<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
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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
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<PAGE> 3
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> 4
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> 5
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> 6
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> 7
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> 8
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BUSINESS
Digital Solutions, Inc. (the Company) was incorporated under the laws of the
State of New Jersey on November 25, 1969. The Company, with its subsidiaries,
provides a broad spectrum of human resource services including Professional
Employer Organization (PEO) services, payroll processing, human resource
administration and placement of temporary and permanent employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements included herein have been prepared by the
registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the registrant believes that the disclosures are
adequate to make the information presented not misleading. 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> 9
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.
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<PAGE> 10
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.
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<PAGE> 11
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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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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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
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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> 15
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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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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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,806,000
<SECURITIES> 0
<RECEIVABLES> 5,542,000
<ALLOWANCES> (618,000)
<INVENTORY> 0
<CURRENT-ASSETS> 8,369,000
<PP&E> 3,301,000
<DEPRECIATION> (2,535,000)
<TOTAL-ASSETS> 15,784,000
<CURRENT-LIABILITIES> 5,070,000
<BONDS> 0
0
0
<COMMON> (19,000)
<OTHER-SE> (7,599,000)
<TOTAL-LIABILITY-AND-EQUITY> 15,784,000
<SALES> 0
<TOTAL-REVENUES> 35,885,000
<CGS> 0
<TOTAL-COSTS> 33,182,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (34,000)
<INTEREST-EXPENSE> (173,000)
<INCOME-PRETAX> 322,000
<INCOME-TAX> (1,470,000)
<INCOME-CONTINUING> 1,792,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,792,000
<EPS-PRIMARY> .09<F1>
<EPS-DILUTED> .09
<FN>
<F1>Amount reflects EPS - Basic not EPS - Primary
</FN>
</TABLE>
