entitled to indemnification with respect to amounts (A) in
excess of the reserve for USEC as set forth on the Financial Statements
of the TeamStaff Entities, and (B) with respect to liability emanating
from the CIGNA medical insurance policy, such number of Digital Shares
received by the Sellers as Merger Consideration as shall equal the
quotient determined by dividing $600,000 by the Escrow Market Price of
the Digital Shares.
(xii) Digital shall have received properly executed
non-competition agreements and employment agreements from the persons
listed on Exhibit J;
(xiii) Digital shall have received from Sun Trust Bank of
Tampa Bay confirmation that all loans and debt owed to it have been
repaid in full and Sun Trust Bank of Tampa Bay has released all
security interests and liens against the TeamStaff Entities and their
respective assets;
(xiv) Digital and KS shall have entered into one or more
agreements whereby Digital and KS have agreed that debt owed by KS to
the TeamStaff Entities in the amount of $135,000 shall be forgiven over
a period of two years, one-half being forgiven on the first anniversary
of the Closing and the remaining one-half being forgiven on the second
anniversary of the Closing and provided KS is then employed by Digital.
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(xv) Digital shall have received the approval of its
shareholders for the transactions contemplated herein in accordance
with the Business Corporation Act of New Jersey and the approval of its
Board of Directors;
(xvi) Digital, its wholly owned Subsidiary DGAC V, TeamStaff
V, Inc. ("TSV")and the Sellers shall have entered into an agreement,
substantially in the form of this Agreement and upon such other terms
as are mutually satisfactory to the Parties, providing for the merger
of DGAC V with and into TSV.
(xvii) Digital shall have received a written waiver of all
claims from employees of the TeamStaff Entities for any compensation,
bonus or other payments which may have been promised or due to such
employees for the transactions contemplated herein.
(xviii) all actions to be taken by the Sellers in connection
with consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be satisfactory in
form and substance to Digital.
Digital may waive any condition specified in this Section 7(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Sellers. The obligation of the
Sellers to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section
3(b) above shall be true and correct in all material respects at and as
of the Closing Date;
(ii) Digital and the Merger Corporations shall have performed
and complied with all of its covenants hereunder in all material
respects through the Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(iv) Digital shall have delivered to the Sellers a certificate
to the effect that each of the conditions specified above in Section
7(b)(i)-(iii) is satisfied in all respects;
(v) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or
otherwise been terminated and the Parties shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Section 3(a)(ii), Section 3(b)(ii), and Section
4(c) above;
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(vi) Digital and KS shall have entered into an employment
agreement substantially in the form annexed hereto as Exhibit A;
(vii) the Sellers shall have received from counsel to Digital
and the Merger Corporations an opinion in form and substance as set
forth in Exhibit E attached hereto, addressed to the Sellers, and dated
as of the Closing Date;
(viii) Digital shall have executed and delivered to each of
the Sellers the Registration Rights Agreement in the form of Exhibit F
with respect to the Digital Shares;
(ix) Digital shall have delivered to each Seller the Merger
Consideration, and the Debt Payment and shall have made the Expense
Payment;
(x) Digital and KS shall have entered into one or more
agreements whereby Digital and KS have agreed that debt owed by KS to
the TeamStaff Entities in the amount of $135,000 shall be forgiven over
a period of two years, one-half being forgiven on the first anniversary
of the Closing and the remaining one-half being forgiven on the second
anniversary of the Closing and provided KS is then employed by Digital.
(xii) Digital, its wholly owned subsidiary DGAC V, TSV and the
Sellers shall have entered into an agreement, substantially in the form
of this Agreement and upon such other terms as are mutually
satisfactory to the Parties, providing for the merger of DGAC V with
and into TSV.
(xiii) all actions to be taken by Digital in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Sellers.
(xiv) Digital and the Sellers shall have entered into a voting
agreement substantially in the form annexed hereto as Exhibit K;
The Sellers may waive any condition specified in this Section 7(b) if they
execute a writing so stating at or prior to the Closing.
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8. Remedies for Breaches of This Agreement.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the Sellers contained in Section 4 of this
Agreement shall survive the Closing hereunder (unless Digital had received from
Sellers written notice of any misrepresentation or breach of warranty prior to
the time of Closing and expressly waived in writing such breach or
misrepresentation) and continue in full force and effect for a period of 18
months from the Closing Date; provided, however, representations and warranties
set forth in Section 4 (y) and Section 4 (x) shall survive until the third
anniversary date of the Closing. All claims arising out of a breach of the
general representations and warranties other than CIGNA and USEC must be made
within 18 months of the Closing.
(b) Indemnification Provisions for Benefit of Digital. In the event any
of the Sellers breaches (or in the event any third party alleges facts that, if
true, would mean any of the Sellers has breached) any of their representations,
warranties, and covenants contained herein, and, if there is an applicable
survival period pursuant to Section 8(a) above, provided that Digital makes a
written claim for indemnification against any of the Sellers pursuant to Section
10(g) below within such survival period, then each of the Sellers agrees to
indemnify Digital from and against the entirety of any Adverse Consequences
Digital may suffer through and after the date of the claim for indemnification
(including any Adverse Consequences Digital may suffer after the end of any
applicable survival period) resulting from, arising out of, relating to, in the
nature of, or caused by the breach (or the alleged breach); provided, however,
that the Sellers shall not have any obligation to indemnify Digital from and
against any Adverse Consequences caused proximately by the breach of any
representation or warranty of the Sellers contained in Section 4 above until
Digital has suffered Adverse Consequences by reason of all such breaches (or
alleged breaches) in excess of a $100,000 aggregate threshold (the "Threshold")
and such indemnification shall be made by the Sellers only to the extent of any
excess over the Threshold. The maximum Liability that will be payable to Digital
by the Sellers pursuant to this Section 8(b) shall be limited as follows: (i)
for any Adverse Consequences for which Digital is entitled to indemnification
for the breach of any representation or warranty other than as set forth in
clause (ii) below, the sum of $525,000; and (ii) for any Adverse Consequences
(except for the initial $50,000 of legal fees incurred by Digital and the
TeamStaff Entities after the Closing for settlement of the USEC litigation) for
which Digital is entitled to indemnification with respect to amounts (A) in
excess of the reserve for USEC as set forth on the Financial Statements of the
TeamStaff Entities, and (B) with respect to liability emanating from the CIGNA
medical insurance policy, the sum of $600,000; provided, however, in the event
that a court of competent jurisdiction determines that the Sellers committed
fraud with respect to any representation or warranty, then Digital shall have
the right to indemnification from the Seller or Sellers who has or have
committed such fraud for the full amount of any Adverse
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Consequences suffered by Digital as a result of such fraud. In addition to the
foregoing, Digital shall not be entitled to indemnification for the initial
$50,000 of legal fees incurred by it or the TeamStaff Entities after the Closing
in connection with the settlement of the USEC litigation. Any liability incurred
by the Sellers pursuant to the terms of this paragraph 8(b) shall be paid by the
Sellers to Digital in cash within 30 days of written demand therefore by
Digital; provided, that in the event such demand shall be served by Digital
within one year from the Closing, the Sellers may, at the option of Digital, pay
such liability by a note payable to the order of Digital bearing interest at the
rate of the rate equal to the prime rate plus 5% per annum, and payable 90 days
after the first anniversary of the Closing.
(c) Indemnification Provisions for Benefit of the Sellers. In the event
Digital breaches (or in the event any third party alleges facts that, if true,
would mean Digital has breached) any of its representations, warranties, and
covenants contained herein, and, if there is an applicable survival period
pursuant to Section 8(a) above, provided that any of the Sellers makes a written
claim for indemnification against Digital pursuant to Section 10(g) below within
such survival period, then Digital agrees to indemnify each of the Sellers from
and against the entirety of any Adverse Consequences the Seller may suffer
through and after the date of the claim for indemnification (including any
Adverse Consequences the Seller may suffer after the end of any applicable
survival period) resulting from, arising out of, relating to, in the nature of,
or caused by the breach (or the alleged breach); provided, however, that Digital
shall not have any obligation to indemnify the Sellers from and against any
Adverse Consequences resulting from, arising out of, relating to, in the nature
of, or caused by the breach (or the alleged breach) of any representation or
warranty of Digital until the Sellers have suffered Adverse Consequences by
reason of all such breaches (or alleged breaches) in excess of a $100,000
aggregate threshold. The maximum Liability that will be payable by Digital to
the Sellers pursuant to this Section 8(c) shall be $525,000;provided, however,
in the event that a court of competent jurisdiction determines that Digital
committed fraud with respect to any representation or warranty, then the Sellers
shall have the right to indemnification from Digital for the full amount of any
Adverse Consequences suffered by the Sellers as a result of such fraud. Any
liability of Digital hereunder payable to the Sellers shall be satisfied by
delivery of shares of Common Stock of Digital, valued at the Exact Market Price,
or in cash, at the option of Digital.
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim")
which may give rise to a claim for indemnification against any other
Party (the "Indemnifying Party") under this Section 8, then the
Indemnified Party shall promptly (and in any event within ten business
days after receiving notice of the Third Party Claim) notify each
Indemnifying Party thereof in writing; provided, however, that no delay
on the part of the Indemnified Party in notifying any Indemnifying
Party shall relieve the Indemnifying Party from any obligation
hereunder unless (and then solely to the extent) the Indemnifying Party
thereby is prejudiced.
(ii) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satisfactory to the
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Indemnified Party so long as (A) the Indemnifying Party notifies the
Indemnified Party in writing within 15 days after the Indemnified Party
has given notice of the Third Party Claim that the Indemnifying Party
will indemnify the Indemnified Party from and against the entirety of
any Adverse Consequences the Indemnified Party may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim, (B) the Indemnifying Party provides the Indemnified
Party with evidence reasonably acceptable to the Indemnified Party that
the Indemnifying Party will have the financial resources to defend
against the Third Party Claim and fulfill its indemnification
obligations hereunder, (C) the Third Party Claim involves only money
damages and does not seek an injunction or other equitable relief, (D)
settlement of, or an adverse judgment with respect to, the Third Party
Claim is not, in the good faith judgment of the Indemnified Party,
likely to establish a precedential custom or practice materially
adverse to the continuing business interests of the Indemnified Party,
and (E) the Indemnifying Party conducts the defense of the Third Party
Claim actively and diligently.
(iii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 8(d)(ii)
above, (A) the Indemnified Party may retain separate co-counsel at its
sole cost and expense and participate in the defense of the Third Party
Claim, (B) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (not
to be withheld unreasonably) and (C) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii)
above fail to be complied with, however, (A) the Indemnified Party may
defend against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, any Indemnifying Party in
connection therewith), (B) the Indemnifying Parties will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (C) the Indemnifying Parties will remain responsible for
any Adverse Consequences the Indemnified Party may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim to the fullest extent provided in this Section 8,
subject to the limitations set forth in Section 8(b).
(e) Determination of Adverse Consequences. All claims for
indemnification payments under this Section 8 shall be made in good faith and
although a claim may be made hereunder, no payments shall be made for the
benefit of the Indemnified Party until the Indemnified Party has incurred actual
out-of pocket expenses; provided, however, in the event Digital has made a claim
for indemnification prior to the termination of any applicable escrow period, no
Digital Shares shall be released from escrow until such time as the claim has
been resolved.
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(f) Other Indemnification Provisions. Each of the Sellers hereby agrees
that he or it will not make any claim for indemnification against any of
TeamStaff and its Subsidiaries by reason of the fact that he or it was a
director, officer, employee, or agent of any such entity or was serving at the
request of any such entity as a partner, trustee, director, officer, employee,
or agent of another entity (whether such claim is for judgments, damages,
penalties, fines, costs, amounts paid in settlement, losses, expenses, or
otherwise and whether such claim is pursuant to any statute, charter document,
bylaw, agreement, or otherwise) with respect to any action, suit, proceeding,
complaint, claim, or demand brought by Digital or any Third Party against such
Seller (whether such action, suit, proceeding, complaint, claim, or demand is
pursuant to this Agreement, applicable law, or otherwise).
9. Termination.
(a) Termination of Agreement. Certain of the Parties may terminate this
Agreement as provided below:
(i) Digital and the Sellers may terminate this Agreement by
mutual written consent at any time prior to the Closing;
(ii) Digital may terminate this Agreement by giving written
notice to the Sellers at any time prior to the Closing (A) in the event
any of the Sellers has breached any material representation, warranty,
or covenant contained in this Agreement in any material respect,
Digital has notified the Sellers of the breach, and the breach has
continued without cure for a period of the earlier of (I) 30 days after
the notice of breach or (II) the Closing Date or (B) if the Closing
shall not have occurred on or before March 31, 1999, by reason of the
failure of any condition precedent under Section 7(a) hereof (unless
the failure results primarily from Digital itself breaching any
representation, warranty, or covenant contained in this Agreement);
(iii) the Sellers may terminate this Agreement by giving
written notice to Digital at any time prior to the Closing (A) in the
event Digital has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, any of
the Sellers has notified Digital of the breach, and the breach has
continued without cure for a period of the earlier to occur of (I) 30
days after the notice of breach or (II) the Closing Date or (B) if the
Closing shall not have occurred on or before March 31, 1999, by reason
of the failure of any condition precedent under Section 7(b) hereof
(unless the failure results primarily from any of the Sellers
themselves breaching any representation, warranty, or covenant
contained in this Agreement).
(iv) Digital may terminate this Agreement in the event that it
does not obtain approval of its shareholders for the transactions
contemplated herein prior to March 31, 1999; provided, however, Digital
shall use reasonable good faith efforts to obtain such approval prior
to such date.
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(v) either Party may terminate this Agreement by giving
written notice to the other Party at any time prior to the Closing in
the event (a) either Party has within the previous 10 business days
given any notice to the other Party pursuant to Section 5(f) (i) above
and (b) the development that is the subject of the notice has had a
Material Adverse Effect on the non-breaching party, taken as a whole;
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 9(a) above, all rights and obligations of the Parties
hereunder shall terminate without any Liability of any Party to any other Party
(except for any Liability of any Party then in breach).
10. Miscellaneous.
(a) Press Releases and Public Announcements. Neither the TeamStaff
Entities nor the Sellers shall issue any press release or make any public
announcement relating to the subject matter of this Agreement prior to the
Closing without the prior written approval of Digital. Digital may make any
public disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in which
case Digital will use its reasonable best efforts to advise the Sellers prior to
making the disclosure).
(b) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(d) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of Digital and the Sellers; provided, however, that Digital may (i)
assign any or all of its rights and interests hereunder to one or more of its
Affiliates and (ii) designate one or more of its Affiliates to perform its
obligations hereunder (in any or all of which cases Digital nonetheless shall
remain responsible for the performance of all of its obligations hereunder).
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
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(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed (i) duly given if (and then
delivered three business days after) it is sent by registered or certified mail,
return receipt requested, postage prepaid, and addressed to the intended
recipient or (ii) duly given if (and then delivered one business day after) it
is sent by overnight courier and
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addressed to the intended recipient. All notices shall be sent to the addresses
as set forth below:
If to the Sellers: Copy to:
Warren M Cason Holland & Knight LLP
c/o Holland & Knight LLP 400 North Ashley Drive
400 North Ashley Drive Suite 2300
Suite 2300 Tampa, Florida 33602
Tampa, Florida 336 Attn: Robert J. Grammig, Esq.
If to the Sellers: (continued)
Kirk A. Scoggins
1901 Brookline Ave.
Tampa, FL 33629
If to Digital: Copy to:
Digital Solutions, Inc. Goldstein & DiGioia LLP
300 Atrium Drive 369 Lexington Avenue, 18th Fl
Somerset, NJ 08873 New York, NY 10017
Attn: Donald Kappauf Attn: Brian C. Daughney, Esq.
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New Jersey without giving
effect to any choice or conflict of law provision or rule (whether of the State
of New Jersey or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New Jersey.
(i) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
Digital and the Sellers. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
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(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Expenses. Digital shall bear its own costs and expenses (including
legal fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby and agrees to pay at the Closing up to $750,000
of reasonable costs and expenses of the TeamStaff Entities and the Sellers
(including fees of Sun Trust Equitable Securities Corporation, Raymond James &
Associates, Inc. and their reasonable legal and accounting fees and expenses
including Holland & Knight LLP and Grant Thornton LLP) paid to unaffiliated
third parties as set forth on Appendix II, in connection with this Agreement or
any of the transactions contemplated hereby (the "Expense Payment").
Notwithstanding the foregoing, neither Digital, the Merger Corporations nor the
TeamStaff Entities shall bear any obligation or have any liability for any
finders or brokers fees or legal or accounting expenses in excess of said
$750,000. In addition, Digital shall receive a credit for the full amount of any
advances paid to any third party.
(l) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(m) Incorporation of Exhibits, Annexes, and Schedules. The Exhibits,
Appendices, and Schedules identified in this Agreement are incorporated herein
by reference and made a part hereof.
(n) Specific Performance. Each of the Parties acknowledges and agrees
that the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter in addition to any other remedy to which they may be
entitled, at law or in equity.
(o) Section 338(h)(10) Tax Election. The Parties hereby agree that in
the event the transactions contemplated herein do not qualify as tax free
reorganizations under the Section 368 of the Code, then Digital shall have the
right, in its sole discretion, to make an election under Section 338(h)(10) of
the Code and the Sellers shall join with Digital in making such election.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
as of the date first above written.
DIGITAL SOLUTIONS, INC.
By: __________________________
Name:
Title:
THE TEAMSTAFF COMPANIES, INC.
By:_____________________________
Kirk A. Scoggins
President
TEAMSTAFF HOLDING COMPANY, INC.
By:_____________________________
Kirk A. Scoggins
President
EMPLOYER SUPPORT SERVICES, INC.
By:____________________________
Kirk A. Scoggins
President
TEAMSTAFF, INC.
By:_____________________________
Kirk A. Scoggins
President
TEAMSTAFF USA, INC.
By:_____________________________
Kirk A. Scoggins
President
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<PAGE> 81
TEAMSTAFF II, INC.
By:_______________________________
Kirk A. Scoggins
President
TEAMSTAFF III, INC.
By:_______________________________
Kirk A. Scoggins
President
TEAMSTAFF IV, INC.
By:_______________________________
Kirk A. Scoggins
President
TEAMSTAFF INSURANCE SERVICES, INC.
By:_______________________________
Kirk A. Scoggins
President
SHAREHOLDERS:
__________________________________
Warren M. Cason, Shareholder
__________________________________
Dorothy C. Cason, Shareholder
__________________________________
Kirk A. Scoggins, Shareholder
__________________________________
Melissa C. Scoggins, as Trustee of the Kirk
Allan Scoggins 1997 Three Year Grantor
Retained Annuity Trust, dated 7/1/97,
Shareholder
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__________________________________
Warren M. Cason, Jr., Trustee of the
Dorothy C. Cason 1997 Three Year Grantor
Retained Annuity Trust, dated 7/1/97,
Shareholder
DGACI, INC. DGACII, INC.
By: ______________________________ By:____________________________
Name: Name:
Title: Title:
DGACIII, INC. DGACIV, INC.
By: ______________________________ By:____________________________
Name: Name:
Title: Title:
DGACVI, INC.
By: ______________________________
Name:
Title:
DGACVII, INC. DGACVIII, INC.
By: ______________________________ By:____________________________
Name: Name:
Title: Title:
DGACIX, INC. DGACX, INC.
By: ______________________________ By:____________________________
Name: Name:
Title: Title:
51
<PAGE> 83
EXHIBIT B
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
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO
COMMISSION FILE NO. 0-18492
DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 ATRIUM DRIVE, SOMERSET, NEW JERSEY 08873
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 748-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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NONE
[Cover Page 1 of 2 Pages]
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 2, 1998, 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 $34,332,000 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 19,141,760
shares of Common Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1998 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 50 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 1,438 client organizations with approximately
5,000 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 Somerset, New Jersey; Houston, Texas; and Clearwater,
Florida and five sales service centers in New York, New York; El Paso and
Houston, Texas; Clearwater, Florida; and Somerset, 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 in some cases 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
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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 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 300 Atrium
Drive, Somerset, New Jersey 08873 where its telephone number is (732) 748-1700.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
BANK CREDIT LINE
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended and
amended on seven occasions. Each loan extension has been for limited periods of
time. The fifth amendment executed as of December 31, 1996, restricted the
Company from borrowing any additional funds available on the Line and required
weekly principal payments of $10,000, effective February 24, 1997. Effective
October 31, 1997, the Company entered into the seventh amendment to the loan
agreement. Under the terms of this agreement, which expires October 31, 1998,
the Company was required to grant to the bank 500,000 warrants to purchase the
Company's common stock. The warrants will vest in amounts of 200,000 and 300,000
as of April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The warrants have
an exercise price of $2.4375 per share which was the fair market value of the
stock at the date of the agreement. The Company is obligated to make monthly
payments of interest on the outstanding amounts at the bank's floating base rate
plus three percent (11.5% at September 30, 1997). The Line is collateralized by
all of the
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Company's assets. On December 1, 1997, as a requirement of the extension of its
bank line of credit, the Company raised $250,000. These funds were an equity
investment provided by its directors, a former director and executive officers
and will be available for general corporate purposes.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no assurance that
the Company will be successful in its efforts to raise additional funds.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area management will continue 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.
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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 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 where
applicable 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
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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 contract staffing subsidiaries have, in the aggregate, more than
27 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 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 the 50 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
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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 five
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.
Although the Company did not consummate any acquisitions during fiscal
1997, management anticipates its acquisition activities will increase next
fiscal year. Any such acquisition activity will be subject to, among other
things, general economic conditions and the Company's ability to raise capital
or utilize its securities.
CUSTOMERS
The Company's customer base consists of over 1,438 client companies,
representing approximately 33,000 employees (including payroll services) as of
September 30, 1997. The Company's client base is broadly distributed throughout
a wide variety of industries; however, more than 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
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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.
COMPETITION
The PEO industry consists of approximately 2,500 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 2,500 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.
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
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such as Volt Information Services, Butler Arde, Olsten 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
additional regulations and interpretation of existing regulations can be
expected to evolve over time. The
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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 a 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
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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 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 2, 1998, the Company employed 117 employees, both
full-time and part-time, including executive officers, a reduction from 133
during the previous
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fiscal year. The Company also employs approximately 4,500 leased employees and
500 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 Somerset, New
Jersey, Houston, Texas and Clearwater, Florida. The Company also has five sales
service centers which are located in New York City, Somerset, New Jersey,
Clearwater, Florida, Houston, and El Paso, Texas. A sales service center is an
office used primarily for sales efforts and client services. The Company's
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 intends to continue its national expansion efforts in fiscal years
1998-1999, most likely through additional acquisitions.
DSI leases its 15,000 square foot corporate headquarters in Somerset,
New Jersey, as well as offices in Clearwater, Florida and Houston, Texas. The
Company also leases sales offices in New York City and El Paso, Texas. The
facilities provide sufficient capacity to meet demands for the foreseeable
future. In fiscal year 1997, the Company's total lease expenses were $537,000.
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 Somerset, 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 $13,440 per month
2 Northpoint Drive, Suite 110 7,396 2/28/00
</TABLE>
13
<PAGE> 96
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Houston, TX 77060
DSI Staff RX, Inc. (Clearwater) 2,805 5/31/00 $ 3,272 per month
601 Cleveland Sreet Suite 350
Clearwater, FL 34615
Staff ConnXions Southwest (El Paso) 3,126 3/31/02 $ 3,759 per month
4050 Rio Bravo, Suite 151
El Paso, TX 79902
Corporate Office 15,244 9/30/07 $23,819 per month
300 Atrium Drive
Somerset, NJ 08873
New York Office 391 4/30/01 $ 3,082 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
</TABLE>
ITEM 3. 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 partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to recover
damages on account of the wrongful sale of the Company's common stock. On July
2, 1997, the Company settled the action. Without admitting or denying the
allegations in the complaint, the defendants agreed to pay $676,000 of which
$426,000 has been paid with the balance of $250,000 to be paid by LNB
14
<PAGE> 97
on or before August 4, 1997. The payment was not made by LNB as of December 16,
1997. The Company has commenced collection proceedings. The subsequent payment
is secured by a confession of judgment and a mortgage in the amount of $625,000.
The payments under the settlement agreement are in addition to $229,000
previously received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and remits the
last payment of $250,000. The agreement also provides that upon payment of all
sums due under the settlement agreement, LNB shall be deemed to have made full
restitution to the Company for the claims alleged in the action.
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 SmallCap Market System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol "DGSI".
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:
15
<PAGE> 98
Common Stock
<TABLE>
<CAPTION>
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
<S> <C> <C>
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
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
1st Quarter 6 1/4 3 1/8
2nd Quarter 3 15/16 1 13/16
3rd Quarter 2 7/16 1 9/16
4th Quarter 2 5/16 1 9/16
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
1st Quarter 2 11/16 1 1/2
</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.
D. Approximated Number of Equity Security Holders
The approximate number of record holders of the Company's common stock
as of January 2, 1998 was 329. 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.
16
<PAGE> 99
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
1997 1996 1995 1994 1993
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Operating Revenues $122,695,000 $100,927,000 $73,821,000 $37,998,000 $14,681,000
Direct Costs 113,894,000 92,490,000 68,530,000 34,939,000 12,459,000
Gross Profit 8,801,000 8,437,000 5,291,000 3,059,000 2,222,000
Selling, General & Administrative
Expenses (includes Depreciation 11,316,000 8,801,000 7,547,000 2,695,000 1,962,000
and Amortization)
Income (Loss) From Continuing
Operations (2,515,000) (364,000) (2,256,000) 364,000 260,000
Net Income (Loss) $(2,832,000) $(597,000) $(3,316,000) $720,000 $301,000
Income (Loss) From Continuing
Operations Per Share of Common
Stock ($0.13) ($0.02) ($0.16) $0.03 $0.04
Net Income (Loss) Per Share ($0.15) ($0.04) ($0.24) $0.05 $0.04
Dividends Paid Per Preferred Stock
$0.00 $0.00 $0.00 $3.30 $4.00
BALANCE SHEET DATA:
Assets $14,163,000 $14,800,000 $13,816,000 $7,727,000 $4,264,000
Liabilities 9,291,000 7,632,000 10,967,000 2,671,000 1,079,000
Long-Term Debt 89,000 100,000 175,000 107,000 241,000
Working Capital (Deficiency) (1,401,000) 286,000 (4,771,000) 1,146,000 1,920,000
Shareholders' Equity $4,872,000 $7,168,000 $2,849,000 $5,056,000 $3,195,000
</TABLE>
17
<PAGE> 100
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). The Company desires to avail itself of certain
"safe harbor" provisions of the 1995 Reform Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Report on Form 10-K involve known and unknown risks, uncertainties, and
other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) achievements expressed or implied by such
forward looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to, risks associated with
the Company's recent losses, the Company's ongoing need for a new credit
facility, need for additional capital, risks of recently consummated
acquisitions as well as future acquisitions, effects of competition and
technological changes and dependence upon key personnel.
Fiscal Year 1997 as Compared to Fiscal Year 1996
Operating revenues for the fiscal year 1997 were $122,695,000 as compared
to fiscal year 1996 of $100,927,000 which represents an increase of $21,768,000
or 21.6%. This increase is due to the efforts of the internal sales force to
continually bring in new business which accounted for all of the increase. PEO
services accounted for 83% of the growth, while the balance is attributed to the
Company's staffing business.
Direct costs for fiscal year 1997 were $113,894,000 as compared to
$92,490,000 for fiscal year 1996 which represents an increase of $21,404,000, or
23.1%. The workers' compensation profit for the first four months of fiscal 1996
of $493,000 was recorded as a reduction of selling, general and administrative
expenses, whereas subsequent to that the revenue and direct costs for the
workers' compensation program were reflected in their respective accounts. In
addition, the first nine months of fiscal 1997 included $308,000 in
underbilled/excess charges for PEO medical expenses. After adjusting for the
treatment of the workers' compensation profit, one-time charges of $678,000
recorded in the second quarter of 1997 (primarily due to increased workers'
compensation charges) and medical expenses, direct costs increased $20,911,000
or 22.7%. As a percentage of revenue, and on an adjusted basis, direct costs for
fiscal 1997 and fiscal 1996 were 92% and 91.1% respectively. This increase is
attributed to the increase in the PEO business as well as the new workers'
compensation program, in which the Company is now expensing the maximum workers'
compensation exposure on a current basis.
18
<PAGE> 101
Gross profits were $8,801,000 and $8,437,000 for fiscal 1997 and 1996,
respectively, for an increase of 4.3%. Giving effect to the previously discussed
adjustments, gross profits for fiscal 1997 and 1996 would have been $9,787,000
and $8,930,000, respectively. As a percentage of revenue, adjusted gross profits
for fiscal 1997 and 1996 would have been 8% and 8.8%, respectively, reflecting
the increased PEO business in fiscal 1997 which has lower margins but adds more
dollars of gross profit.
Selling, general and administrative costs ("SG&A") for fiscal 1997
increased $2,334,000, or 29%, from $7,972,000 in fiscal 1996 to $10,306,000. Of
this increase, $1,973,000 pertains to charges recorded in the second quarter of
fiscal 1997, $1,000,000 of which was to increase the bad debt reserve with the
balance for other miscellaneous items. Giving effect to these adjustments, SG&A
increased 4.5%.
Depreciation and amortization increased $181,000 in fiscal 1997 due to the
write-off of all the intangible assets of Digital Insurance Services ($261,000)
recorded in the second fiscal quarter.
Net loss for fiscal 1997 was ($2,832,000) versus a net loss of ($597,000)
in fiscal 1996. The increased loss is due to $3,100,000 in adjustments recorded
in the second quarter of 1997.
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 costs as a percentage of revenue for fiscal year 1996 was 91.6% as
compared to 92.8% 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 were achieved through better
managed claims experience.
Selling, general and administrative costs ("SG&A") increased $1,270,000.
This growth in expenses includes $195,000 in charges for intangibles associated
with acquisitions that were not consummated during the year and $309,000 in an
increase in 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
19
<PAGE> 102
previously established reserves for claims which the Company resolved in its
favor. As a percentage of gross profit, SG&A expenses are 94.5% 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
improve this margin in the future.
Net loss before taxes was ($563,000) in fiscal year 1996 as compared to
loss of ($3,453,000) in fiscal year 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.
Direct costs as a percentage of revenue 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 the cost of direct mail efforts and 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 benefit 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 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.
Liquidity and Capital Resources
The Company's working capital for fiscal year 1997 was a deficit of
($1,401,000) versus
20
<PAGE> 103
$286,000 in fiscal 1996. At September 30, 1997, the Company had cash of
$841,000, restricted cash of $738,000 and net accounts receivable of $5,820,000.
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended and
amended on seven occasions. Each loan extension has been for limited periods of
time. The fifth amendment executed as of December 31, 1996, restricted the
Company from borrowing any additional funds available on the Line and required
weekly principal payments of $10,000, effective February 24, 1997. Effective
October 31, 1997, the Company entered into the seventh amendment to the loan
agreement. Under the terms of this agreement, which expires October 31, 1998,
the Company was required to grant to the bank 500,000 warrants to purchase the
Company's common stock. The warrants will vest in amounts of 200,000 and 300,000
as of April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The warrants have
an exercise price of $2.4375 per share, which was the fair market value of the
stock at the date of the agreement. The Company is obligated to make monthly
payments of interest on the outstanding amounts at the bank's floating base rate
plus three percent (11.5% at September 30, 1997). Under the present amendment,
the Company can not borrow additional funds and continues to make weekly
principal payments of $10,000. The line is collateralized by all of the
Company's assets. At September 30, 1997 and December 31, 1997, the total amount
outstanding on the Line was $2,697,000 and $2,567,000, respectively. In December
1997, the Company's directors and executive officers, as well as a former
director, made an equity investment of $250,000 for general corporate purposes.
The raising of these funds was a requirement of the recently negotiated bank
line of credit extension.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no assurance that
the Company will be successful in its efforts to raise additional funds. At the
present time, the Company does not have funds available to repay the Line.
Repayment of the Line is due in full on October 31, 1998.
In December 1996, due to the favorable trends in losses in its Workers'
Compensation program, the Company's former carrier reduced its letter of credit
requirement from $1,610,000 to $1,193,000 which resulted in $417,000 in
additional cash available. Of this availability, $344,000 has been added to
working capital during the quarter ended December 31, 1996 while the balance of
$73,000 was added to working capital during the quarter ended March 31, 1997.
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.
ITEM 8. FINANCIAL STATEMENTS
See Attached Financial Statements appearing at pages F-1 through F-18.
21
<PAGE> 104
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 69 Chairman of the Board of Directors
George J. Eklund 54 Director
Donald T. Kelly 48 Vice President, Chief Financial Officer
and Corporate Secretary
Senator John H. Ewing 77 Director
William J. Marino 54 Director
Donald W. Kappauf 51 President and Chief Executive Officer
</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; 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 became President and Chief Operating Officer of the
Company on September 21, 1994, and President and Chief Executive Officer on
March 13, 1996. On December 16, 1997, Mr. Eklund's position changed for health
reasons but he remains active with the Company. From 1992 to 1994, Mr. Eklund
was President of the
22
<PAGE> 105
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.
Donald T. Kelly, has been Chief Financial Officer and Vice President of
Finance since he joined DSI on January 20, 1997. He was elected Corporate
Secretary in August of 1997. Mr. Kelly was Vice President and Chief Financial
Officer of Wireless Cable International and its predecessor company, Cross
Country Wireless, Inc. from 1993 to 1997. From 1987 to 1993, he was Vice
President of Finance and Administration at Potters Industries.
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.
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 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.
Donald W. Kappauf became President and Chief Executive Officer of
Digital Solutions, Inc. on December 16, 1997. Mr. Kappauf joined Digital
Solutions, Inc. in 1990 and has held several senior management positions
including Division President and Executive Vice President. From 1988 to 1990, Mr
Kappauf was President of Perm Staff/Temp Staff in Princeton, New Jersey. He was
Assistant Vice President of SMC Engineering and then President of SMC Personnel
Support from 1968 to 1988.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
Karl W. Dieckmann, John H. Ewing and William J. Marino served on the
Company's Compensation Committee during the last fiscal year.
23
<PAGE> 106
ITEM 11. EXECUTIVE COMPENSATION
The following provides certain summary information concerning
compensation paid or accrued by the Company during the years ended September 30,
1997, 1996 and 1995 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.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND YEAR SALARY BONUS OTHER OPTIONS/SAR'S
PRINCIPAL POSITION
<S> <C> <C> <C> <C> <C>
Raymond Skiptunis (1) 1997 $0 $0 $210,000 0
1996 $214,061 $0 $0 0
1995 $193,542 $0 $0 0
George J. Eklund, (2) 1997 $210,000 $0 $0 0
Chief Executive Officer 1996 $207,924 $100,000 $0 300,000
1995 $181,866 $50,000 $0 0
Donald T. Kelly, (3) 1997 $90,865 $20,000 $0 30,000
Chief Financial Officer
Louis J. Monari, (4) 1997 $106,077 $0 $0 0
Vice President 1996 $91,539 $20,000 $0 30,000
1995 $90,538 $15,000 $0 0
Donald W. Kappauf, (5) 1997 $121,154 $0 $0 0
Executive Vice President
1996 $110,000 $20,000 $0 0
1995 $110,000 $0 $0 0
</TABLE>
(1) Mr. Skiptunis was replaced as Chief Executive Officer by Mr. Eklund in
March, 1996. The other compensation of $210,000 during 1997 was
severance pay.
(2) Mr. Eklund's employment with the Company commenced on September
19,1994. He assumed the position of Chief Executive Office in March
1996.
(3) Mr. Kelly was granted a sign on bonus of $20,000 at employment, on
January 20, 1997.
(4) Mr. Monari's employment terminated in July, 1997.
(5) This includes Mr. Kappauf's compensation for the executive vice
president position he assumed on August 27, 1997. His compensation in
1997, prior to becoming executive
24
<PAGE> 107
vice president was $105,288. Compensation for 1996 and 1995 was for his
position as Division Vice President.
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. Effective October 1, 1997 the meeting and
committee meeting fees were increased to $1,000 and $500 respectively.
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
provided 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. Effective December 16, 1997, Mr. Eklund's
position was changed for health reasons. The Company and Mr. Eklund have entered
into an agreement regarding the change in his position. Pursuant to this
agreement, Mr. Eklund no longer serves as President and Chief Executive Officer
of the Company. Mr. Eklund remains a Director. Mr. Eklund will continue to
receive his salary and certain other benefits as provided in his original
employment agreement.
Effective December 16, 1997, the Company entered into a verbal
agreement with Mr. Donald Kappauf wherein Mr. Kappauf assumed the duties of
President and Chief Executive Officer. The agreement provides for (i) annual
compensation of $165,000 for the first year of the agreement increasing at the
discretion of the Company; (ii) a bonus equivalent to 6% of the Company's
pre-tax profit for fiscal 1998 (8% of the amount over $2,500,000) provided the
Company's earnings before taxes are at least $1,500,000; (iii) the award of
stock options to purchase 100,000 shares of the Company's common stock, 50,000
of which will vest in one year while the remainder will vest in two years; (iv)
a two year term.
25
<PAGE> 108
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NO. OF PERCENTAGE
SECURITIES OF TOTAL
UNDERLYING OPTIONS/ EXERCISE OF
OPTIONS GRANTED IN BASE PRICE EXPIRATION
GRANTED FISCAL YEAR PER SHARE DATE
NAME
<S> <C> <C> <C> <C>
Donald T. Kelly 30,000 29% $1.875 01/20/02
</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, 1997.
<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, 1997 1997
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
George J. Eklund 0 0 300,000/200,000 $0/$0
Louis Monari 0 0 30,000/20,000 $63,900/$0
Donald W. Kappauf 0 0 100,000/0 $213,000/$0
Donald T. Kelly 0 0 10,000/20,000 $21,300/$42,600
</TABLE>
(1) Based upon a closing bid price of the Common Stock at $2.1300 per share
on September 30, 1997.
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
26
<PAGE> 109
1990 Plan provides for the 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
27
<PAGE> 110
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 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
28
<PAGE> 111
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.
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
29
<PAGE> 112
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 2,
1998 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>
Karl W. Dieckmann(2) 310,743 1.6%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
George J. Eklund(3) 379,545 2.0%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Senator John H. Ewing(4) 120,625 *
76 Claremont Road
Barnardsville, NJ 07924
William J. Marino(5) 88,617 *
c/o Blue Cross/Blue Shield
of New Jersey
3 Penn Plaza East
Newark, NJ 07105
Donald W. Kappauf(6) 526,248 2.75%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
</TABLE>
30
<PAGE> 113
<TABLE>
<CAPTION>
<S> <C> <C>
Donald T. Kelly(7) 18,850 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
All officers and directors as a group 1,444,628 7.55%
(6) persons (2,3,4,5,6,7)
</TABLE>
* Less than 1 percent.
(1) Ownership consists of sole voting and investment power except as
otherwise noted.
(2) Includes options to purchase 10,000 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.
(3) Includes options to purchase 300,000 shares of the Company's common
stock, and excludes unvested options to purchase 200,000 shares of
common stock.
(4) Includes options to purchase 35,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(5) Includes options to purchase 10,000 shares of the Company's common
stock, and excludes unvested options to purchase 5,000 shares of common
stock.
(6) Includes options to purchase 150,000 shares of the Company's common
stock, and excludes unvested options to purchase 150,000 shares of
common stock.
(7) Includes options to purchase 10,000 shares of common stock, and
excludes unvested options to purchase 70,000 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".
31
<PAGE> 114
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-18 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.
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>
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.6.1 *-- Lease dated May 30, 1997 for office space at 300 Atrium, Somerset, New
Jersey
10.15.1 - Employment agreement between George J. Eklund and the Company dated March 12, 1996
10.15.2 *-- Amended employment agreement between George J. Eklund and the Company dated December 16, 1997
10.16.1 *-- Seventh Amended Loan Agreement between Registrant and Summit Bank and sixth amended Promissory
Note
</TABLE>
32
<PAGE> 115
21.0 -- Subsidiaries (Exhibit 21 to Form 10-K for fiscal 1996)
23.1 *-- Consent of Arthur Andersen LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 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 1997 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 1997 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 1997 into the Company's registration
Statement on form S-3 file number 33-09313.
27. *-- Financial Data Schedule.
(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.
33
<PAGE> 116
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/Donald W. Kappauf
-------------------------------------
Donald W. Kappauf
President and Chief Executive Officer
Dated: January 13, 1998
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.
/s/George J. Eklund Director January 13, 1998
- ----------------------------
George J. Eklund
/s/Karl W. Dieckmann Chairman of the Board January 13, 1998
- ----------------------------
Karl W. Dieckmann
/s/John H. Ewing Director January 13, 1998
- ----------------------------
Senator John H. Ewing
/s/William J. Marino Director January 13, 1998
- ----------------------------
William J. Marino
/s/Donald W. Kappauf President & Chief January 13, 1998
- ---------------------------- Executive Officer
Donald W. Kappauf
/s/Donald T. Kelly Chief Financial Officer January 13, 1998
- ---------------------------- & Corporate Secretary
Donald T. Kelly
34
<PAGE> 117
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, 1997 And 1996 F-3
Consolidated Statements Of Operations For The Years Ended
September 30, 1997, 1996 And 1995 F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 1997, 1996 And 1995 F-6
Consolidated Statements Of Cash Flows For The Years Ended
September 30, 1997, 1996 And 1995 F-7
Notes To Consolidated Financial Statements F-9
Schedule I -- Valuation And Qualifying Accounts For The Years Ended
September 30, 1997, 1996 and 1995 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> 118
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 (the "Company") as of September 30, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 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 presented for purposes of complying with
the Securities and Exchange Commission's rules and regulations 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 23, 1997
F-2
<PAGE> 119
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $841,000 $0
Restricted cash (Note 8) 738,000 1,155,000
Accounts receivable, net of allowance for doubtful accounts
of $862,000 at September 30, 1997 and $339,000
at September 30, 1996 5,820,000 6,338,000
Notes due from officers 0 136,000
Other current assets 402,000 189,000
----------------- ----------------
Total current assets 7,801,000 7,818,000
----------------- ----------------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,170,000 2,883,000
Leasehold improvements 47,000 180,000
----------------- ----------------
3,217,000 3,063,000
Less - accumulated depreciation and amortization 2,310,000 2,226,000
----------------- ----------------
907,000 837,000
DEFERRED TAX ASSET (Note 4) 760,000 760,000
GOODWILL, net of accumulated amortization of $835,000 in 1997
and $713,000 in 1996 (Notes 2 and 3) 4,344,000 4,780,000
OTHER ASSETS 351,000 605,000
----------------- ----------------
$14,163,000 $14,800,000
================= ================
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part of
these consolidated balance sheets.
F-3
<PAGE> 120
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings (Notes 5 and 8) $2,697,000 $2,907,000
Current portion of long-term debt (Note 7) 113,000 88,000
Accounts payable 2,254,000 1,620,000
Accrued expenses and other current liabilities (Note 6) 4,138,000 2,917,000
----------------- ----------------
Total current liabilities 9,202,000 7,532,000
LONG-TERM DEBT, net of current portion (Note 7) 89,000 100,000
----------------- ----------------
Total liabilities 9,291,000 7,632,000
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Common stock, $.001 par value; authorized 40,000,000 shares; issued and
outstanding 19,141,760 in 1997 and 18,786,609 in 1996 19,000 19,000
Additional paid-in capital 13,393,000 12,857,000
Accumulated deficit (8,540,000) (5,708,000)
----------------- ----------------
4,872,000 7,168,000
----------------- ----------------
$14,163,000 $14,800,000
================= ================
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part of
these consolidated balance sheets.
F-4
<PAGE> 121
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING REVENUES $122,695,000 $100,927,000 $73,821,000
DIRECT OPERATING COSTS 113,894,000 92,490,000 68,530,000
----------------- ----------------- -----------------
Gross profit 8,801,000 8,437,000 5,291,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 8) 10,306,000 7,972,000 6,702,000
DEPRECIATION AND AMORTIZATION 1,010,000 829,000 845,000
----------------- ----------------- -----------------
Loss from operations (2,515,000) (364,000) (2,256,000)
----------------- ----------------- -----------------
OTHER CREDITS (CHARGES):
Interest income 60,000 173,000 124,000
Interest expense (Notes 5 and 7) (377,000) (422,000) (935,000)
Other income (expense) 0 50,000 (386,000)
----------------- ----------------- -----------------
(317,000) (199,000) (1,197,000)
----------------- ----------------- -----------------
Loss before income taxes (2,832,000) (563,000) (3,453,000)
INCOME TAX (EXPENSE) BENEFIT (Note 4) 0 (34,000) 137,000
----------------- ----------------- -----------------
Net loss ($2,832,000) ($597,000) ($3,316,000)
================= ================= =================
NET LOSS PER COMMON SHARE ($0.15) ($0.04) ($0.24)
================= ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,070,349 16,840,371 13,595,382
================= ================= =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 122
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional
Shares Issued Paid-In
(Retired) Amount Capital Deficit
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1994 12,125,753 $ 12,000 $ 6,492,000 $ (1,795,000)
Exercise of stock options 1,605,426 2,000 853,000
Exercise of stock warrants 206,500 - 110,000
Retirement of common stock in connection with
exercise of stock options and warrants (249,255) - -
Common stock issued in connection with the
acquisition of Staff Rx 360,000 - 743,000
Expenses related to private placement of
common stock - - (164,000)
Common stock issued in connection with the
acquisition of Turnkey Services, Inc. 68,205 - 166,000
Common stock retired related to the
acquisition of The Alternative Source,
Inc., Ram Technical Corp. and MLB
Medical Staffing, Inc. (112,714) - (254,000)
Net loss - - - (3,316,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1995 14,003,915 14,000 7,946,000 (5,111,000)
Common stock issued in connection with
private placements, net of expenses 2,304,200 2,000 4,526,000 -
Common stock received and retired in
satisfaction of officer loans (107,130) - (679,000) -
Common stock issued 525,000 1,000 228,000 -
Exercise of stock options 794,157 1,000 48,000 -
Exercise of stock warrants 1,209,799 1,000 703,000 -
Stock issued for services rendered 56,668 - 85,000 -
Net loss - - - (597,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1996 18,786,609 19,000 12,857,000 (5,708,000)
Exercise of stock options 204,471 - 53,000
Exercise of stock warrants 117,347 - 181,000
Stock issued for employee bonus 33,333 - 100,000
Proceeds related to LNB settlement,
net of expenses - - 202,000
Net loss - - - (2,832,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1997 19,141,760 $19,000 $ 13,393,000 $ (8,540,000)
================= ================= ================= =================
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part of these consolidated statements.
F-6
<PAGE> 123
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30
---------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,832,000) ($597,000) ($3,316,000)
Adjustments to reconcile net loss to net
cash used in operating activities-
Deferred income taxes 0 0 (160,000)
Depreciation and amortization 1,010,000 829,000 845,000
Provision for doubtful accounts 1,120,000 462,000 153,000
Amortization of rent deferral 0 0 28,000
Stock issued employee bonus 100,000 85,000 0
Changes in operating assets and liabilities-
Increase in accounts receivable (602,000) (1,871,000) (2,490,000)
Decrease (increase) in other assets (106,000) 239,000 (909,000)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 1,855,000 (278,000) 2,806,000
Decrease in other liabilities 0 (75,000) (55,000)
Decrease (increase) in restricted cash 417,000 (1,155,000) 0
----------------- ---------------- ----------------
Net cash provided by (used in)
operating activities 962,000 (2,361,000) (3,098,000)
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (361,000) (187,000) (355,000)
Acquisitions of businesses, net of cash acquired 0 0 (1,351,000)
----------------- ---------------- ----------------
Net cash used in investing activities (361,000) (187,000) (1,706,000)
----------------- ---------------- ----------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
<PAGE> 124
<TABLE>
<CAPTION>
For the Years Ended September 30
----------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from borrowings on
revolving line of credit ($210,000) ($225,000) $2,122,000
Principal payments on long-term debt 0 (941,000) (443,000)
(Principal payments) proceeds on
subordinated bridge loan 0 (1,887,000) 1,887,000
Proceeds from other borrowings, net of repayments 14,000 71,000 837,000
Net proceeds from issuance of common stock,
net of expenses 0 4,528,000 245,000
Net proceeds from the exercise of stock options
and warrants 234,000 753,000 0
Net proceeds from common stock issued 0 229,000 0
Proceeds from LNB settlement, net of expenses 202,000 0 0
Other 0 0 (2,000)
----------------- ---------------- -----------------
Net cash provided by financing activities 240,000 2,528,000 4,646,000
----------------- ---------------- -----------------
Net increase (decrease) in cash 841,000 (20,000) (158,000)
CASH AT BEGINNING OF PERIOD 0 20,000 178,000
----------------- ---------------- -----------------
CASH AT END OF PERIOD $841,000 $0 $20,000
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $363,000 $412,000 $705,000
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Value of common stock issued in a business
acquisition $0 $0 $909,000
================= ================ =================
Value of common stock retired in satisfaction of
shareholder loans $0 $679,000 $0
================= ================ =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-8
<PAGE> 125
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-Northeast, DSI Staff ConnXions Southwest,
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.
As more fully explained in Note 5, the Company has recently extended its
line of credit and is currently in discussion with several financial
institutions to receive additional financing for its capital needs. In
addition, management has instituted several cost reduction programs in an
effort to address its recurring operating losses. These management
initiatives have resulted in return to profitability of the Company in
the 4th quarter of fiscal 1997. Based upon the actions instituted and
forecast operating cash flows, management of the Company believes it can
sustain operations for at least twelve months from September 30, 1997.
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 represent 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.
F-9
<PAGE> 126
Equipment and Improvements-
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using straight-line and accelerated methods
over the estimated useful asset lives (3 to 5 years) and the shorter of
the lease term or estimated useful life for leasehold improvements.
Goodwill-
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at 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). Goodwill amortization expense
charged to operations was approximately $434,000 for 1997, $415,000 for
1996 and $327,000 for 1995. Amortization expense for 1997 and 1996
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, 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.
In 1997, the Company decided not to remain in the insurance business and
elected to write off $261,000 in intangible assets of Digital Insurance,
Inc.
Insurance Programs-
The Company previously maintained a large deductible workers'
compensation insurance program which was replaced on April 1, 1997 with a
new program. Under the old program the Company still maintains a reserve
for claims that are outstanding as of the balance sheet date. However the
new program requires the funding of anticipated loss reserves on a
current basis. To be conservative the Company expenses the maximum loss
it can be held accountable for under this program which is greater than
the current funding requirement.
Net Loss Per Common Share-
Net loss per common share is based upon the weighted average number of
shares outstanding. Outstanding stock options and warrants have not been
considered in the computations of net loss per common share in 1997, 1996
and 1995 since their effect was antidilutive. In March, 1997 the
Financial Accounting Standards Board issued Statement on Financial
Accounting Standards Number 128, (Earnings Per Share) [(SFAS No. 128)].
SFAS No. 128 is effective for fiscal years ending after December 15,
1997, and when adopted, it will require restatement of prior year
earnings per share. If the Company had adopted SFAS No. 128 for the year
ended September, 1997 there would have been no effect on earnings per
share.
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.
F-10
<PAGE> 127
(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 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,
valued at $743,000, 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.
(4) INCOME TAXES:
At September 30, 1997, the Company had available operating loss
carryforwards of approximately $6,945,000 to reduce future periods'
taxable income. The carryforwards expire in various years beginning in
2004 and extending through 2012.
The Company has recorded a $760,000 deferred tax asset at September 30,
1997 and 1996. 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.
F-11
<PAGE> 128
The income tax benefit reflected in the consolidated statement of
operations for 1995 represents a portion of the recorded deferred tax
asset described above.
An analysis of the Company's deferred income tax asset is as follows-
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C>
Net operating loss carryforwards $2,500,000 $1,985,000
Accrued workers' compensation 476,000 278,000
Allowance for doubtful accounts 310,000 122,000
Other items, net 154,000 0
-------------------- --------------------
Gross deferred income tax asset 3,440,000 2,335,000
Valuation allowance (2,680,000) (1,575,000)
-------------------- --------------------
Deferred income tax asset $760,000 $760,000
==================== ====================
</TABLE>
(5) SHORT-TERM BORROWINGS:
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended
and amended on seven occasions. Each loan extension has been for limited
periods of time. The fifth amendment executed as of December 31, 1996,
restricted the Company from borrowing any additional funds available on
the Line and required weekly principal payments of $10,000, effective
February 24, 1997. Effective October 31, 1997, the Company entered into
the seventh amendment to the loan agreement. Under the terms of this
agreement, which expires October 31, 1998, the Company was required to
grant to the bank 500,000 warrants to purchase the Company's common
stock. The warrants will vest in amounts of 200,000 and 300,000 as of
April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The
warrants have an exercise price of $2.4375 per share which was the fair
market value of the stock at the date of the agreement. The Company is
obligated to make monthly payments of interest on the outstanding amounts
at the bank's floating base rate plus three percent (11.5% at September
30, 1997). The Line is collateralized by all of the Company's assets. On
December 1, 1997, as a requirement of the Line, the Company raised
$250,000. These funds were an equity investment provided by its
directors, a former director and executive officers and will be available
for general corporate purposes.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no
assurance that the Company will be successful in its efforts to raise
additional funds.
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 9).
Other information with respect to short term borrowings for 1997 and 1996
is as follows-
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Balance at end of period $2,697,000 $2,907,000
Maximum amount outstanding during period 3,017,000 5,019,000
Weighted average balance outstanding during the
period 2,916,000 3,382,000
Weighted average interest rate during the period 11.16% 12.31%
</TABLE>
F-12
<PAGE> 129
(6) ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 1997 and
1996 consist of the following-
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Payroll and payroll taxes $2,271,000 $1,888,000
Worker's compensation insurance reserves 1,321,000 631,000
Legal 134,000 100,000
Other 412,000 298,000
--------------- ---------------
$4,138,000 $2,917,000
=============== ===============
</TABLE>
(7) LONG-TERM DEBT:
Long-term debt at September 30, 1997 and 1996 consists of the following-
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Leases $202,000 $188,000
Less- Current portion (113,000) (88,000)
------------- -------------
$89,000 $100,000
============= =============
</TABLE>
Maturities of long-term debt as of September 30, 1997 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
------------------
<S> <C>
1998 $113,000
1999 48,000
2000 34,000
2001 7,000
---------------
$202,000
===============
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES:
Leases-
In November 1991, the Company entered into a lease for its corporate
headquarters facility. The lease term extended 69 months with fixed
monthly payments of $18,000. The Company recognized rent expense of
$253,000 under this lease in 1997, 1996 and 1995. Commencing September,
1997, the Company relocated its corporate headquarters to a new
facility. The lease for this facility extends through September, 2007
and provides for minimum annual payments of $286,000. The old lease was
a triple net lease resulting in actual total payments approximating the
lease payments in the new building. Rent expense under all operating
leases was $537,000 in 1997, $627,000 in 1996 and $384,000 in 1995.
F-13
<PAGE> 130
Minimum payments under noncancellable lease obligations at September 30,
1997 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
------------------
<S> <C>
1998 $ 567,000
1999 572,000
2000 434,000
2001 353,000
2002 308,000
Thereafter 1,601,000
-------------------
$ 3,835,000
===================
</TABLE>
Workers' Compensation Policy-
In connection with the Company's former workers' compensation insurance
policy which expired on April 1, 1997, the insurance company developed
reserve factors on each claim that may or may not materialize after the
claim is fully investigated. Generally Accepted Accounting Principles
require that all incurred, but not paid claims, as well as an estimate
for claims incurred, but not reported (IBNR), be accrued on the balance
sheet as a current liability, although a portion of the claims may not be
paid in the following 12 months. As of September 30, 1997 and September
30, 1996, this accrual amounted to $818,000 and $631,000, respectively.
On April 1, 1997, the Company entered into a workers' compensation policy
with a new carrier. Under the terms of the new workers' compensation
insurance program the Company fully accrues the maximum loss on a monthly
basis. During the twelve months ended September 30, 1997 and 1996, the
Company recognized approximately $868,000 and $1,332,000, respectively,
as its share of premiums collected from customers covered by these
policies in excess of claims and fees paid. The decrease in reported
workers' compensation profit is due to the revised methodology in
evaluating the Company's exposure as reported in the Company's second
fiscal quarter 10-Q and the new insurance program.
The Company has outstanding letters of credit amounting to $1,193,000 as
of September 30, 1997. The letters of credit are required to
collateralize unpaid claims in connection with the Company's former
workers' compensation insurance policy and can only be drawn upon by the
beneficiary if the Company does not perform according to the terms of the
related agreement. The Company has collateralized these letters of credit
by maintaining compensating restricted cash balances of $738,000 and
utilizing $455,000 of amounts available under its line of credit. The
Company's current policy does not require a letter of credit because the
Company funds the estimated loss reserves on a monthly basis.
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
F-14
<PAGE> 131
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 partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to
recover damages on account of the wrongful sale of the Company's common
stock. On July 2, 1997, the Company settled the action. Without
admitting or denying the allegations in the complaint, the defendants
agreed to pay $676,000 of which $426,000 ($202,000, net of expenses)
has been paid with the balance of $250,000 to be paid by LNB on or
before August 4, 1997. The payment was not made by LNB as of December
16, 1997 and as a result, the Company has commenced collection
proceedings. The subsequent payment is secured by a confession of
judgment and a mortgage in the amount of $625,000. The payments under
the settlement agreement are in addition to $229,000 previously
received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and
remits the last payment of $250,000. The agreement also provides that
upon payment of all sums due under the settlement agreement, LNB shall
be deemed to have made full restitution to the Company for the claims
alleged in the action.
At September 30, 1997 the Company is involved in various other legal
proceedings incurred in the normal course of business. In the opinion
of management and its counsel, none of these proceedings would have a
material effect, if adversely decided, on the consolidated financial
position or results of operations of the Company.
(9) 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 $4,091,000,
net of expenses through a private placement of 1,882,408 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 8) and for working capital needs.
On December 1, 1997, as a requirement of the extension of its bank line
of credit, the Company raised $250,000. These funds were an equity
investment provided by its directors, a former director and executive
officers and will be available for general corporate purposes.
F-15
<PAGE> 132
Stock Warrants -
The following is a summary of the outstanding warrants to purchase the
Company's common stock at September 30, 1997 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>
October 1991 October 2001 0.75 100,000
June 1993 June 1998 0.75 25,000
August 1993 August 1998 0.75 300
September 1993 September 1998 1.06 50,000
January 1995 January 2000 1.90 64,350
April 1995 April 2000 2.50 5,000
October 1995 October 2000 2.25 24,000
December 1995 December 2000 1.56 5,000
June 1996 June 2001 2.70 112,979
-------------
386,629
=============
</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.
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.
F-16
<PAGE> 133
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, 1997 and 1996.
<TABLE>
<CAPTION>
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1996 Granted (1) Canceled Exercised 1997
------------------- ----------------- -------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Employee Plan 248,558 60,000 135,751 79,682 93,125
Director Plan 71,250 15,000 10,000 0 76,250
Management
Plan 977,540 30,000 207,751 124,789 675,000
----------------- -------------- --------------- --------------- -----------------
1,297,348 105,000 353,502 204,471 844,375
================= ============== =============== =============== =================
</TABLE>
(1) Options granted during 1997 have a weighted average exercise price
and weighted average fair value of $1.875 and $1.12, respectively.
<TABLE>
<CAPTION>
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1995 Granted(2) 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>
(2) Options granted during 1996 have a weighted average exercise price
and weighted average fair value of $4.63 and $2.40, respectively.
During 1997, 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 fair market value of the shares redeemed by the Company.
F-17
<PAGE> 134
Options outstanding as of September 30, 1997 become exercisable as
follows-
<TABLE>
<CAPTION>
Exercise
Plan Price Total 1997 1998 1999 Thereafter
----------------- ------------- ------------- -------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Employee $0.75- 93,125 41,178 24,614 15,833 11,500
Plan $6.50
Director $0.81- 76,250 61,250 15,000 0 0
Plan $4.4375
Management $.875- 675,000 438,999 124,000 112,001 0
Plan $5.8125
------------- -------------- ----------- ------------ ---------------
844,375 541,427 163,614 127,834 11,500
============= ============== =========== ============ ===============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), which was
effective October 1, 1996, the fair value of option grants is estimated
on the date of grant using the Black-Scholes option-pricing model for
proforma footnote purposes with the following assumptions used for
options granted subsequent to October 1, 1996; dividend yield of 0%,
risk-free interest rate of 6.31% and 6.64% in 1997 and 1996, and
expected option life of 4 years. Expected volatility was assumed to be
73.5% and 78% in 1997 and 1996, respectively.
As permitted by FAS 123, the Company has chosen to continue to account
for its employee stock-based compensation at their intrinsic value in
accordance with Accounting Principle Board Opinion No. 25. Accordingly
no compensation expense has been recognized for its stock option
compensation plans. Had the fair value method of accounting been
applied to the company's stock option plans, the tax-effected impact
would be as follows:
<TABLE>
<CAPTION>
------------------ -------------------
(Thousands of dollars except per share amounts) 1997 1996
------------------ -------------------
<S> <C> <C>
Net loss as reported $2,832 $597
Estimated fair value of the year's option grants, net of tax
76 788
------------------ -------------------
Net loss adjusted
$2,908 $1,385
------------------ -------------------
Adjusted net loss per share
$.15 $.08
================== ===================
</TABLE>
F-18
<PAGE> 135
SCHEDULE I
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<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
- ------------------------------ --------------- --------------- -------------- --------------- ---------------
Allowance for doubtful
accounts, year ended-
<S> <C> <C> <C> <C> <C>
September 30, 1997 $339,000 $1,120,000 ($597,000) $0 $862,000
============= ============== ============== =============== =============
September 30, 1996 $150,000 $462,000 ($273,000) $0 $339,000
============= ============== ============== =============== =============
September 30, 1995 $99,000 $153,000 ($102,000) $0 $150,000
============= ============== ============== =============== =============
</TABLE>
S-20
<PAGE> 136
EXHIBIT C
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-18492
DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Atrium Drive, Somerset, NJ 08873
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 748-1700
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
19,298,010 shares of Common Stock, par value $.001 per share, were outstanding
as of July 24, 1998.
1 of 16
<PAGE> 137
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 1998
Table of Contents
Page No.
--------
Part I - Financial Information
Item 1. Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and
September 30, 1997 3
Consolidated Statements of
Income for the three months ended
June 30, 1998 and 1997 (Unaudited) 5
Consolidated Statements of
Income for the nine months ended
June 30, 1998 and 1997 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1998 and 1997
(Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Part II - Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2 of 16
<PAGE> 138
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,806,000 $ 841,000
Restricted Cash 738,000 738,000
Accounts receivable, net of allowance 4,924,000 5,820,000
Other current assets 901,000 402,000
----------- -----------
Total current assets 8,369,000 7,801,000
EQUIPMENT AND IMPROVEMENTS
Equipment 3,254,000 3,170,000
Leasehold improvements 47,000 47,000
----------- -----------
3,301,000 3,217,000
Accumulated depreciation and amortization 2,535,000 2,310,000
----------- -----------
766,000 907,000
DEFERRED TAX ASSET 1,916,000 760,000
GOODWILL, net of amortization 4,158,000 4,344,000
OTHER ASSETS 575,000 351,000
----------- -----------
TOTAL ASSETS $15,784,000 $14,163,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 3 of 16
<PAGE> 139
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ -- $ 2,697,000
Current portion of long-term debt 541,000 113,000
Accounts payable 1,680,000 2,254,000
Accrued expenses and other current liabilities 2,849,000 4,138,000
------------ ------------
Total current liabilities 5,070,000 9,202,000
LONG-TERM DEBT 3,096,000 89,000
------------ ------------
Total Liabilities 8,166,000 9,291,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 19,298,010 and 19,141,760 at
June 30, 1998 and September 30, 1997, respectively 19,000 19,000
Additional paid-in capital 13,643,000 13,393,000
Accumulated deficit (6,044,000) (8,540,000)
------------ ------------
Total shareholders' equity 7,618,000 4,872,000
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 15,784,000 $ 14,163,000
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 4 of 16
<PAGE> 140
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES $ 35,885,000 $ 31,185,000
DIRECT EXPENSES 33,182,000 28,908,000
------------ ------------
Gross profit 2,703,000 2,277,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,059,000 2,034,000
DEPRECIATION AND AMORTIZATION 163,000 213,000
------------ ------------
Income from operations 481,000 30,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 14,000 1,000
Interest expense (173,000) (88,000)
------------ ------------
(159,000) (87,000)
------------ ------------
Income (loss) before tax 322,000 (57,000)
INCOME TAX BENEFIT 1,470,000 --
------------ ------------
NET INCOME (LOSS) $ 1,792,000 $ (57,000)
============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.09 $ (0.00)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 19,298,010 19,103,854
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.09 $ (0.00)
============ ============
DILUTED SHARES OUTSTANDING 19,548,671 19,103,854
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 5 of 16
<PAGE> 141
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUES $ 102,122,000 $ 92,295,000
DIRECT EXPENSES 94,588,000 85,911,000
------------- -------------
Gross profit 7,534,000 6,384,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,677,000 8,402,000
DEPRECIATION AND AMORTIZATION 502,000 830,000
------------- -------------
Income (loss) from operations 1,355,000 (2,848,000)
------------- -------------
OTHER INCOME (EXPENSE)
Interest and other income 37,000 34,000
Interest expense (366,000) (284,000)
------------- -------------
(329,000) (250,000)
------------- -------------
Income (loss) before tax 1,026,000 (3,098,000)
INCOME TAX BENEFIT 1,470,000 --
------------- -------------
NET INCOME (LOSS) $ 2,496,000 $ (3,098,000)
============= =============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.13 $ (0.16)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 19,263,097 19,048,901
============= =============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.13 $ (0.16)
============= =============
DILUTED SHARES OUTSTANDING 19,504,058 19,048,901
============= =============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 6 of 16
<PAGE> 142
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
JUNE 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,496,000 $(3,098,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 502,000 830,000
Provision for doubtful accounts 69,000 1,085,000
Deferred taxes (1,470,000) --
Other non cash items -- 1,109,000
Changes in operating assets and liabilities:
Accounts receivable 827,000 403,000
Other current assets (499,000) (293,000)
Notes due from officers -- 136,000
Accounts payable, accrued expenses and
other current liabilities (1,865,000) 369,000
----------- -----------
Net cash provided by operating activities 60,000 541,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and improvements (84,000) (163,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on line of credit 3,600,000 410,000
Repayments on long term debt (42,000) --
Repayments on revolving line of credit (2,697,000) (490,000)
Payments under capital lease obligations (122,000) (44,000)
Proceeds from letter of credit termination -- 417,000
Proceeds from issuance of common stock and
exercise of common stock options and warrants - net 250,000 208,000
----------- -----------
Net cash provided by financing activities 989,000 501,000
----------- -----------
Net increase in cash 965,000 879,000
CASH AT BEGINNING OF PERIOD 841,000 --
----------- -----------
CASH AT END OF PERIOD $ 1,806,000 $ 879,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 276,000 $ 265,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 7 of 16
<PAGE> 143
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
Digital Solutions, Inc. (the Company) was incorporated under the laws of the
State of New Jersey on November 25, 1969. The Company, with its subsidiaries,
provides a broad spectrum of human resource services including Professional
Employer Organization (PEO) services, payroll processing, human resource
administration and placement of temporary and permanent employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements included herein have been prepared by the
registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the registrant believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K. This financial information reflects, in the opinion
of management, all adjustments necessary to present fairly the results for the
interim periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
The accompanying consolidated financial statements include those of DSI, a New
Jersey Corporation and its wholly-owned subsidiaries; DSI Contract Staffing, DSI
Staff ConnXions - Northeast, Inc., DSI Staff ConnXions - Southwest, Inc., and
DSI Staff Rx, Inc. The results of operations of acquired companies have been
included in the consolidated financial statements from the date of acquisition.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
Earnings Per Common Share
In March 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards Number 128, "Earnings Per Share" (FAS No. 128).
FAS 128 requires the presentation of basic earnings per share and diluted
earnings per share for all periods presented. "Basic earnings per share"
represents net income divided by the
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<PAGE> 144
weighted average shares outstanding. "Diluted earnings per share" represents net
income divided by weighted average shares outstanding adjusted for the
incremental dilution of outstanding and vested stock options and warrants.
A reconciliation of weighted average number of common shares outstanding to
weighted average common shares outstanding assuming dilution is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common shares 19,298,010 19,103,854 19,263,097 19,048,901
Dilutive share equivalents of outstanding
stock options 250,661 -- 240,961 --
---------- ---------- ---------- ----------
Weighted average number of common shares
assuming dilution 19,548,671 19,103,854 19,504,058 19,048,901
========== ========== ========== ==========
</TABLE>
Stock options and warrants outstanding at June 30, 1998 to purchase 686,479
shares of common stock were not included in the computation of earnings per
share assuming dilution because the options were antidilutive.
(3) INCOME TAXES
Income taxes for the quarter ended June 30, 1998 reflected a net tax benefit of
$1,470,000 relating to a reduction in the Company's valuation allowance. As of
September 30, 1997, the Company had established a deferred tax valuation
allowance of $2,680,000. In view of the continued earnings improvement of the
Company over the last four quarters and its current financial position and
prospects, management has determined that it is more likely than not that the
majority of such valuation allowance will be realized. As of June 30, 1998, the
Company's valuation allowance approximated $680,000.
(4) COMMITMENTS AND CONTINGENCIES
In connection with the Company's former workers' compensation insurance policy
which expired on April 1, 1997, the insurance company developed reserve factors
on each claim that may or may not materialize after the claim is fully
investigated. Generally Accepted Accounting Principles require that all
incurred, but not paid claims, as well as an estimate for claims incurred, but
not reported (IBNR), be accrued on the balance sheet as a current liability,
although a portion of the claims may not be paid in the following 12 months. On
April 1, 1997, the Company entered into a workers' compensation policy with a
new carrier. During the nine months ended June 30, 1998 and 1997, the Company
recognized approximately $717,000 and $694,000, respectively, as its share of
premiums collected from customers covered by these policies in excess of claims
and fees paid.
9 of 16
<PAGE> 145
The Company has outstanding letters of credit amounting to $1,193,000 as of June
30, 1998. The letters of credit are required to collateralize unpaid claims in
connection with the Company's former workers' compensation insurance policy and
can only be drawn upon by the beneficiary if the Company does not perform
according to the terms of the related agreement. The Company has collateralized
these letters of credit by maintaining compensating restricted cash balances of
$738,000 and utilizing $455,000 of amounts available under its line of credit.
The Company's current policy does not require a letter of credit because the
Company funds the estimated loss reserves on a monthly basis.
(5) SHAREHOLDERS' EQUITY
During the first nine months of fiscal 1998, $250,000 was received from an
equity investment by the Company directors and executive officers, as well as
from a former director, to be used for general corporate purposes.
10 of 16
<PAGE> 146
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). Digital Solutions, Inc. (the "Company") desires
to avail itself of certain "safe harbor" provisions of the 1995 Reform Act and
is therefore including this special note to enable the Company to do so.
Forward-looking statements included in this report involve known and unknown
risks, uncertainties, and other factors which could cause the Company's actual
results, performance (financial or operating) or achievements to differ from the
future results, performance (financial or operating) achievements expressed or
implied by such forward looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to, risks
associated with the Company's risks of future acquisitions, effects of
competition and technological changes and dependence upon key personnel.
The Company's revenues for the three months ended June 30, 1998 and
1997 were $35,885,000 and $31,185,000, respectively, which represents an
increase of $4,700,000 or 15.1%. For the nine months ended June 30, 1998 and
1997, the Company's revenues were $102,122,000 and $92,295,000, respectively,
which represents an increase of $9,827,000 or 10.6%. This increase is due to the
efforts of the internal sales force to continually bring in new business which
accounted for all of the increase. Revenues for the first nine months ended June
30, 1997 include approximately $8,000,000 in revenue from two contracts
completed in the third quarter of fiscal 1997. Excluding these contracts,
revenues for the first nine months of fiscal 1998 increased 21% over the
comparable prior year period.
Direct expenses were $33,182,000 for the three months ended June 30,
1998 and $28,908,000 for the comparable period last year, representing an
increase of $4,274,000 or 14.8%. This increase represents the corresponding
higher costs associated with higher revenues. As a percentage of revenue, direct
expenses for the three months ended June 30, 1998 and 1997 were 92.5% and 92.7%.
For the nine months ended June 30, 1998 and 1997, direct costs increased
$8,677,000 or 10.1%, from $85,911,000 to $94,588,000, respectively. This
increase represents the corresponding higher costs associated with higher
revenues. As a percentage of revenue, direct costs for the nine months ended
June 30, 1998 and 1997 were 92.6% and 93.1%, respectively.
Gross profits were $2,703,000 and $2,277,000 for the quarters ended
June 30, 1998 and 1997, respectively, or an increase of $426,000. Gross profits,
as a percentage of revenue, were 7.5% and 7.3% for the quarters ended June 30,
1998 and 1997,
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<PAGE> 147
respectively. For the nine months ended June 30, 1998 and 1997, gross profits
increased to $7,534,000 from $6,384,000, respectively. As a percentage of
revenue, gross profits for the nine months ended June 30, 1998 and 1997 were
7.4% and 6.9%, respectively. The increase in gross profits as a percentage of
revenue is attributed to an increase in the percentage of the medical staffing
business which has a higher margin.
SG&A costs for the quarters ended June 30, 1998 and 1997 were
$2,059,000 and $2,034,000, respectively, representing an increase of $25,000 or
1.2%. This increase is attributed to the corresponding increase in revenue. For
the nine months ended June 30, 1998 and 1997 SG&A decreased from $8,402,000 to
$5,677,000, respectively. Included in the nine months ended June 30, 1997 SG&A
costs were $2,024,000 of items including $1,002,000 to increase the Company's
bad debt reserve, $300,000 to absorb miscellaneous charges, $124,000 to correct
unrecorded 1996 expenses, $102,000 to establish a vacation pay accrual, $81,000
to change supplies accounting, $93,000 to establish a reserve for severance
costs, a $51,000 severance charge and $271,000 for various other miscellaneous
items. The need to substantially increase the Company's bad debt reserve became
evident after January, 1997 when previously current clients became seriously
delinquent. The Company is currently filing legal claims to recover some of
these amounts. Excluding these items, SG&A decreased by $701,000 which was
attributable to the reduction in overhead costs implemented in the fourth fiscal
quarter of 1997.
Depreciation and amortization for the quarters ended June 30, 1998 and
1997 decreased to $163,000 from $213,000, respectively, or $50,000. The decrease
was attributable to several intangible assets that have become fully amortized
in the current fiscal year. For the nine month period ended June 30, 1998 and
1997, depreciation and amortization decreased from $830,000 to $502,000,
respectively, or $328,000. The majority of the decrease was attributable to the
writing off of the intangible assets of Digital Insurance Services, Inc. in the
first quarter of 1997, as a result of management's decision to abandon these
assets since it was decided not to remain in the insurance business.
Income taxes for the quarter ended June 30, 1998 reflected a net tax
benefit of $1,470,000 relating to a reduction in the Company's valuation
allowance. As of September 30, 1997, the Company had established a deferred tax
valuation allowance of $2,680,000. In view of the continued earnings improvement
of the Company over the last four quarters and its current financial position
and prospects, management has determined that it is more likely than not that
the majority of such valuation allowance will be realized. As of June 30, 1998,
the Company's valuation allowance approximated $680,000.
Net income for the quarter ended June 30, 1998 was $1,792,000 versus a
net loss of $57,000 for the similar period in 1997. This increase of $1,849,000
is attributed to the $1,470,000 in net tax benefits and the overhead reductions
implemented in the fourth fiscal quarter of 1997. For the nine months ended June
30, 1998 the Company reported
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<PAGE> 148
net income of $2,496,000 versus a loss of $3,098,000 in the similar period of
1997 or an increase of $5,594,000. This increase is attributable to the $3.1
million in adjustments recorded in fiscal 1997, the net tax benefit of
$1,470,000 recorded in fiscal 1998 and the overhead reductions implemented in
the fourth fiscal quarter of 1997.
Liquidity and Capital Resources
The Company's working capital position as of June 30, 1998 was
$3,299,000 versus a working capital deficit of ($1,401,000) as of September 30,
1997. The improved working capital position is attributable to the continued
earnings improvement of the Company and the successful refinancing of the
Company's short term borrowings, as discussed below, to a long term credit
facility. At June 30, 1998, the Company had cash of $1,806,000, restricted cash
of $738,000 and accounts receivable of $4,924,000.
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended and
amended on seven occasions. At September 30, 1997 the total amount outstanding
on the Line was $2,697,000. On April 29, 1998, the Company was successful in
replacing the former credit facility with a new long term credit facility from
FINOVA Capital Corporation totaling $4.5 million. The credit facility includes a
three year term loan for $2.5 million, with a five year amortization, at prime +
3% (currently 11.5%) and a $2 million revolving line of credit secured by
certain accounts receivable of the Company at prime + 1% (currently 9.5%).
Taking various fees into consideration and assuming the Company continuously
fully utilizes the revolver, the effective rate of interest on the total
borrowings is approximately 16.1%. The Balance Sheet as of June 30, 1998
reflects the categorization of the debt between short-term and long-term due to
the new financing. The short-term portion reflects the next twelve months of
principal payments due FINOVA starting June 1, 1998. The long-term portion
reflects the balance of the debt owed as of June 30, 1998.
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.
The Company anticipates that its available funds, together with cash
generated from operations and amounts that may be borrowed under the credit
facility will be sufficient to fund working capital and debt service
requirements for the next twelve months.
Year 2000 Issue
13 of 16
<PAGE> 149
The year 2000 issue is the programming of computer systems to
recognize the values "00" in a date field as the year 2000 and not the year
1900. The Company began steps in 1997 to reasonably ensure that the software it
utilizes will be year 2000 compliant. The Company is utilizing internal staff
and external sources to make its information technology/computer systems year
2000 compliant. The Company believes that with modifications to existing
software and conversions to new software, the year 2000 issue will not pose
significant operational problems. The costs of these modifications are not
expected to have a material impact on the Company's financial position.
Statement of Financial Accounting Standards
In June, 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for reporting
and displaying comprehensive income and its components. The components of
comprehensive income refer to revenues, expenses, gains and losses that are
excluded from net income under current accounting standards, including
unrecognized foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with the other financial
statements; the total of other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after fiscal December
15, 1997, at which time the Company will adopt the provisions. The Company does
not expect SFAS 130 to have a material effect on reported results.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way public
enterprises are to report information about operating segments in interim
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for periods
beginning after fiscal December 15, 1997, at which time the Company will adopt
the provisions. The Company does not expect SFAS 131 to have a material effect
on reported results.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Cost of Startup Activities". SOP 98-5 provides
guidance on the financial reporting of startup costs and organization costs and
requires that the cost of startup activities and organization costs be expensed
as incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998, at which time the Company will adopt the
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<PAGE> 150
provisions. The Company does not expect SOP 98-5 to have a material effect on
reported results.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 1998 the Company is involved in various other legal
proceedings incurred in the normal course of business. The Company continues to
pursue the collection of past due accounts receivable balances. In the opinion
of management and its counsel, none of these proceedings would have a material
effect, if adversely decided, on the consolidated financial position or results
of operations of the Company.
Item 5. Other Information
On April 28, 1998, the Company entered into a loan and security
agreement (the "Agreement") with Finova Capital Corporation ("Finova") which
provided a facility in the aggregate amount of $4,500,000. The facility includes
a revolving loan in the maximum amount of $2,000,000 secured by certain eligible
receivables as defined in the Agreement, and a three-year term loan in the
aggregate amount of $2,500.000. The term loan bears interest at the rate of
prime plus 3% and the revolving loan bears interest at prime plus 1%. The
proceeds of the loan were used to repay the existing balance of the Company's
previous credit facility maintained with Summit Bank, and for general working
capital. The timely retirement of the Summit Bank facility enabled the Company
to cancel a warrant to purchase 500,000 shares of Common Stock issued to Summit
upon the renewal of the bank loan in October 1997. In addition, the Company was
also required to pay additional fees and expenses of Finova in connection with
the establishment of the credit facility.
On July 14, 1998, the Company announced that two new directors had been
elected, increasing the board membership to seven. The new directors are Mr.
Charles R. Dees, Jr. Ph.D., a nationally known university administrator and
former official in the U.S. Department of Education and Mr. Martin J. Delaney,
a prominent healthcare executive.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
none filed during the quarter ended June 30, 1998.
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<PAGE> 151
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL SOLUTIONS, INC.
(Registrant)
/s/ Donald W. Kappauf
-----------------------
Donald W. Kappauf
Chief Executive Officer
/s/ Donald T. Kelly
-----------------------
Donald T. Kelly
Chief Financial Officer
Date: July 24, 1998
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<PAGE> 152
EXHIBIT D
COMBINED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
TEAMSTAFF COMPANIES, INC. AND
AFFILIATED COMPANIES
DECEMBER 31, 1997, 1996 and 1995
<PAGE> 153
Report of Independent Certified Public Accountants
Board of Directors
TeamStaff Companies, Inc.
and Affiliated Companies
We have audited the accompanying combined balance sheets of TeamStaff Companies,
Inc. and Affiliated Companies as of December 31, 1997 and 1996, and the related
combined statements of operations, shareholders' deficit and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of TeamStaff
Companies, Inc. and Affiliated Companies as of December 31, 1997 and 1996, and
the combined results of their operations and their combined cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Tampa, Florida
April 24, 1998
<PAGE> 154
Independent Auditors' Report
The Board of Directors
TeamStaff Companies, Inc.
and Affiliated Companies
We have audited the accompanying combined statements of operations,
shareholders' deficit and cash flows of TeamStaff Companies, Inc. and Affiliated
Companies for the year ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of TeamStaff Companies, Inc. and Affiliated Companies for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New Orleans, Louisiana
April 4, 1996
<PAGE> 155
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 861,932 $ 50,568
Accounts receivable, net of allowance for doubtful accounts of $-0- and
$45,556, respectively 2,680,260 2,035,504
Notes receivable from shareholders 338,382 321,570
Due from voluntary employees' beneficiary association -- 145,511
Deposits with workers' compensation insurer 333,703 75,000
Restricted certificate of deposit pledged to workers' compensation insurer -- 900,000
----------- -----------
Total current assets 4,214,277 3,528,153
FURNITURE, FIXTURES AND EQUIPMENT, net 239,076 171,325
NOTE RECEIVABLE FROM SHAREHOLDER 1,800,000 1,800,000
OTHER ASSETS 314,318 388,447
----------- -----------
Total assets $ 6,567,671 $ 5,887,925
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Book overdraft in bank account $ -- $ 620,182
Accounts payable and accrued expenses 795,739 164,576
Accrued salaries, wages and payroll taxes 3,447,981 2,115,042
Accrued workers' compensation claims 462,115 856,229
Current maturities of note payable 33,326 --
Current maturities of notes payable to shareholders 847,000 689,000
Other liabilities 15,310 131,000
----------- -----------
Total current liabilities 5,601,471 4,576,029
ACCRUED WORKERS' COMPENSATION CLAIMS 400,000 441,668
NOTES PAYABLE TO SHAREHOLDERS, less current portion 2,300,000 2,300,000
NOTE PAYABLE, less current portion 55,563 --
CLIENT DEPOSITS 33,850 41,546
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' DEFICIT
Preferred stock 1,800,000 1,800,000
Common stock 46,800 46,800
Additional paid-in capital 1,776,704 1,776,704
Accumulated deficit (5,446,717) (5,094,822)
----------- -----------
Total shareholders' deficit (1,823,213) (1,471,318)
----------- -----------
Total liabilities and shareholders' deficit $ 6,567,671 $ 5,887,925
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 156
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 105,246,022 $ 76,026,835 $ 61,972,534
Direct costs:
Salaries and wages of worksite employees 90,099,908 64,498,444 52,485,309
Benefits and payroll taxes 11,847,485 10,135,880 6,889,104
------------- ------------- -------------
Total direct costs 101,947,393 74,634,324 59,374,413
------------- ------------- -------------
Gross profit 3,298,629 1,392,511 2,598,121
Operating expenses:
Administrative personnel 1,953,141 1,686,942 1,321,752
General and administrative expenses 1,834,147 1,801,962 1,672,811
------------- ------------- -------------
Total operating expenses 3,787,288 3,488,904 2,994,563
------------- ------------- -------------
Loss from operations (488,659) (2,096,393) (396,442)
Other income (expense):
Interest, net (46,769) (84,595) (66,454)
Other 183,533 71,982 139,890
------------- ------------- -------------
Total other income (expense) 136,764 (12,613) 73,436
------------- ------------- -------------
NET LOSS $ (351,895) $ (2,109,006) $ (323,006)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 157
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED STATEMENT OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Accumulated
stock stock capital deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ -- $ 46,500 $ 1,776,704 $(2,662,810) $ (839,606)
Issuance of 100 shares of common
stock of TeamStaff III, Inc. -- 100 -- -- 100
Issuance of 100 shares of common
stock of TeamStaff IV, Inc. -- 100 -- -- 100
Issuance of 100 shares of common
stock of TeamStaff V, Inc. -- 100 -- -- 100
Net Loss -- -- -- (323,006) (323,006)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1995 -- 46,800 1,776,704 (2,985,816) (1,162,312)
Issuance of preferred stock of
TeamStaff V, Inc. 1,800,000 -- -- -- 1,800,000
Net loss -- -- -- (2,109,006) (2,109,006)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 1,800,000 46,800 1,776,704 (5,094,822) (1,471,318)
Net loss -- -- -- (351,895) (351,895)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 1,800,000 $ 46,800 $ 1,776,704 $(5,446,717) $(1,823,213)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 158
TeamStaff Companies Inc. and Affiliated Companies
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net loss $ (351,895) $(2,109,006) $ (323,006)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 83,753 68,898 81,053
Changes in assets and liabilities:
Accounts receivable (644,756) (852,012) (660,475)
Notes receivable from shareholders (16,812) (1,853,209) (640)
Due from voluntary employees' beneficiary
association 145,511 (549,824) 61,188
Deposit with workers' compensation insurer (258,703) -- (25,000)
Other assets 73,281 35,066 (121,077)
Accounts payable and accrued expenses 631,163 (136,710) (84,675)
Accrued salaries, wages and payroll taxes 1,332,939 750,747 979,534
Accrued workers' compensation claims (435,782) 682,681 65,346
Other liabilities (115,690) (16,679) 24,274
Client deposits (7,696) 10,558 10,800
----------- ----------- -----------
Net cash provided by (used in) operating
activities 435,313 (3,969,490) 7,322
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (150,656) (70,787) (36,373)
Restricted certificate of deposit 900,000 -- (546,316)
----------- ----------- -----------
Net cash used in investing activities 749,344 (70,787) (582,689)
Cash flows from financing activities:
Proceeds from notes payable to shareholders 158,000 2,308,000 394,292
Proceeds from note payable 100,000 -- --
Payments of notes payable to shareholders -- (186,292) --
Payments of note payable (11,111) -- --
Net change in book overdraft in bank account (620,182) (104,770) 90,580
Proceeds from issuance of preferred stock -- 1,800,000 --
Proceeds from issuance of common stock -- -- 300
----------- ----------- -----------
Net cash provided by (used in) financing
activities (373,293) 3,816,938 485,172
----------- ----------- -----------
Net increase (decrease) in cash 811,364 (223,339) (90,195)
Cash at beginning of year 50,568 273,907 364,102
----------- ----------- -----------
Cash at end of year $ 861,932 $ 50,568 $ 273,907
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ 276,889 $ 84,595 $ 66,454
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 159
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TeamStaff Companies, Inc. and Affiliates (collectively referred to as "the
Company" or "TeamStaff") are professional employer organizations ("PEO") which
provide professional employer services through its service arrangements with its
clients. The Company provides human resource management services, including
payroll processing, personnel administration, employee benefits administration,
workers' compensation insurance coverage and claims management, risk management,
and other human resource services. The Company earns a fee for providing human
resource services, generally computed as a percent of gross wages of payroll
processed. The majority of the Company's clients are located in the State of
Florida.
The following are the significant accounting policies followed by the Company in
preparing its combined financial statements.
1. Principles of Combination
The accompanying combined financial statements of TeamStaff Companies, Inc. and
Affiliated Companies include the accounts of The TeamStaff Companies, Inc.,
TeamStaff, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV, Inc.,
TeamStaff V, Inc., TeamStaff U.S.A., Inc., TeamStaff Insurance Services, Inc.,
and Employer Support Services, Inc. All material intercompany balances and
transactions have been eliminated.
2. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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. The more significant estimates relate to the
Company's accrued workers' compensation claims. Actual results could differ from
those estimates.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash in banks
and certificates of deposit with original maturities of ninety days or less to
be cash equivalents. There were no cash equivalents at December 31, 1997 and
1996.
7
<PAGE> 160
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
4. Revenue Recognition
Revenues and expenses and the related receivables and payables are recognized
during the period in which the worksite employee earns wages. The Company's
client service contracts generally provide for the billing and collection of
revenues prior to or concurrent with the delivery of payrolls. Ordinarily, the
Company does not grant credit to its clients; however, credit is granted on a
case-by-case basis at the discretion of management.
Accounts receivable consists primarily of billed receivables of approximately
$430,000 and $380,000 and unbilled receivables of approximately $2,250,000 and
$1,700,000 at December 31, 1997 and 1996.
5. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is computed
utilizing the straight-line method over the estimated useful lives of the
assets, principally ranging from 5-7 years.
6. Other Assets
Included in other assets and receivables is approximately $26,000 and $73,000 of
advances to a shareholder and the shareholder's family at December 31, 1997 and
1996, respectively.
7. Reserves for Workers' Compensation Claims
Client employees were covered under an insurance policy with Northbrook
Insurance Company (Northbrook) until August 1996, at which time the coverage was
changed to a policy with American International Group (AIG). The Northbrook
policy provided a specific loss limitation of $500,000 per occurrence. The AIG
policy provides for a range of premium costs depending on the claims activity
during the policy year and limits the aggregate claims exposure to a percentage
of workers' compensation payroll.
From January 1, 1991 through July 31, 1994, all client employees were covered
under fully insured policies with United States Employer Consumer Association,
Inc. Self-Insured Fund (USEC), which is currently in receivership (See Note H).
Claims for workers' compensation benefits covered through the USEC, Northbrook
and AIG policies, are administered by the respective workers' compensation
insurers (the Insurers). The Insurers evaluate all workers' compensation claims
and pay qualifying claims. The Company employs a staff of risk managers
responsible for assisting the Insurers in the review and evaluation of claims.
8
<PAGE> 161
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Reserves for workers' compensation claims represent the Company's estimated
undiscounted liability for the settlement of workers' compensation claims, both
reported and incurred but not reported, as of the balance sheet date. The
Company's reserves are established based in part upon information provided by
the Company's Insurers. Management believes that the reserves for workers'
compensation claims are adequate. While management uses available information,
including historical loss ratios, to estimate reserves, future adjustments may
be necessary based on actual losses.
8. Income Taxes
All companies in the group are Subchapter S corporations, except for TeamStaff
V, Inc. which is a C-corporation. The Company's policy is to record income tax
expenses on the C-corporation financial statements based on applicable statutory
rates.
The C-corporation uses the asset and liability method to account for income
taxes. The objective of the asset and liability method is to establish deferred
tax assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. The principal temporary difference between
the basis of assets and liabilities for financial reporting and tax purposes
relates to reserves for workers' compensation and health insurance claims and
net operating loss carryforwards. Net deferred tax assets related to such
differences have been offset by a valuation allowance due to the uncertainty of
their ultimate realization. Income tax expense is not presented on the statement
of operations, as it is not material.
The Subchapter S corporations do not provide for income taxes in the
accompanying combined financial statements because those companies' results of
operations are allocated directly to their shareholders.
9. Fair Value of Financial Instruments
The carrying amounts of the Company's accounts receivable, notes receivable from
shareholders, certificate of deposit, accounts payable and accrued expenses,
accrued salaries, wages and payroll taxes, due from voluntary employees'
beneficiary association, accrued workers' compensation and notes payable at
December 31, 1997 and 1996, approximate fair value due to the short-term nature
of these items.
9
<PAGE> 162
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B - LIQUIDITY
During 1997 and 1996, the Company's net loss was $351,895 and $2,109,006,
respectively, and at December 31, 1997 and 1996 the accumulated deficit totaled
$5,446,717 and $5,094,822, respectively.
The significant reduction in the operating loss for 1997 as compared to 1996 was
primarily attributable to the Company's containment of workers' compensation
losses, which were achieved by the Company implementing a more aggressive
approach to claim management and the change in the workers' compensation
insurance carrier. Management intends to continue improving the operating
results by better controlling its health insurance-related costs and increasing
gross client revenues. Management believes that these steps will result in
economies of scale and greater contribution to net income.
The Company has also obtained a commitment from the shareholders to indemnify
the Company against any and all losses resulting from the inability of or the
failure by the Company to meet its obligations. Management believes that the
indemnification and the cash flow from operations will be sufficient to provide
the Company with the resources to continue its operations through the current
year.
NOTE C - NOTES RECEIVABLE FROM SHAREHOLDERS
The notes receivable from shareholders relate to nine notes outstanding from two
shareholders. The notes have fixed interest rates ranging from 8% to 10%,
payable quarterly or at the due date. All principle on these notes are due on
December 31, 1998 and January 31, 1999.
NOTE D - FURNITURE, FIXTURES AND EQUIPMENT
A summary of furniture, fixtures and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Computer equipment $ 331,673 $ 240,020
Furniture and fixtures 110,224 59,590
Leasehold improvements 24,866 24,866
--------- ---------
466,763 324,476
Less accumulated depreciation (227,687) (153,151)
--------- ---------
$ 239,076 $ 171,325
========= =========
</TABLE>
10
<PAGE> 163
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE E - NOTES PAYABLE TO SHAREHOLDERS
A summary of notes payable to shareholders at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to shareholder, dated December 27, 1996, principal due on
January 31, 1999, interest due quarterly at 10% $ 1,800,000 $ 1,800,000
Note payable to shareholder, dated December 27, 1996, principal due on
January 31, 1999, interest due quarterly at 10% 500,000 500,000
Note payable to shareholder, dated November 15, 1994, principal due on
December 31, 1998, interest due annually at 7.25% 50,000 50,000
Note payable to shareholder, dated July 31, 1995, principal due on
December 31, 1998, interest due quarterly at LIBOR (5.97% at December 31,
1997) plus 1% 350,000 350,000
Note payable to shareholder, dated December 29, 1993, principal due on
December 31, 1998, interest due monthly at 8% 132,000 124,000
Note payable to shareholder, dated December 31, 1997, principal due on
December 31, 1998, interest due annually at 9% 50,000 --
Note payable to shareholder, dated December 29, 1993, principal due on
December 31, 1998, interest due monthly at 9% 100,000 100,000
Note payable to shareholder, dated December 31, 1997, principal due on
December 31, 1998, interest due annually at 9% 100,000 --
Note payable to shareholder, dated December 29, 1993, principal due on
December 31, 1998, interest due monthly at 9% 65,000 65,000
----------- -----------
3,147,000 2,989,000
Less current portion (847,000) (689,000)
----------- -----------
$ 2,300,000 $ 2,300,000
=========== ===========
</TABLE>
11
<PAGE> 164
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F - NOTE PAYABLE
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Note payable to a bank, dated August 5, 1997, principal due on August
5, 2000, interest due quarterly at LIBOR plus 1% (5.97% at December
31, 1997) $ 88,889
Less current portion (33,326)
--------
$ 55,563
========
</TABLE>
NOTE G- EMPLOYEE BENEFIT PLANS
Voluntary Employees' Beneficiary Association
In 1996 and 1995, the Company sponsored a fully insured health plan (the Plan)
covering all full-time employees of its clients. The Plan's assets were held in
a voluntary employees' beneficiary association trust for federal income tax
purposes. The Company administered claims for benefits under the Plan. During
1996 and 1995, all Plan participants were covered under traditional fully
insured policies. Payments to the plan in 1996 and 1995 totaled approximately
$2,260,000 and $1,380,000, respectively. The Company terminated the Plan
effective December 31, 1996.
401(k) Contribution Plan
In 1996, the Company established a deferred compensation plan (the "Plan") under
Section 401(a)(g) of the Internal Revenue Code. Generally, any employee of the
Company, including those leased to clients, is eligible to participate in the
Plan upon completion of a year of service and after attaining the age of 21
years. At its discretion, the Company may make matching contributions to the
Plan. Generally, employees become partially vested in Company contributions
after 2 years of service and are fully vested after 6 years of service. In 1997
and 1996, approximately $190,000 and $54,000, respectively, were contributed by
the Company to the Plan.
12
<PAGE> 165
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE H - COMMITMENTS AND CONTINGENCIES
Pledged Certificate of Deposit
As security under the Northbrook insurance policy described previously, the
Company had pledged a certificate of deposit of $900,000 to Northbrook as of
December 31, 1996. During 1997, this certificate was transferred to Northbrook
to use for claim payments, resulting in a $258,703 deposit balance at December
31, 1997. In addition, as required under the Northbrook policy, the Company also
maintains a $75,000 deposit with the insurer, which is used to fund all claims.
Workers' Compensation Claim
The Company has a contingent liability for a potential assessment from a former
worker's compensation insurer, which is currently in receivership. The Company
used the insurer for policy years prior to 1994. The Company is a member of the
insured group and has been given an assessment of $1.1 million for its portion
of the $38 million assessed to the group. The Company is currently in litigation
for this assessment and management, after consultation with legal counsel, has
recorded approximately $400,000 of reserves for this claim. In the event that
other parties of the group are unable to satisfy their assessments, additional
assessments could be given to the Company.
Operating Leases
The Company has various operating lease agreements for their offices and
equipment. Future minimum lease payments required under these operating leases
for the years ended December 31, are as follows:
<TABLE>
<S> <C>
1998 $68,539
1999 24,674
2000 13,699
2001 11,176
Thereafter 6,519
</TABLE>
The leases provide for payment of taxes and other expenses by the Company. Rent
expense was approximately $168,000, $164,000 and $127,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
13
<PAGE> 166
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
Legal Proceedings
Various legal actions and proceedings are pending or threatened against the
Company and include suits relating to its professional employer services. While
the final outcome of these matters cannot be predicted at this time and many of
them may take a number of years to resolve, management believes, after
consultations with counsel, that these proceedings are subject to meritorious
defenses, are covered by insurance, or, if not so covered, any ultimate
liability will not have a material adverse effect on the financial position,
results of operations, or liquidity of the Company.
NOTE I - CAPITAL STOCK
Preferred and common stock balances consist of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
Preferred Common
Stock Stock
----- -----
<S> <C> <C>
THE TEAMSTAFF COMPANIES, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 29,000 shares. $ -- $29,000
EMPLOYER SUPPORT SERVICES, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 3,800 shares. -- 3,800
TEAMSTAFF II, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF III, INC.
Common stock - authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF IV, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
</TABLE>
14
<PAGE> 167
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE I - CAPITAL STOCK - Continued
<TABLE>
<CAPTION>
Preferred Common
Stock Stock
---------- ----------
<S> <C> <C>
TEAMSTAFF V, INC.
Preferred stock - 8% cumulative - $1,000 par value; authorized, 10,000
shares; issued and outstanding 1,800 shares. 1,800,000 --
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF INSURANCE, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 100 shares. -- 100
TEAMSTAFF U.S.A., INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 3,800 shares. -- 3,800
TEAMSTAFF, INC.
Common stock - Authorized 10,000 shares of $1.00 par value; issued and
outstanding 9,700 shares. -- 9,700
---------- ----------
$1,800,000 $ 46,800
========== ==========
</TABLE>
All companies have authorized 10,000 shares of $1.00 preferred stock; with the
exception of those issued above, no shares are issued and outstanding.
NOTE J - RELATED PARTY TRANSACTION
In 1996, a shareholder gave the Company $1,800,000 in exchange for 10,000 shares
of preferred stock in TeamStaff V, Inc. TeamStaff V., Inc. then loaned the
$1,800,000 to the shareholder (resulting in the $1,800,000 long-term note
receivable) who in turn loaned the $1,800,000 to TeamStaff, Inc. (resulting in
the $1,800,000 note payable). The interest rates on the note receivable and note
payable are identical.
15
<PAGE> 168
NOTE K - INCOME TAXES (UNAUDITED)
The Company is considering being acquired in a business combination being
accounted for as a purchase. Upon completion of this transaction, the S
corporations included in the Company will become subject to corporate income
taxes. The acquirer will recognize a deferred tax benefit for cumulative
temporary differences between financial and tax reporting as of the date of the
acquisition. If the acquisition had occurred at December 31, 1997, the deferred
tax benefit would have been approximately $400,000, which principally relates to
the reserves for workers' compensation claims. Additionally, pro forma tax
expense is not presented as the benefit derived from each year's loss would have
been offset by a corresponding increase in a valuation allowance against the
benefit.
16
<PAGE> 169
EXHIBIT E
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF TEAMSTAFF COMPANIES, INC. AND AFFILIATES
RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"1995 Reform Act"). TeamStaff Companies, Inc. and Affiliates (collectively
referred to herein as the "Company") desires to avail itself of certain
"safe harbor" provisions of the 1995 Reform Act and is therefore including this
special note to enable the TeamStaff Entities to do so. Forward-looking
statements included in this discussion involve known and unknown risks,
uncertainties, and other factors which could cause the TeamStaff Entities'
actual results, performance (financial or operating) or achievements to differ
from the future results, performance (financial or operational) achievements
expressed or implied by such forward looking statements. Such future results are
based upon management's best estimates based upon current conditions and the
most recent results of operations. These risks include, but are not limited to,
risks associated with the TeamStaff Entities' recent losses, need for additional
capital, effects of competition and technological changes and dependence upon
key personnel.
The year 2000 issues may materially affect the TeamStaff Entities' services
or competitive conditions. This issue affects computer systems that have
time-sensitive programs that may not properly recognize the year 2000. This
could result in major systems failures or miscalculations. The Company has begun
the process of identifying, evaluating, and implementing changes to computer
programs necessary to address the year 2000 issues in order to provide
uninterrupted normal operations of critical business systems before, during and
after the year 2000. If necessary modifications and conversions are not
completed in a timely manner, the year 2000 issue may have a materially adverse
effect on the results of operations and financial condition of the Company. The
total cost associated with the required modifications and conversions is not
known at this time, however, it is not expected to be material to the Company's
financial position and is being expensed as incurred.
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Operating revenue for the year ended December 31, 1997 was $105,246,022 as
compared to the year ended December 31, 1996 of $76,026,835 which represents an
increase of $29,219,187, or 38.4%. This increase was due to the efforts of the
internal sales force to continually bring in new business, which accounted for
all of the increase.
Direct costs for the year ended December 31, 1997 were $101,947,393 as
compared to $74,634,324 for the year ended December 31, 1996 which represents an
increase of $27,313,069, or 36.6%. The Company experienced unusually high
workers compensation claim losses in both 1997 and 1996 due to significant
adverse development of claims. As a result, the Company received excess workers
compensation claim losses of approximately $493,000 and $870,000 for the year
ended December 31, 1997 and December 31, 1996, respectively. After adjusting for
the excess workers compensation losses, as a percentage of revenue,
direct costs, for year ended December 31, 1997 and 1996 were 96.4% and 97.0%,
respectively.
Gross profits were $3,298,629 and $1,392,511 for the years ended December
31, 1997 and 1996, respectively, for an increase of 137%. Giving effect to the
previously discussed excess workers compensation claim losses, gross profits for
years ended December 31, 1997 and 1996 would have been $3,791,629 and
$2,262,511, respectively. As a percentage of revenue, adjusted gross profits for
years ended December 31, 1997 and 1996 would have been 3.6% and 3.0%,
respectively. The increase was due to the TeamStaff Entities' implementation of
an aggressive workers compensation claims management program, resulting in
significantly lower workers compensation direct claim costs.
Operating expenses for the year ended December 31, 1997 increased $298,384,
or 8.6%, from $3,488,904 for the year ended December 31, 1996 to $3,787,288. Of
this increase, $266,199 related to personnel expenses, as a result of additional
administrative personnel hired due to the increase in business volume.
<PAGE> 170
Net loss for the year ended December 31, 1997 was ($351,895) versus a net
loss of ($2,109,006) for the year ended December 31, 1996. The reduction of the
loss was due to the increase in sales volume and more effective workers
compensation claims management.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Operating revenue for the year ended December 31, 1996 was $76,026,835 as
compared to the year ended December 31, 1995 of $61,972,534 which represents an
increase of $14,054,301, or 22.7%. This increase was due to the efforts of the
internal sales force to continually bring in new business, which accounted for
all of the increase.
Direct costs for the year ended December 31, 1996 were $74,634,324 as
compared to $59,374,413 for the year ended December 31, 1995 which represents an
increase of $15,259,911, or 25.7%. The Company incurred unusually high workers
compensation claim losses of approximately $870,000 due to adverse claim
development for the year ended December 31, 1996. After adjusting for the
excessive additional workers compensation claim losses, as a percentage of
revenue, direct costs, for year ended December 31, 1996 and 1995 were 97.0% and
95.8%, respectively. In addition, the TeamStaff Entities incurred approximately
$380,000 in excess medical claim losses for the year ended December 31, 1996.
Gross profits were $1,392,511 and $2,598,121 for years ended December 31,
1996 and 1995, respectively, for a decrease of 46.4%. Giving effect to the
previously discussed excess workers compensation claim losses, gross profits for
year ended December 31, 1996 would have been $2,262,511. As a percentage of
revenue, adjusted gross profits for years ended December 31, 1996 and 1995 would
have been 3.0% and 4.2%, respectively. The decrease was a result of the
TeamStaff Entities incurring significantly high medical claim costs due to being
under a minimum premium medical policy.
Operating expenses for the year ended December 31, 1996 increased $494,341,
or 16.5%, from $2,994,563 for the year ended December 31, 1995 to $3,488,904. Of
this increase, $365,190 related to personnel expenses, as a result of additional
administrative personnel hired due to the increase in business volume.
Net loss for the year ended December 31, 1996 was ($2,109,006) versus a net
loss of ($323,006) for the year ended December 31, 1995. The increase in loss
was due primarily to the $870,000 in excessive workers compensation losses,
$380,000 excess medical claim losses and an increase in operating expenses.
Six Months Ended June 30, 1998 as Compared to Six Months Ended June 30, 1997
Operating revenue for the six months ended June 30, 1998 was $53,795,852 as
compared to the six months ended June 30, 1997 of $47,279,494, which represents
an increase of $6,516,358, or 13.8%. This increase was due to the efforts of the
internal sales force to continually bring in new business, which accounted for
all of the increase.
<PAGE> 171
Direct costs for the six months ended June 30, 1998 were $51,676,717 as
compared to $45,452,126 for the six months ended June 30, 1997, which represents
an increase of $6,224,591, or 13.7%. The increase was entirely due to the
related increase in revenues.
Gross profits were $2,119,135 and $1,827,368 for the six months ended June
30, 1998 and 1997, respectively, for an increase of 16.0%. The increase was due
to the related increase in revenues.
Operating expenses for the six months ended June 30, 1998 increased
$329,744, or 20.1%, from $1,640,605 for the six months ended June 30, 1997 to
$1,970,349. Of this increase, $145,655 related to personnel expenses, as a
result of additional administrative personnel hired due to the increase in
business volume. Non-personnel operating expenses increased by $184,089 of which
$98,636 was due to professional fees, primarily as a result of the Company's
negotiations for an unsuccessful acquisition.
Net income for the six months ended June 30, 1998 was $94,843 versus a net
income of $162,308 for the six months ended June 30, 1997. The decrease was due
primarily to the professional fees incurred as noted above.
Liquidity and Capital Resources
The working capital of the TeamStaff Entities position as of June 30, 1998
was a deficit of $1,832,163 versus a deficit of $1,387,194 for the year ended
December 31, 1997. The decrease in working capital was primarily due to
shareholder's notes payable of $2,300,000 being classified as current
liabilities at June 30, 1998. These notes have a due date of January 31, 1999.
At June 30, 1998 and December 31, 1997, the TeamStaff Entities had cash of
$0 and $861,932, respectively, and net accounts receivable of $2,885,999 and
$2,680,260, respectively. Net accounts receivable was inclusive of unbilled
receivables of $2,250,000 for both periods. The reduction in cash was a result
of the paydown of workers compensation claim reserves ($389,492) and as
reduction of accrued salaries, wages and payroll taxes ($612,824).
The TeamStaff Entities borrowed $50,000 from a bank for purposes of
acquiring capital equipment. The bank loan is personally guaranteed by a
shareholder. As of June 30, 1998, the Company had used $36,764 of the proceeds.
The Company has not pursued additional funding arrangements from a third party
lender.
The TeamStaff Entities has also obtained a commitment from the shareholders
to indemnify the TeamStaff Entities against any and all losses resulting from
the inability of or the failure by the Company to meet its obligations.
Management believes that the indemnification and the cash flow from operations
will be sufficient to provide the Company with the resources to continue its
operations through the next twelve months.
<PAGE> 172
The Board of Directors
Teamstaff Companies, Inc. and Affiliated Companies:
We consent to the incorporation by reference in the registration statements on
Form S-3 (No. 33-70928 and No. 33-09313) of Digital Solutions, Inc. of our
report dated April 4, 1996, with respect to the combined statements of
operations, shareholders' deficit, and cash flows of Teamstaff Companies, Inc.
and Affiliated Companies for the year ended December 31, 1995, which report
appears in the proxy statement of Digital Solutions, Inc. dated November 2,
1998.
KPMG Peat Marwick LLP
New Orleans, Louisiana
November 2, 1998
<PAGE> 173
Exhibit F
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED BALANCE SHEET
June 30, 1998
(unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ --
Accounts receivable 2,885,999
Notes receivable from shareholders 2,181,839
Deposits with workers' compensation insurer 243,937
----------
Total current assets 5,311,775
FURNITURE, FIXTURES AND EQUIPMENT, net 230,452
OTHER ASSETS 393,918
----------
Total assets $ 5,936,145
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Book overdraft in bank account $ 239,057
Accounts payable and accrued expenses 794,545
Accrued salaries, wages and payroll taxes 2,835,157
Accrued workers' compensation claims 72,623
Current maturities of note payable 55,556
Notes payable to shareholders 3,147,000
-----------
Total current liabilities 7,143,938
ACCRUED WORKERS' COMPENSATION CLAIMS 400,000
NOTE PAYABLE, less current portion 64,815
CLIENT DEPOSITS 55,762
COMMITMENTS AND CONTINGENCIES --
SHAREHOLDERS' DEFICIT
Preferred stock 1,800,000
Common stock 46,800
Additional paid-in capital 1,776,704
Accumulated deficit (5,351,874)
-----------
Total shareholders' deficit (1,728,370)
-----------
Total liabilities and shareholders' deficit $ 5,936,145
===========
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE> 174
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 53,795,852 $ 47,279,494
Direct costs:
Salaries and wages of worksite employees 45,790,494 39,667,362
Benefits and payroll taxes 5,886,223 5,784,764
------------ ------------
Total direct costs 51,676,717 45,452,126
Gross profit 2,119,135 1,827,368
Operating expenses:
Administrative personnel 991,641 845,986
General and administrative expenses 978,708 794,619
------------ ------------
Total operating expenses 1,970,349 1,640,605
Income from operations 148,786 186,763
Other income (expense):
Interest, net (57,153) (48,314)
Other 3,210 23,859
------------ ------------
Total other income (expense) (53,943) (24,455)
------------ ------------
NET INCOME $ 94,843 $ 162,308
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 175
TeamStaff Companies, Inc. and Affiliated Companies
COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net income $ 94,843 $ 162,308
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 45,388 28,104
Changes in assets and liabilities:
Accounts receivable (205,739) (76,720)
Notes receivable from shareholders (43,457) --
Due from voluntary employees' beneficiary association -- 145,511
Deposit with workers' compensation insurer 89,766 --
Other assets (79,600) 77,248
Accounts payable and accrued expenses (1,194) 557,560
Accrued salaries, wages and payroll taxes (612,824) 124,052
Accrued workers' compensation claims (389,492) (760,291)
Other liabilities (15,310) (131,000)
Client deposits 21,912 (6,393)
----------- -----------
Net cash provided by (used in) operating activities (1,095,707) 120,379
Cash flows from investing activities
Purchase of furniture, fixtures and equipment (36,764) (20,428)
----------- -----------
Net cash used in investing activities (36,764) (20,428)
Cash flows from financing activities:
Proceeds from note payable 50,000 4,887
Payments of note payable (18,518) (1,287)
Net change in book overdraft in bank account 239,057 (154,118)
----------- -----------
Net cash provided by (used in) financing activities 270,539 (150,518)
----------- -----------
Net decrease in cash (861,932) (50,567)
Cash at beginning of period 861,932 50,567
----------- -----------
Cash at end of period $ -- $ --
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 57,152 $ 48,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 176
TeamStaff Companies, Inc. and Affiliated Companies
NOTES TO COMBINED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
TeamStaff Companies, Inc. and Affiliated Companies (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These combined financial statements should be read in
conjunction with the combined financial statements and the notes thereto
included in the Company's December 31, 1997 financial statements. This financial
information reflects, in the opinion of management, all adjustments necessary to
present fairly the results for the interim periods. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
NOTE B - NOTES RECEIVABLE FROM SHAREHOLDERS
During the six months ended June 30, 1998, a shareholder borrowed an additional
$43,357 from the Company. The note has a stated rate of 9% and is due in June
1999.
4
<PAGE> 177
EXHIBIT G
FORM OF
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIGITAL SOLUTIONS, INC.
To: Secretary of State
State of New Jersey
Pursuant to the Provisions of Section 14A:9-2(4) and Section 14A:9-4(3),
Corporations, General, of the New Jersey Statutes, the undersigned corporation
executes the following Certificate of Amendment to its Amended and Restated
Certificate of Incorporation:
1. The name of the Corporation is Digital Solutions, Inc.
2. The following amendment to the Amended and Restated Certificate of
Incorporation was approved by the Board of Directors and thereafter
duly adopted by the shareholders of the corporation on the th day of
, 1998:
Resolved, that Article FIRST of the Amended and Restated Certificate
of Incorporation be amended to read as follows:
"FIRST: The name of the corporation is "TeamStaff, Inc."
3. The only class of securities entitled to vote upon the amendment was
the Common Stock. The number of shares of Common Stock entitled to
vote upon the amendment was 19,356,833.
4. The number of shares voting for and against such amendment is as
follows:
Number of Shares Voting For Number of Shares Voting Against
Amendment Amendment
- --------------------------- -------------------------------
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment to the Amended and Restated Certificate of incorporation as of the
th day of , 1998.
DIGITAL SOLUTIONS, INC.
By:
-----------------------------------------
Donald W. Kappauf, President
<PAGE> 178
EXHIBIT H
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in
this Proxy Statement of our report dated December 23, 1997 included in
Digital Solutions, Inc, and subsidiaries Form 10-K for the year ended
September 30, 1997. It should be noted that we have not audited any financial
statements of the Company subsequent to September 30, 1997 or performed any
audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 30, 1998
<PAGE> 179
EXHIBIT I
The Board of Directors
Teamstaff Companies, Inc. and Affiliated Companies:
We consent to the incorporation by reference in the registration statements on
Form S-3 (No. 33-70928 and No. 33-09313) of Digital Solutions, Inc. of our
report dated April 4, 1996, with respect to the combined statements of
operations, shareholders' deficit, and cash flows of Teamstaff Companies, Inc.
and Affiliated Companies for the year ended December 31, 1995, which report
appears in the proxy statement of Digital Solutions, Inc. dated November 2,
1998.
KPMG Peat Marwick LLP
New Orleans, Louisiana
October 29, 1998
<PAGE> 180
EXHIBIT J
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 24, 1998, accompanying the combined
financial statements of TeamStaff Companies, Inc. and Affiliated Companies for
the years ended December 31, 1977 and 1996 contained in the proxy statement of
Digital Solutions, Inc. dated November, 2, 1998. We consent to the use of the
aforementioned report in the proxy statement.
GRANT THORNTON LLP
Tampa, Florida
October 29, 1998
<PAGE> 181
DIGITAL SOLUTIONS, INC.
SPECIAL MEETING OF SHAREHOLDERS -- DECEMBER 17, 1998
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Karl W. Dieckmann and Donald W. Kappauf, and
each of them, proxies, with full power of substitution, to vote all shares of
common stock of Digital Solutions, Inc owned by the undersigned at the Special
Meeting of shareholders of Digital Solutions, Inc. to be held on December 17,
1998 and at any adjournments thereof, hereby revoking any proxy heretofore
given. The undersigned instructs such proxies to vote:
I. Proposal to approve and adopt two separate agreements entitled Plan and
Agreement of Merger and Reorganization, dated as of October 29, 1998 (together,
the "Merger Agreement") entered into among the Company, ten specially formed
subsidiaries of the Company (the "Merger Corporations"), ten affiliated entities
operating under the tradename the TeamStaff Companies (the "TeamStaff Entities")
and the shareholders of the TeamStaff Entities. Providing for the acquisition by
way of mergers (collectively referred to as the "Merger") of the TeamStaff
Entities with the Merger Corporations, the result of which the TeamStaff
Entities will become wholly-owned subsidiaries of the Company and pursuant to
which Merger the Company may issue up to an aggregate of 9,383,334 shares of
Common Stock and to vote upon any other business as may properly become before
the meeting or any adjournment thereof, all as described in the Proxy Statement
of the Company dated November 12, 1998, receipt of which is hereby acknowledged.
/ / FOR / / AGAINST / / ABSTAIN
II. Proposal to approve, only in the event that Proposal I at the Special
Meeting is approved and adopted, an amendment to the Amended and Restated
Certificate of Incorporation to change the name of the Company from Digital
Solutions, Inc. to TeamStaff, Inc.
/ / FOR / / AGAINST / / ABSTAIN
(continued on the reverse side)
<PAGE> 182
Either of the proxies or their respective substitutes, who shall be present
and acting shall have and may exercise all the powers hereby granted. The shares
represented by this proxy will be voted (i) FOR the proposal to approve the
Merger with the TeamStaff Entities and the issuance of up to 9,383,334 shares of
Common Stock and (ii) FOR the proposal to change the name of the Company to
TeamStaff, Inc., unless contrary instructions are given. Said proxies will use
their discretion with respect to any other matters which properly come before
the meeting.
Date
--------------------------------------
Signed
--------------------------------------
(Please date and sign exactly as
accounts. Each joint owner should
sign. Executors, administrators,
trustees, etc. should also indicate
when signing.)
The proxy is solicited on behalf of
the Board of Directors. Please sign
and return in the enclosed envelope.
