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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, 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)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 748-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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NONE
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[Cover Page 1 of 2 Pages]
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes x No
On January 11, 1999, 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 $21,679,653 based
upon the average bid and asked price for such Common Stock on said date as
reported by Nasdaq Small Cap Market. On such date, there were issued and
outstanding 19,356,833 shares of Common Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1999 Annual Meeting of Shareholders Incorporated by
Reference into Part II of this Form 10-K
[Cover Page 2 of 2 Pages]
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PART I
SAFE HARBOUR STATEMENT
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 of recently
consummated acquisitions as well as future acquisitions, effects of competition
and technological changes and dependence upon key personnel.
ITEM 1. BUSINESS
INTRODUCTION
Digital Solutions, Inc., a New Jersey Corporation ("DSI") 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 wholly-owned subsidiaries include DSI-Contract Staffing, DSI Staff
ConnXions-Northeast, DSI Staff ConnXions-Southwest, and DSI-Staff Rx, Inc
(collectively referred to, with DSI as the "Company").
The Company currently provides three types of services related to the
employee leasing and payroll service business: (1) professional employer
organization ("PEO") services, such as payroll processing, personnel and
administration, benefits administration, workers compensation administration and
tax filing; (2) employer administrative services, such as payroll processing 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 1,220 client organizations with approximately 4,350 worksite
PEO and staffing employees and processing for approximately 30,000 payroll
service 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, the Company places temporary
help in hospitals and clinics throughout the United States through its
Clearwater, Florida and Houston, Texas offices. The Company has three regional
offices located 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 has positioned 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 of the
human resource administrative functions, 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 assigns these
employees to the client to perform their intended functions at the worksite.
Management has determined to emphasize the Company's 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
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with a client base serviceable from existing facilities. As part of its effort
to expand its PEO business, management has expanded the services of DSI-Staff
Rx, Inc., the Company's medical contract staffing subsidiary, to include 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. See "Recent Developments."
Digital Solutions, Inc. was organized under the laws of the State of
New Jersey on November 25, 1969 and maintains its executive offices at 300
Atrium Drive, Somerset, New Jersey 08873 where its telephone number is (732)
748-1700.
RECENT DEVELOPMENTS
TEAMSTAFF ACQUISITION
Effective as of October 29, 1998, the Company entered into two separate
agreements entitled Plan and Agreement of Merger and Reorganization with the
TeamStaff Companies (as defined below) and the shareholders owning all of the
shares of the TeamStaff Companies. On December 17, 1998, the Company held a
Special Meeting of Shareholders in Somerset, New Jersey at which meeting the
acquisition of the TeamStaff Companies was approved by the Company's
shareholders.
The acquisition is expected to be consummated in January, 1999
following receipt of financing from the Company's primary lender, FINOVA
Capital Corporation in the amount of upwards to $4,500,000.
The TeamStaff Companies 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 Service, Inc. ("TIS"). Each of the TeamStaff companies are
Florida corporations with its principal address at 1211 N. Westshore Blvd.,
Suite 806, Tampa, Florida 33607.
Following the acquisition, the combined companies' PEO business
will be based in Tampa. Mr. Kirk Scoggins, president and a principal shareholder
of TeamStaff, will become president of the combined company's professional
employment organization division and will join the Board of Directors of the
Company effective on the closing day of the acquisition. TeamStaff has offices
in Raleigh/Durham, NC; Dallas, TX; Atlanta, GA; and Jacksonville, FL as well as
Tampa. The TeamStaff Companies serve a variety of industries, including golf
course management, resort property management, manufacturing, distribution and
service industries.
Pursuant to the terms of the acquisition, the Company will issue
8,233,334 million shares of its common stock in exchange for all of the common
stock of the TeamStaff companies and $3.1 million in cash for all the preferred
stock and for payment of outstanding debt.
The transaction was approved by holders of approximately 60 percent of
Digital Solution's common stock, which represents 97 percent of the shares voted
at the special meeting. The combined companies will have revenues of
approximately $240 million and approximately 11,000 worksite employees, ranking
the combined company among the top 15 PEOs in the U.S.
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The TeamStaff Companies 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 acquisition is in the best
interests of the Company because (i) as a result of the acquisition the
Company's revenues will be increased by approximately 72% (based upon the
Company's fiscal year ended September 30, 1998), (ii) the combined entities will
have approximately 11,000 worksite employees (iii) the acquisition will allow
the Company to enjoy opportunities for operating efficiencies and synergies from
the combined entities and (iv) the acquisition provides the Company with an
avenue of expansion into the Southeastern United States.
As a result of the acquisition, the 10 TeamStaff Companies will become
wholly-owned subsidiaries of the Company.
NAME CHANGE
At the special meeting, shareholders approved a change in the Company's
name to "TeamStaff, Inc." The Company expects to change its name within the next
60-90 days.
CREDIT LINE
On April 28, 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
loan for $2.5 million, with a five year amortization, at prime + 3% (11.5% at
September 30, 1998) and a $2 million revolving line of credit secured by certain
accounts receivable of the Company at prime + 1% (9.5% at September 30, 1998).
The balance on the term loan was $2,333,000 and $2,250,000 at September 30, 1998
and November 30, 1998, respectively and the revolving credit line balance was
$1,103,000 and $986,000 at September 30, 1998 and November 30, 1998,
respectively. The credit facility is also subject to success fees of $200,000,
$225,000 and $250,000 due on the anniversary dates of the loan beginning in
April, 1999. Taking these 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%.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area management will continue to
emphasize, is its PEO services. When a client utilizes the Company's PEO
services, the client administratively transfers all or some of its employees to
the Company which then provides them to the client. DSI thereby becomes a
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. The client is, however, relieved of reporting and
tax filing requirements and other administrative tasks. Moreover, because of
economies of scale, the Company 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 then offer its employees
the same or similar benefits as larger companies, and successfully compete in
recruiting highly qualified personnel, as well as build the morale and loyalty
of its staff.
As a PEO service provider, the Company can offer the following benefits
to employees:
COMPREHENSIVE MAJOR MEDICAL PLANS - Management of the Company 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 offer the employees assigned to their
clients a variety of health coverage plans from traditional indemnity plans to
Health Maintenance Organizations (HMO) or Preferred Provider Organizations
(PPO).
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DENTAL AND VISION COVERAGE - These types of benefits are generally
beyond the reach of most small groups. As a result of economies of scale
available, a client of the Company can obtain these benefits for the assigned
employees.
LIFE INSURANCE -- Affordable basic coverage is available.
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 -- Management believes that most small
employers do not provide any significant retirement benefits due to the
administrative and regulatory requirements associated with the establishment and
maintenance of retirement plans. The Company enables small business owners to
offer the assigned employees retirement programs comparable to those of major
corporations. Such plans can be used to increase morale, productivity and
promote employee loyalty.
CREDIT UNION -- The Company provides 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. The Company's PEO services include all payroll and payroll tax
processing.
UNEMPLOYMENT COMPENSATION COST CONTROL - The Company provides an
unemployment compensation cost control program to aggressively manage
unemployment claims.
HUMAN RESOURCES MANAGEMENT SERVICES - The Company can provide clients
with expertise in areas such as personnel policies and procedures, hiring and
firing, training, compensation and performance evaluation.
WORKERS COMPENSATION PROGRAM - The Company has a national workers
compensation policy which can provide the Company with a significant advantage
in marketing its services, particularly in jurisdictions where workers
compensation policies are difficult to obtain at reasonable costs. The Company
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 assigned employees, a competitive rate in
workers' compensation insurance, and savings in time and paperwork previously
required in connection with personnel administration.
PAYROLL SERVICES
The Company 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 900 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 timely deposit of taxes, impounding of tax payments, filing of
returns, distribution of quarterly and year-end statements and responding to
agency inquiries.
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TEMPORARY STAFFING SERVICES
DSI provides temporary staffing services through several subsidiaries
which have, in the aggregate, more than 28 years of experience in placing
permanent and temporary employees with specialized skills and talents with
regional, national and international employers. Temporary staffing enables
clients to attain management and productivity goals by matching highly trained
professionals and technical personnel to specific project requirements. DSI
focuses its temporary staffing services in two specific markets where it places
people on a temporary long term assignment, or on a permanent basis: (1)
radiologists, therapists, nurses with hospitals, clinics and therapy centers
throughout the 50 states and (2) technical employees such as engineers,
information systems specialists and project managers primarily with Fortune 100
companies for specific projects. 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.
The Company's temporary staffing services provide clients with the
ability to "rightsize"; that is, expand or reduce its workforce in response to
changing business conditions. Management believes that these services provide
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.
Management believes that it's temporary staffing services provides an
employer with an increased pool of qualified applicants, since temporary
staffing employees have access to a wide array of benefits such as health and
life insurance, Section 125 premium conversion plans, and 401(k) retirement
plans. These benefits provide interim employees with the motivation of full-time
workers without additional benefit costs to the client. A client is also able to
temporarily rehire a retired employee for short-term or specialized projects
without jeopardizing their pension plan.
ACQUISITION STRATEGY
A key component of the Company's growth strategy has been, and will
continue to be, the acquisition of compatible businesses to expand its
operations and customer base. Currently, the human resource service industry
includes numerous small companies seeking to develop services, operations and
customer base similar to those developed by the Company. The Company has
actively acquired companies in the human resource industry during the last 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. As discussed above, the Company expects to acquire the TeamStaff
Companies. See "Recent Developments - TeamStaff Acquisition." 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; and 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. There can be no
assurance, however, that the Company will be able to successfully identify,
acquire and integrate into the Company operations compatible PEO companies.
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CUSTOMERS
The Company's customer base consists of over 1,220 client companies,
representing approximately 34,000 employees (including payroll services) as of
September 30, 1998. 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 the customers of the Company's subsidiary Staff-Rx, are employed in the
healthcare industry.
The Company intends to maintain diversity within its client base to
lower its exposure to downturns or volatility in any particular industry and
help insulate the Company to some extent from general economic cycles. All
prospective customers are also evaluated individually on the basis of workers'
compensation risk, group medical history, unemployment history and operating
stability.
SALES AND MARKETING
The Company maintains sales and marketing personnel in all of its
locations, which presently include New Jersey, New York, Texas, and Florida.
Sales personnel offer to customers a full array of the Company's
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.
The Company has also implemented several focused marketing activities
to increase sales opportunities. The Company has been licensed by the various
state Boards of Accountancy to hold continuing professional education seminars
for CPAs. In addition, the Company and its management 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 $2 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 have recently
purchased PEOs in Florida, will be major competitors in the future. The Company
also competes with manual payroll systems sold by numerous companies, as well as
other providers of computerized payroll services including banks, and smaller
independent companies. Some companies have in-house computer capability to
generate their own payroll documents and reports. The increasing availability of
personal computers at low cost may result in additional businesses acquiring
such capabilities. In the area of providing temporary technical and medical
personnel, the Company competes with companies such as Volt Information
Services, Butler Arde, 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.
Management of the Company believes that its broad scope of human
resource management services and its
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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. Management 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, the Company is establishing itself as a professional
employer organization which will assist companies, small and large, with all of
their human resource management challenges.
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INDUSTRY/GOVERNMENT 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 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; (ii) obligations under FICA; and, (iii) obligations under the
Federal Unemployment Tax Act (FUTA).
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, group health plans, dental insurance, a
group life insurance plan and a group disability insurance plan. Generally,
employee benefit plans are subject to provisions of both the Code and the
Employee Retirement Income Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees. In addition to the employer/employee threshold,
pension and profit-sharing plans, including plans that offer CODAs under Code
Section 401(k) and matching contributions under Code Section 401(m), must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to
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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. For example, the Company's
activities in the State of Texas are governed by the Staff Leasing Services
Licensing Act (the "Act"), which regulates PEOs in the state of 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 or a subsidiary 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. A DSI subsidiary is currently licensed in
Florida and New Mexico as well as Texas.
EMPLOYEES
As of December 21, 1998, the Company employed 122 employees, both
full-time and part-time, including executive officers, an increase from 117
during the previous fiscal year. The Company also employs approximately 4,000
leased employees and 350 temporary employees on client assignments. The Company
believes its relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
OPERATION AND FACILITIES
The Company currently has processing centers in Somerset, New Jersey;
Houston, Texas; and Clearwater, Florida. The Company also has 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 1999-2000, most likely
through additional acquisitions.
DSI leases its 15,000 square foot corporate headquarters in Somerset,
New Jersey, as well as offices in
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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 1998, the Company's
total lease expenses were $630,000.
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 the Company's facilities:
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APPROXIMATE EXPIRATION
LOCATION SQUARE FEET DATE TERMS
- -------- ----------- ---- -----
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DSI Staff RX, Inc. (Houston) 5,398 9/30/99 $13,440 per month
2 Northpoint Drive, Suite 110 7,396 2/28/00
Houston, TX 77060
DSI Staff RX, Inc. (Clearwater) 2,805 5/31/00 $ 3,272 per month
601 Cleveland Street 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 1,890 4/30/01 $ 3,082 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
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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.
12
<PAGE> 13
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to recover
damages on account of the wrongful sale of the Company's common stock. On July
2, 1997, the Company settled the action. Without admitting or denying the
allegations in the complaint, the defendants agreed to pay $676,000 of which
$426,000 has been paid with the balance of $250,000 to be paid by LNB on or
before August 4, 1997. The payment was not made by LNB as of December 28, 1998.
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's subsidiary, DSI Staff ConnXions-Southwest, Inc., is the
defendant in a lawsuit (Frederico Farias v. Thomson Consumer Electronics and
DSI Staff Connxions-Southwest, Inc.; 327th Judicial District Case No. 96-3036;
District Court of El Paso County, Texas) whereby a former leased employee of a
client obtained a judgment against the Company during August, 1998 in the
amount of $315,000 including interest. The judgment includes approximately
$115,000 in compensatory damages and $200,000 in punitive damages. The Company
has posted a bond for the full amount of the judgment and is appealing the
judgment. Management of the Company, after consultation with counsel, believes
that there is no basis for the awarding of punitive damages, and that the award
of compensatory damages was based on insufficient evidence. Although there can
be no assurances the Company will be successful in prosecuting the appeal,
management of the Company, after consultation with counsel, believes it will
obtain a reversal of the judgment. If the Company is not successful with the
appeal, the Company would record expense of $315,000.
The Company is also a defendant in a lawsuit (ASI Group, Inc. and Terr
Munkirs v. Digital Solutions, Inc., George Eklund and Miriam H. Silverman
Superior Court of New Jersey, Law Division, Middlesex Court Docket No. 8906-97)
which is currently pending in the Superior Court of New Jersey. This action was
brought by a competitor of the Company in connection with the transfer of
several former clients of the competitor to the Company. The Company has denied
the material allegations of the complaint. Discovery in the case is in the
preliminary stages. The plaintiffs have submitted a calculation of damages of
$300,000 for the claims identified in the lawsuit which includes damages for
clients which never became clients of the Company. Although there can be no
assurances the Company will be successful in defending the claim, management of
the Company after consultation with counsel, believes it has meritorious
defenses against the claim.
The Company is engaged in no other litigation, the effect of which
would be anticipated to have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company did not submit any matters to its shareholders for approval
during the fourth quarter ended September 30, 1998.
On December 17, 1998, the Company held a Special Meeting of
Shareholders in Somerset, New Jersey. Shareholders of record at October 30, 1998
were entitled to attend and vote at the meeting. At the record date there were
outstanding 19,356,833 shares of Common Stock, of which 12,320,088 (65%) were
represented by proxy or in person at the Special Meeting.
At the Special Meeting, shareholders approved the acquisition of the
TeamStaff Companies and a proposal to change the Company's name to "TeamStaff,
Inc." The Shareholders of the Company voted 12,320,088 shares (98% of those
voting) in favor of the proposal to acquire the TeamStaff Companies.
Shareholders holding 235,640 shares (2% of those voting) voted against the
proposal and shareholders holding 77,240 shares either withheld approval or
abstained from voting.
The Shareholders of the Company voted 12,217,552 (97% of those voting)
shares in favor of the proposal to change the Company's name to TeamStaff, Inc.
Shareholders holding 246,124 shares (2% of those voting) voted against the
proposal and shareholders holding 169,292 shares abstained from the vote.
13
<PAGE> 14
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". In connection with the
recently approved proposal to change the Company's name to TeamStaff, Inc., the
Company will be submitting a request to Nasdaq to obtain a new symbol for the
Common Stock.
B. MARKET INFORMATION
The range of high and low bid prices for the Company's Common Stock for
the periods indicated below, are:
COMMON STOCK
<TABLE>
<S> <C> <C>
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
1st Quarter 5 15/16 1 15/32
2nd Quarter 6 15/16 4 5/16
3rd Quarter 6 1/8 3 9/16
4th Quarter 6 1/4 3 5/8
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
2nd Quarter 2 17/32 1 3/4
3rd Quarter 2 15/32 1 9/16
4th Quarter 1 13/16 1
FISCAL YEAR 1999 HIGH LOW
---------------- ---- ---
1st Quarter 1 27/32 15/16
</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. On January 11,
1999, the Company's Common Stock had a closing price of $1.09 per share.
C. DIVIDENDS
The payment by the Company of cash dividends is restricted by the
Company's debt facility provider, FINOVA. Without FINOVA'S prior written
consent, which FINOVA may withhold in its sole discretion, the Company may not
declare or pay cash dividends upon any of its stock. 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.
14
<PAGE> 15
D. APPROXIMATED NUMBER OF EQUITY SECURITY HOLDERS
The approximate number of record holders of the Company's common stock
as of January 11, 1999 was 308. 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 4,000 beneficial holders of the Company's common stock.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $139,675,000 $122,695,000 $100,927,000 $73,821,000 $37,998,000
Direct Expenses 129,747,000 113,894,000 92,490,000 68,530,000 34,939,000
Gross Profit 9,928,000 8,801,000 8,437,000 5,291,000 3,059,000
Selling, General & Administrative
Expenses (includes Depreciation
and Amortization) 8,050,000 11,316,000 8,801,000 7,547,000 2,695,000
Income (Loss) From Operations 1,878,000 (2,515,000) (364,000) (2,256,000) 364,000
Net Income (Loss) $2,703,000 ($2,832,000) ($597,000) ($3,316,000) $720,000
Earnings (Loss) per share (1)
Basic $.14 ($.15) ($.04) ($.24) $.06
Diluted $.14 ($.15) ($.04) ($.24) $.05
Weighted average
shares outstanding
(1)
Basic 19,271,897 19,070,349 16,840,371 13,595,382 10,597,537
Diluted 19,403,298 19,070,349 16,840,371 13,595,382 12,867,027
Dividends Paid per Preferred
Stock $0.00 $0.00 $0.00 $0.00 $3.30
BALANCE SHEET DATA:
Assets $16,648,000 $14,163,000 $14,800,000 $13,816,000 $7,727,000
Liabilities 8,774,000 9,291,000 7,632,000 10,967,000 2,671,000
Long-Term Debt 2,981,000 89,000 100,000 175,000 107,000
Working Capital (Deficiency) 3,319,000 (1,401,000) 286,000 (4,771,000) 1,146,000
Shareholders' Equity $7,874,000 $4,872,000 $7,168,000 $2,849,000 $5,056,000
</TABLE>
(1) In accordance with SFAS 128, basic and diluted earnings (loss) per
share have replaced primary and diluted earnings (loss) per share.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FISCAL YEAR 1998 AS COMPARED TO FISCAL YEAR 1997
The Company's revenues for the fiscal year ended September 30, 1998 were
$139,675,000 as compared to fiscal year 1997 of $122,695,000 which represents an
increase of $16,980,000 or 13.8%. 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 61% of the growth, while the
balance is attributed to the Company's staffing business.
Direct expenses for fiscal year 1998 were $129,747,000 as compared to
$113,894,000 for fiscal year 1997 which represents an increase of $15,853,000,
or 13.9%. This increase represents the corresponding higher costs associated
with higher revenues. As a percentage of revenue, direct expenses for the fiscal
year 1998 and 1997 were 92.9% and 92.8%, respectively.
Gross profits were $9,928,000 and $8,801,000 for fiscal 1998 and 1997,
respectively, for an increase of 12.8%. Gross profits, as a percentage of
revenue, were 7.1% and 7.2% for the fiscal years ended September 30, 1998 and
1997, respectively.
Selling, general and administrative costs ("SG&A") for fiscal 1998
decreased $2,917,000, or 28.3%, from $10,306,000 in fiscal 1997 to $7,389,000.
Of this decrease, $1,973,000 pertains to charges recorded in the second quarter
of fiscal 1997, $1,002,000 of which was to increase the 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 and
$271,000 for various other miscellaneous items. Giving effect to these
adjustments, SG&A decreased $944,000 which is attributable to the reduction in
overhead costs implemented in the fourth fiscal quarter of 1997 as well as a
reevaluation by management of the bad debt reserve due to the payments on
previously nonperforming accounts.
Depreciation and amortization decreased $349,000 in fiscal 1998 due to
several intangible assets that have became fully amortized in the current fiscal
year. The decrease was also attributable to the writing off of $261,000 in
intangible assets of Digital Insurance Services, Inc. which ceased operations in
the fiscal year 1997.
Interest expense for fiscal year 1998 increased $177,000 to $554,000 from
$377,000 in fiscal 1997 due to an increase in debt financing and an increase in
the effective borrowing rate.
Income taxes for the fiscal year 1998 reflected a net tax benefit of
$1,296,000 primarily related to the 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, the management determined in June of 1998 that it is more likely
than not that the majority of such valuation allowance will be realized. As of
September 30, 1998, the Company's valuation allowance approximated $400,000.
Net income for fiscal 1998 was $2,703,000 versus a net loss of ($2,832,000)
in fiscal 1997. This increase is attributed to the $3.1 million in adjustments
recorded in fiscal 1997, the net tax benefit of $1,296,000 recorded in fiscal
1998, the growth of all businesses and the overhead reductions implemented in
the fourth fiscal quarter of 1997.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
Operating revenues for the fiscal year ended September 30, 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.
17
<PAGE> 18
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.
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 a subsidiary, 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,
Inc. 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 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 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.
18
<PAGE> 19
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital for fiscal year ended September 30, 1998 was
$3,319,000 versus a deficit of ($1,401,000) in fiscal 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 September 30,
1998, the Company had cash of $1,530,000 and net accounts receivable of
$6,891,000.
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. On 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
loan for $2.5 million, with a five year amortization, at prime + 3% (11.5% at
September 30, 1998), with a balance of $2,333,000 and $2,250,000 at September
30, 1998 and November 30, 1998, respectively and a $2 million revolving line of
credit secured by certain accounts receivable of the Company at prime + 1% (9.5%
at September 30, 1998), with a balance of $1,103,000 and $986,000 at September
30, 1998 and November 30, 1998, respectively. The credit facility is also
subject to success fees of $200,000, $225,000 and $250,000 due on the
anniversary date of the loan beginning in April, 1999. Taking these 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%.
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. In
September 1998, the Company negotiated and settled with Liberty Mutual Insurance
Company its liability on all workers' compensation claims incurred during the
three year period 1995, 1996 and 1997. In return for terminating all future
exposure under the Liberty Mutual workers' compensation policy, the Company
agreed to make a one-time payment of approximately $919,000. The settlement was
funded by allocating $738,000 of the Company's restricted cash, which had been
used to collateralize a portion of the letter of credit to Liberty Mutual and by
internal funds of $181,000. The $181,000 cash payment was offset somewhat by a
recent $50,000 equity investment by a new member of the Company's board of
directors and by approximately $45,000 in interest from the restricted cash
investments.
The management of the Company believes that its existing cash, available
borrowing capacity and anticipated borrowings in connection with the TeamStaff
acquisition will be sufficient to support cash needs through September 30, 1999.
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.
YEAR 2000 ISSUE
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 has evaluated the Year 2000 readiness of the
hardware and software
19
<PAGE> 20
products used by the Company. The Company's assessment covered the following
phases: (1) identification of all Products, IT Systems, and non-IT Systems, such
as building security and voice mail; (2) assessment of repair or replacement
requirements; (3) testing and (4) implementation. The assessment and the first
phases of testing and implementation were completed in 1998 and based on this,
the Company believes that with some modifications to existing software and
conversions to new software, the year 2000 issue will not pose significant
operational problems. The replacement, final testing and implementation will be
complete in February of 1999. The costs of these modifications are not expected
to have a material impact on the Company's financial position. However, the
assessment of whether a complete system or device will operate correctly depends
in large part on the Year 2000 compliance of the product or system's other
components, many of which are supplied by parties other than the Company. The
supplier of the Company's current financial and accounting software has informed
the Company that such software is Year 2000 compliant. Further, the Company
relies on various vendors, utility companies, telecommunication service
companies, delivery service companies and other service providers who are
outside of the Company's control. There is no assurance that such parties will
not suffer Year 2000 business disruption, which could impact the Company's
financial condition and results of operations.
The Company has discussed the year 2000 compliance issue with the
TeamStaff management and reviewed their computer systems. With the exception of
one major system, which is currently being updated to comply with this issue,
management believes the systems of the TeamStaff Companies are Year 2000
compliant. However, the TeamStaff Companies rely on various vendors, utility
companies, telecommunication service companies, delivery service companies and
other service providers who are outside of their control. There is no
assurance that such parties will not suffer Year 2000 business disruption,
which could impact TeamStaff's financial condition and results of operations.
In the event the one system of the TeamStaff Companies can not become Year 2000
compliant in a timely manner, the Company has the option of converting this
system to the Company's. The cost of this conversion would not be expected to
have a material impact on the Company's financial position.
As disclosed, the Company may be acquiring companies from time to
time and at the time of acquisition, the Company will evaluate the Year 2000
compliance issue regarding the computer systems of the entity to be acquired.
There can be no assurances that the systems of any potential acquisition will
be Year 2000 compliant or that the Company may not be required to expend funds
to update such systems.
NEW ACCOUNTING PRONOUNCEMENTS
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 fiscal periods
beginning after 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 March 1998, the AICPA issued Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Maintained
for Internal Use." SOP 98-1 provides guidance on the treatment of costs related
to internal use software. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998, at which time the Company will adopt the provisions. The
Company does not expect SOP 98-1 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 provisions. The Company does not
expect SOP 98-5 to have a material effect on reported results.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS
See Attached Financial Statements appearing at pages F-1 through F-17.
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 70 Chairman of the Board of Directors
George J. Eklund 55 Director
Donald T. Kelly 49 Vice President, Chief Financial Officer
and Corporate Secretary
Senator John H. Ewing 78 Director
William J. Marino 55 Director
Donald W. Kappauf 52 President and Chief Executive Officer
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.
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 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
21
<PAGE> 22
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.
Charles R. Dees, Jr. joined the Board of Directors in July, 1998. Mr.
Dees is a nationally known university administrator and former official of the
U. S. Department of Education. He is currently Senior Vice President for
Institutional Advancement of Fairleigh Dickinson University.
Martin J. Delaney also joined the Board of Directors in July, 1998. Mr.
Delaney is a prominent healthcare executive presently serving as President, CEO
and a director of the Winthrop-South Nassau University Health System, Inc., in
Long Island, New York.
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. There are no
interlocks between the Company's Directors and Directors of other companies.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During the fiscal year ended September 30, 1998, the Board of Directors
met on 5 occasions and acted by unanimous written consent on 5 occasions. The
Board of Directors is comprised of 8 persons and has 3 committees. Messrs
Dieckmann, Ewing and Marino are members of the Board's Compensation committee.
Messrs. Dieckmann, Ewing, Ecklund and Marino are members of the Board's Audit
Committee. Messrs Dieckmann, Kappauf and Marino are members of the Board's
Nominating Committee. The Audit Committee, the Nominating Committee and
Compensation Committee of the Board of Directors met on 1, 3 and 2 occasions,
respectively, during the fiscal year.
22
<PAGE> 23
ITEM 11. EXECUTIVE COMPENSATION
The following provides certain summary information concerning
compensation paid or earned by the Company during the years ended September 30,
1998, 1997 and 1996 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>
NAME AND ANNUAL COMPENSATION LONG TERM COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS/SAR'S
- ------------------ ---- ------ ----- ----- ----------------------
<S> <C> <C> <C> <C> <C>
George J. Eklund, (1)
Director 1998 $210,000 $0 $0 0
1997 $210,000 $0 $0 0
1996 $207,924 $100,000 $0 300,000
Donald W. Kappauf, (2)
Chief Executive Officer 1998 $173,308 $89,670 $16,991 200,000
1997 $121,154 $25,000 $0 0
1996 $110,000 $20,000 $0 0
Donald T. Kelly, (3)
Chief Financial Officer 1998 $151,038 $45,000 $0 50,000
1997 $ 90,865 $20,000 $0 30,000
</TABLE>
(1) Mr. Eklund's employment with the Company commenced on September 19, 1994.
He assumed the position of Chief Executive Office in March 1996. In
December 1997 due to health concerns, his position changed. Mr.
Eklund remains a Director.
(2) The 1997 salary 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 vice president was $105,288.
Compensation for 1996 was for his position as Division Vice President.
Other compensation includes car and car insurance.
(3) Mr. Kelly was granted a sign on bonus of $20,000 at employment, on
January 20, 1997.
The Company provides normal and customary life and health insurance
benefits to all of its employees including executive officers. The Company 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 $1,000 per board meeting, related travel
expenses, and $400 for each committee meeting. The Directors' Plan also provides
that directors, upon joining
23
<PAGE> 24
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.
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 and proforms special projects work
for compensation. 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.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
PERCENTAGE OF
NO. OF SECURITIES TOTAL OPTIONS/
UNDERLYING OPTIONS GRANTED IN FISCAL EXERCISE OF BASE
NAME GRANTED YEAR PRICE PER SHARE EXPIRATION DATE
- ------------------------------- -------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Donald Kappauf 100,000 38% $1.9375 08/27/2002
Donald Kappauf 100,000 38% $1.9375 01/02/2003
Donald Kelly 50,000 19% $1.9375 01/02/2003
</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, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED MONEY OPTIONS AS
SHARES OPTIONS/SARS OF SEPTEMBER 30,
ACQUIRED SEPTEMBER 30, 1998 1998
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
George J. Eklund 0 0 380,000/120,000 $0/$0
Donald W. Kappauf 0 0 175,000/125,000 $0/$0
Donald T. Kelly 0 0 45,000/35,000 $0/$0
</TABLE>
(1) Based upon a closing bid price of the Common Stock at $1 1/16 per
share on September 30, 1998.
24
<PAGE> 25
1990 STOCK OPTION PLANS
In April, 1990, the Board of Directors adopted the 1990 Employees Stock
Option Plan (the "1990 Plan") which was approved by shareholders in August,
1990. The 1990 Plan provides for the grant of options to purchase up to
1,000,000 shares of the Company's common stock. Under the terms of the 1990
Plan, options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Code, or
options which do not so qualify ("Non-ISO's").
The 1990 Plan is administered by a Stock Option Committee designated by
the Board of Directors. The Stock Option Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted; whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option. The Committee has full authority to interpret the 1990
Plan and to establish and amend rules and regulations relating thereto.
Under the 1990 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the common stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent (10%) shareholder (as defined in the 1988 Plan), such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to
a participant, which are designated as ISOs and which become exercisable in any
calendar year, shall not exceed $100,000.
The Stock Option Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1990 Plan will expire in April 2000.
In April 1990, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by
shareholders in August, 1991 and amended in March 1996. The Director Plan
provides for issuance of a maximum of 500,000 shares of common stock upon the
exercise of stock options arising under the Director Plan. Options may be
granted under the Director Plan until April, 2000 to: (i) non-executive
directors as defined and, (ii) members of any advisory board established by the
Company who are not full-time employees of the Company or any of its
subsidiaries. The Director Plan provides that each non-executive director is
automatically granted an option to purchase 5,000 shares upon joining the Board
and each September lst, pro rata, based on the time the director has served in
such capacity during the previously year. Similarly, each eligible director of
an advisory board will receive on each September lst an option to purchase 5,000
shares of the Company's common stock each September lst. The Directors' Plan
also provides that directors, upon joining the Board, and for one (1) year
thereafter, will be entitled to purchase restricted stock from the Company at a
price equal to 80% of the closing bid price on the date of purchase up to an
aggregate purchase price of $50,000.
The exercise price for options granted under the Director Plan shall be
100% of the fair 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
25
<PAGE> 26
the interpretation of the Director Plan. Options granted under the Director Plan
are not qualified for incentive stock option treatment.
In April 1990, the Board of Directors adopted and in August, 1990, the
Company's shareholders approved the Senior Management Incentive Plan (the
"Management Plan") for use in connection with the issuance of stock, options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
It is contemplated that only those executive management employees (generally the
Chairman of the Board, Chief Executive Officer, Chief Operating Officer,
President and Vice Presidents of the Company or Presidents of the Company's
subsidiaries) who perform services of special importance to the Company will be
eligible to participate under the Management Plan. A total of 5,000,000 shares
of common stock will be reserved for issuance under the Management Plan. Awards
made under the Management Plan will be subject to three (3) year vesting
periods, although the vesting periods are subject to the discretion of the
Administrator.
Unless otherwise indicated, the Management Plan is to be administered
by the Board of Directors or a committee of the Board, if one is appointed for
this purpose (the Board or such committee, as the case may be, shall be referred
to in the following description as the "Administrator"). The Management Plan
generally provides that, unless the Administrator determines otherwise, each
option or right granted under a plan shall become exercisable in full upon
certain "change of control" events as described in the Management Plan. If any
change is made in the stock subject to the Management Plan, or subject to any
right or option granted under the Management Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Administrator will make appropriate adjustments to such plans and the classes,
number of shares and price per share of stock subject to outstanding rights or
options. The Management Plan permits awards until April, 2000.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan.
The Management Plan provides four types of awards: stock options,
incentive stock rights, stock appreciation rights (including limited stock
appreciation rights) and restricted stock purchase agreements, as described
below.
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.
26
<PAGE> 27
Restricted shares awarded under the Management Plan will be subject to
a period of time designated by the Administrator (the "restricted period")
during which the recipient must continue to render services to the Company
before the restricted shares will become vested. The Administrator may also
impose other restrictions, terms and conditions that must be fulfilled before
the restricted shares may vest.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
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) 325,743 1.7%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
George J. Eklund(3) 459,545 2.4%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Senator John H. Ewing(4) 128,125 *
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. Phd(8) 5,000 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Martin J. Delaney(9) 116,823 *
c/o Digital Solutions, Inc.
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C> <C>
300 Atrium Drive
Somerset, NJ 08873
All officers and directors as a group 1,733,951 8.96%
(6)persons (2,3,4,5,6,7,8,9)
</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.
(3) Includes options to purchase 380,000 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 the Company's common
stock, and warrants to purchase 2,500 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(5) Includes options to purchase 15,000 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) Includes options to purchase 5,000 shares of common stock, and excludes
unvested options to purchase 1,250 shares of common stock.
(9) Includes options to purchase 5,000 shares of common stock, and excludes
unvested options to purchase 1,250 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". The Directors' Plan 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.
28
<PAGE> 29
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-16 and includes
page S-1.
2. All other schedules have been omitted since the required information
is not applicable 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. 201.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 -- Agreement for purchase of Temp-Staff, Inc. (Exhibit 3 to
Form 8-K dated May 17, 1990).
2.2 -- Agreement for purchase of X-L Technical Corp. (Exhibit 2a
to Form 8-K dated October 31, 1990).
2.3 -- 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 A to Proxy
Statement of Digital Solutions, Inc. dated November 12,
1998).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (Exhibit A to Definitive Proxy Material dated
July 20, 1990).
3.1.1 -- Form of Amendment to Amended and Restated Certificate of
Incorporation (filed as Exhibit G to the Company's Proxy
Statement dated November 12, 1998 as filed with the
Securities and Exchange Commission).
3.2 -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March
21, 1990).
10.2 -- Employment Agreement with Donald Kappauf (Exhibit 3 to Form
8-K dated May 17, 1990).
10.4 -- Agreement between Registrant and First Fidelity Bank, N.A.
(Exhibit 10.4 to form 10-K for fiscal year ended September
30, 1991).
10.5 -- Agreement between Registrant and Midlantic Banks, Inc. dated
October 11, 1991 (Exhibit 10.5 to form 10-K for fiscal year
ended September 30, 1991).
10.6 -- Lease dated 10/15/91 for office space at 4041 Hadley Road,
South Plainfield, New Jersey (Exhibit 10.6 to form 10-K for
fiscal year ended September 30, 1991).
10.7 -- Employment Agreement between Karl Dieckmann and the Company
dated November 1, 1991 (Exhibit 10.7 to form 10-K for fiscal
year ended September 30, 1991).
10.6.1 -- Lease dated May 30, 1997 for office space at 300 Atrium,
Somerset, New Jersey (Exhibit 10.6.1 to Form 10K for the
fiscal year ended September 30, 1997).
10.15.1 -- Employment agreement between George J. Eklund and the
Company dated March 12, 1996 (Exhibit 10.15.1 to Form 10K
for the fiscal year ended September 30, 1997).
10.15.2 -- Amended employment agreement between George J. Eklund and
the Company dated December 16, 1997 (Exhibit 10.15.2 to Form
10K for the fiscal year ended September 30, 1997).
10.10 -- Employment Contract between David L. Clark and the Company
dated January 1, 1993.
10.11 -- Bridge financing between Katie and Adam Bridge Partners,
L.P. and the Company in June 1993.
10.12 -- Sales representation agreement between Sid A. Robinson, III
and the Company dated April 14, 1993.
10.13 -- Agreement between Staff Leasing of Mississippi, Inc. and the
Company for purchase of business and assets dated November
4, 1993.
10.15 -- Employment agreement between George J. Eklund and the
Company dated September 19, 1994.
10.16.1 -- Seventh Amended Loan Agreement between Registrant and Summit
Bank and sixth amended Promissory Note (Exhibit 10.16.1 to
Form 10K for the fiscal year ended September 30, 1997).
10.17* -- Loan and Security Agreement dated April 28, 1998 among
Digital Solutions, Inc. and Finova Capital Corporation.
10.18* -- Secured Promissory Note in the principal amount of
$2,500,000 dated April 28, 1998 in favor of Finova Capital
Corporation.
10.19* -- Stock Pledge Agreement (Security Agreement) dated April 28,
1998 between Finova Capital Corporation and Digital
Solutions, Inc.
10.20* -- Employment Agreement between Donald Kappauf and the
Registrant dated January 1, 1998.
21.* -- Subsidiaries of Registrant.
23.1* -- Consent of Arthur Andersen, LLP to the incorporation of its
report on the Company's financial statements for the fiscal
year ended 1998 into the Company's previously filed
registration Statements on form S-3 file number 33-85526,
33-70928, 33-91700 and 33-09313.
27.* -- Financial Data Schedule.
(b) Reports on Form 8-K.
None
(c) Exhibits. See Item (a)(3) above.
(d) Financial Statement Schedule. See Schedule II annexed hereto and appearing
at page S-1.
29
<PAGE> 30
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 11, 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.
<TABLE>
<S> <C> <C>
/s/George J. Eklund Director January 11, 1998
- ------------------------------
George J. Eklund
/s/Karl W. Dieckmann Chairman of the Board January 11, 1998
- ------------------------------
Karl W. Dieckmann
/s/John H. Ewing Director January 11, 1998
- ------------------------------
Senator John H. Ewing
/s/William J. Marino Director January 11, 1998
- ------------------------------
William J. Marino
/s/Charles R. Dees, Jr. Phd Director January 11, 1998
- ------------------------------
Charles R. Dees, Jr. Phd
/s/Martin J. Delaney Director January 11, 1998
- ------------------------------
Martin J. Delaney
/s/Donald W. Kappauf President & Chief January 11, 1998
- ------------------------------ Executive Officer
Donald W. Kappauf
/s/Donald T. Kelly Chief Financial Officer January 11, 1998
- ------------------------------ & Corporate Secretary
Donald T. Kelly
</TABLE>
30
<PAGE> 31
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report Of Independent Public Accountants F-2
Consolidated Balance Sheets As Of September 30, 1998 and 1997 F-3
Consolidated Statements Of Operations For The Years Ended
September 30, 1998, 1997 and 1996 F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 1998, 1997 and 1996 F-6
Consolidated Statements Of Cash Flows For The Years Ended F-7
September 30, 1998, 1997 and 1996
Notes To Consolidated Financial Statements F-8
Schedule I -- Valuation And Qualifying Accounts For The Years Ended
September 30, 1998, 1997 and 1996 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
F-1
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Digital Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Solutions, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 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
November 21, 1998
F-2
<PAGE> 33
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,530,000 $ 841,000
Restricted cash 0 738,000
Accounts receivable, net of allowance for doubtful accounts
of $284,000 at September 30, 1998 and $862,000
at September 30, 1997 6,891,000 5,820,000
Other current assets 691,000 402,000
----------- -----------
Total current assets 9,112,000 7,801,000
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,336,000 3,170,000
Leasehold improvements 47,000 47,000
----------- -----------
3,383,000 3,217,000
Less - accumulated depreciation and amortization 2,591,000 2,310,000
----------- -----------
792,000 907,000
DEFERRED TAX ASSET 1,782,000 760,000
GOODWILL, net of accumulated amortization of $1,082,000 in 1998
and $835,000 in 1997 4,096,000 4,344,000
OTHER ASSETS 866,000 351,000
----------- -----------
$16,648,000 $14,163,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE> 34
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 0 $ 2,697,000
Current portion of long-term debt 540,000 113,000
Accounts payable 1,792,000 2,254,000
Accrued expenses and other current liabilities 3,461,000 4,138,000
------------ ------------
Total current liabilities 5,793,000 9,202,000
LONG-TERM DEBT, net of current portion 2,981,000 89,000
------------ ------------
Total liabilities 8,774,000 9,291,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; authorized 40,000,000 shares; issued and
outstanding 19,356,833 in 1998 and 19,141,760 in
1997 19,000 19,000
Additional paid-in capital 13,692,000 13,393,000
Accumulated deficit (5,837,000) (8,540,000)
------------ ------------
7,874,000 4,872,000
------------ ------------
$ 16,648,000 $ 14,163,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE> 35
\ DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 139,675,000 $ 122,695,000 $ 100,927,000
DIRECT EXPENSES 129,747,000 113,894,000 92,490,000
------------- ------------- -------------
Gross profit 9,928,000 8,801,000 8,437,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,389,000 10,306,000 7,972,000
DEPRECIATION AND AMORTIZATION 661,000 1,010,000 829,000
------------- ------------- -------------
Income (loss) from operations 1,878,000 (2,515,000) (364,000)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 83,000 60,000 173,000
Interest expense (554,000) (377,000) (422,000)
Other income 0 0 50,000
------------- ------------- -------------
(471,000) (317,000) (199,000)
------------- ------------- -------------
Income (loss) before income taxes 1,407,000 (2,832,000) (563,000)
INCOME TAX BENEFIT (EXPENSE) 1,296,000 0 (34,000)
------------- ------------- -------------
Net income (loss) $ 2,703,000 $ (2,832,000) $ (597,000)
============= ============= =============
EARNINGS (LOSS) PER SHARE - BASIC $ 0.14 $ (0.15) $ (0.04)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,271,897 19,070,349 16,840,371
============= ============= =============
EARNINGS (LOSS) PER SHARE - DILUTED $ 0.14 $ (0.15) $ (0.04)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING 19,403,298 19,070,349 16,840,371
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 36
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Shares Issued Paid-In Accumulated
(Retired) Amount Capital Deficit
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
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)
Common stock issued in connection with financing 156,250 -- 250,000 --
Common stock issued 58,823 -- 49,000 --
Net income -- -- -- 2,703,000
---------- ------------ ------------ ------------
BALANCE, September 30, 1998 19,356,833 $ 19,000 $ 13,692,000 $ (5,837,000)
========== ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 37
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,703,000 $(2,832,000) $ (597,000)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities-
Deferred income taxes (1,402,000) 0 0
Depreciation and amortization 661,000 1,010,000 829,000
Provision for doubtful accounts (247,000) 1,120,000 462,000
Stock issued for employee bonus 0 100,000 85,000
Changes in operating assets and liabilities-
Increase in accounts receivable (824,000) (602,000) (1,871,000)
(Increase) decrease in other current assets (289,000) (106,000) 239,000
Increase in other assets (249,000) 0 0
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities (1,139,000) 1,855,000 (278,000)
Decrease in other liabilities 0 0 (75,000)
Decrease (increase) in restricted cash 738,000 417,000 (1,155,000)
----------- ----------- -----------
Net cash (used in) provided by operating
activities (48,000) 962,000 (2,361,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (184,000) (361,000) (187,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit $ 1,103,000 $ 410,000 $ (225,000)
Proceeds from borrowings on long term debt 2,500,000 0 0
Principal payments on long-term debt (167,000) 0 (941,000)
Payments on revolving line of credit (2,697,000) (620,000) 0
Principal payments on subordinated bridge loan 0 0 (1,887,000)
(Repayments) proceeds on capital leases obligations (117,000) 14,000 71,000
Net proceeds from issuance of common stock, net of expenses 299,000 0 4,757,000
Net proceeds from the exercise of stock options and warrants 0 234,000 753,000
Proceeds from LNB settlement, net of expenses 0 202,000 0
----------- ----------- -----------
Net cash provided by financing activities 921,000 240,000 2,528,000
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 689,000 841,000 (20,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 841,000 0 20,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,530,000 $ 841,000 $ 0
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 439,000 $ 363,000 $ 412,000
=========== =========== ===========
Taxes $ 80,000 $ 31,000 $ 25,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Value of common stock retired in satisfaction of
shareholder loans $ 0 $ 0 $ 679,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
<PAGE> 38
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
Digital Solutions, Inc. ("DSI" or the "Company"), a New Jersey
Corporation, 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. The Company has regional offices in Somerset,
New Jersey; Houston, Texas; and Clearwater, Florida and sales service
centers in New York, New York; El Paso and Houston, Texas; Clearwater,
Florida; and Somerset, New Jersey.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION-
The accompanying consolidated financial statements include those of DSI
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 within the period
reflected 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.
NEW ACCOUNTING PRONOUNCEMENTS-
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 fiscal periods beginning
after 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.
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 RECOGNITION-
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 expenses. Payroll
services, commissions and other fees for administrative services are
recognized as revenue as the related service is provided.
F-8
<PAGE> 39
CONCENTRATIONS OF CREDIT RISK-
The Company's customer base consists of over 1,220 client companies,
representing approximately 34,000 employees (including payroll
services) as of September 30, 1998. 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.
CASH EQUIVALENTS-
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.
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. Goodwill amortization expense charged to
operations was approximately $247,000 for fiscal year 1998, $434,000
for fiscal year 1997 and $415,000 for fiscal year 1996. Amortization
expense for 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 companies acquired experiencing operating cash flow
deficits, 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
of additional amortization to depreciation and amortization for the
year ended September 30, 1996.
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.
INCOME TAXES-
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based
on the differences between the financial statement and the tax basis of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
RECLASSIFICATIONS-
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
EARNINGS PER SHARE-
In February 1997, the FASB issued Statement on Financial Accounting
Standards Number 128, "Earnings Per Share" ("SFAS No. 128"), which
requires the presentation of basic earnings per share ("Basis EPS") and
diluted earnings per share ("Diluted EPS"). Basic EPS is calculated by
dividing income available to common shareholders by the weighted
average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period adjusted to reflect potentially dilutive
securities.
F-9
<PAGE> 40
In accordance with SFAS 128, the following table reconciles net income
(loss) and share amounts used to calculate basic earnings per share and
diluted earnings per share:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 2,703,000 $ (2,832,000) $ (597,000)
------------ ------------ ------------
Denominator:
Weighted average number of common shares
outstanding - Basic 19,271,897 19,070,349 16,840,371
Incremental shares for assumed conversions
of stock options/warrants 131,401 0 0
------------ ------------ ------------
Weighted average number of common and
equivalent shares outstanding-Diluted 19,403,298 19,070,349 16,840,371
------------ ------------ ------------
Earnings (loss) per share - Basic $ 0.14 $ (0.15) $ (0.04)
Earnings (loss) per share - Diluted $ 0.14 $ (0.15) $ (0.04)
</TABLE>
Stock options and warrants outstanding at September 30, 1998 to
purchase 925,229 shares of common stock were not included in the
computation of Diluted EPS as they were antidilutive.
(3) INCOME TAXES:
At September 30, 1998, the Company had available operating loss
carryforwards of approximately $6,538,000 to reduce future periods'
taxable income. The carryforwards expire in various years beginning in
2004 and extending through 2012.
The Company has recorded a $2,162,000 and a $760,000 deferred tax asset
at September 30, 1998 and 1997, respectively. This represents
management's estimate of the income tax benefits to be realized upon
utilization of a portion of its net operating losses as well as temporary
differences between the financial statement and tax bases of certain
assets and liabilities, for which management believes utilization to be
more likely than not. In order for the Company to realize a $2,162,000
deferred tax asset, the Company would have to generate approximately
$6,000,000 in future taxable income. Management believes the Company's
operations can generate sufficient taxable income to realize this
deferred 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.
An analysis of the Company's deferred tax asset is as follows-
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 2,350,000 $ 2,976,000
Allowance for doubtful accounts 102,000 310,000
Other items, net 110,000 154,000
----------- -----------
Gross deferred income tax asset 2,562,000 3,440,000
Valuation allowance (400,000) (2,680,000)
----------- -----------
Deferred income tax asset $ 2,162,000 $ 760,000
=========== ===========
</TABLE>
As of September 30, 1998 other current assets included $380,000 related
to the deferred tax asset.
F-10
<PAGE> 41
The components of the income tax (benefit) expense for income taxes are
summarized as follows-
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1998 1997 1996
----------- ---- --------
<S> <C> <C> <C>
Current expense $ 106,000 $ 0 $ 34,000
Deferred benefit (1,402,000) 0 0
----------- ---- --------
Total (benefit) expense $(1,296,000) $ 0 $ 34,000
=========== ==== ========
</TABLE>
The following table indicates the significant elements contributing to
the difference between the Federal statutory rates and the Company's
effective tax rate-
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% (34)% (34)%
State taxes net of federal income tax benefit 5% 0% 1%
Valuation allowance 0% 34% 34%
Reversal of valuation allowance (134)% 0% 0%
Other 3% 0% 0%
---- ---- ----
(92%) 0% 1%
==== ==== ====
</TABLE>
(4) DEBT:
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. On September 30, 1997 the total amount
outstanding on the Line was $2,697,000. The maximum amount outstanding
during 1997 was $3,017,000, the weighted average balance outstanding
during 1997 was $2,916,000 and the weighted average interest rate was
11.16%. 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 $4,500,000. Substantially all assets of the
Company secure the credit facility. The facility includes a three year
loan for $2,500,000, with a five year amortization, at prime + 3% (11.5%
as of September 30, 1998) and a $2 million revolving line of credit
secured by certain accounts receivable of the Company at prime + 1% (9.5%
as of September 30, 1998). The credit facility is also subject to success
fees of $200,000, $225,000 and $250,000 due on the anniversary date of
the loan. Taking these 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 credit facility is
subject to certain covenants including but not limited to a minimum
current ratio, debt to net worth ratio, a minimum net worth and a minimum
debt service coverage ratio, as defined.
Long-term debt at September 30, 1998 and 1997 consists of the following-
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revolving Loan $ 1,103,000 $ 0
Term Loan 2,333,000 0
Capital leases 85,000 202,000
----------- -----------
3,521,000 202,000
Less- Current portion (540,000) (113,000)
----------- -----------
$ 2,981,000 $ 89,000
=========== ===========
</TABLE>
Maturities of long-term debt as of September 30, 1998 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
------------
<S> <C>
1999 $ 540,000
2000 535,000
2001 2,446,000
----------
$3,521,000
==========
</TABLE>
F-11
<PAGE> 42
(5) ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 1998
and 1997 consist of the following-
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Payroll and payroll taxes $2,415,000 $2,271,000
Worker's compensation insurance 403,000 1,321,000
Legal 0 134,000
Other 643,000 412,000
---------- ----------
$3,461,000 $4,138,000
========== ==========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES:
LEASES-
Minimum payments under noncancellable lease obligations at September
30, 1998 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
------------
<S> <C>
1999 $ 572,000
2000 434,000
2001 353,000
2002 308,000
2003 320,000
Thereafter 1,281,000
----------
$3,268,000
==========
</TABLE>
Rent expense under all operating leases was $630,000 in 1998, $537,000
in 1997 and $627,000 in 1996.
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,
this accrual amounted to $818,000. In September 1998, the Company
negotiated and settled with Liberty Mutual Insurance Company its
liability on all workers' compensation claims incurred during the three
year period 1995, 1996 and 1997. In return for terminating all future
exposure under the Liberty Mutual workers' compensation policy, the
Company agreed to make a one-time payment of approximately $919,000.
The settlement was funded by allocating $738,000 of the Company's
restricted cash, which had been used to collateralize a portion of the
letter of credit to Liberty Mutual and by internal funds of $181,000.
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 is required to fund the
anticipated loss reserves on a current basis. During the twelve months
ended September 30, 1998 and 1997, the Company recognized approximately
$774,000 and $868,000, respectively, as its share of premiums collected
from customers covered by these policies in excess of claims and fees
paid by the Company.
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 maximum of 7,500,000 shares were pledged
as collateral.
F-12
<PAGE> 43
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 ($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
28, 1998 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.
The Company's subsidiary, DSI Staff Connxions-Southwest, Inc., is the
defendant in a lawsuit whereby a former leased employee of a client
obtained a judgment against the Company during August, 1998 in the
amount of $315,000 including interest. The judgment includes
approximately $115,000 in compensatory damages and $200,000 in punitive
damages. The Company has posted a bond for the full amount of the
judgment and is appealing the judgment. Management of the Company,
after consultation with counsel, believes that there is no basis for
the awarding of punitive damages, and that the award of compensatory
damages was based on insufficient evidence. Although there can be no
assurances the Company will be successful in prosecuting the appeal,
the management of the Company, after consultation with counsel,
believes it will obtain a reversal of the judgment. If the Company is
not successful with the appeal, the Company would record expense of
$315,000.
The Company is also a defendant in a lawsuit which is currently pending
in the Superior Court of New Jersey. This action was brought by a
competitor of the Company in connection with the transfer of several
former clients of the competitor to the Company. The Company has denied
the material allegations of the complaint. Discovery in the case is in
the preliminary stages. The plaintiffs have submitted a calculation of
damages of $300,000 for the claims identified in the lawsuit which
includes damages for clients which never became clients of the Company.
Although there can be no assurances the Company will be successful
in defending the claim, management of the Company, after consultation
with counsel, believes it has meritorious defenses against the claim.
At September 30, 1998 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.
(7) 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. 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 Subordinated Bridge Notes,
collateralize letters of credit issued to secure the Company's
workers' compensation program 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.
F-13
<PAGE> 44
STOCK WARRANTS-
The following is a summary of the outstanding warrants to purchase the
Company's common stock at September 30, 1998 as a result of various
debt and equity offerings that have occurred since the Company's
inception:
<TABLE>
<CAPTION>
Number of Shares of
Exercise Period Exercise Period Exercise Price Per Common Stock
From To Common Share Reserved
- --------------- --------------- ------------------ -------------------
<S> <C> <C> <C>
October 1991 October 2001 0.75 100,000
November 1993 November 1998 1.19 5,000
January 1995 January 2000 1.90 64,350
April 1995 April 2000 2.50 5,000
October 1995 October 2000 2.25 25,000
December 1995 December 2000 1.56 5,000
June 1996 June 2001 2.70 219,879
February 1998 February 2003 2.06 25,000
-------
449,229
=======
</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 not employees of the Company and non-employee 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 non-executive directors and 5,000 each
September 1, commencing September 1, 1990 provided such person had been
eligible for the preceding 12 months. Directors of advisory boards will
receive on each September 1 an option to purchase 10,000 shares of
common stock, providing such director has served as a director of the
advisory board for the previous 12 month period. The term of each
option commences on the date it is granted and expires five years from
grant date unless terminated sooner as provided in the Director Plan.
The 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 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 years ended September 30, 1998, 1997 and 1996:
F-14
<PAGE> 45
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF EXERCISE FAIR
SHARES PRICE VALUE
<S> <C> <C> <C>
Options outstanding, September 30, 1995 1,708,464 $1.55
Granted 512,750 $4.63 $2.40
Exercised (794,157) $1.06
Canceled (129,709) $2.52
Options outstanding, September 30, 1996 1,297,348 $2.73
Granted 105,000 $1.88 $1.12
Exercised (204,471) $1.79
Canceled (353,502) $3.41
Options outstanding, September 30, 1997 844,375 $2.72
Granted 260,000 $1.95 $1.05
Exercised -- --
Canceled (98,250) $2.79
--------- -----
Options outstanding, September 30, 1998 1,006,125 $2.52
========= =====
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 9/30/98 LIFE PRICE AT 9/30/98 PRICE
-------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.75 - 1.25 121,125 0.1 $1.12 121,125 $1.12
$1.56 - 2.51 332,000 4.2 $1.94 214,000 $1.93
$2.44 - 4.00 525,000 2.0 $3.07 405,000 $2.95
$4.44 - 6.50 28,000 5.2 $5.04 28,000 $5.04
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 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 5.73%, 6.31% and 6.64% in 1998, 1997 and
1996, and expected option life of 4 years. Expected volatility was
assumed to be 64%, 73% and 78% in 1998, 1997 and 1996, respectively.
As permitted by SFAS 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) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income (loss) as reported $ 2,703 $(2,832) $ (597)
Estimated fair value of option grants, net of tax (82) (76) (788)
------- ------- -------
Net income (loss) adjusted $ 2,621 $(2,908) $(1,385)
------- ------- -------
Adjusted net earnings (loss) per share $ 0.14 $ (0.15) $ (0.08)
======= ======= =======
</TABLE>
F-15
<PAGE> 46
(8) SUBSEQUENT EVENT:
Effective as of October 29, 1998, the Company entered into two separate
agreements entitled Plan and Agreement of Merger and Reorganization,
dated as of October 29, 1998, with the TeamStaff Companies and the
shareholders owning all of the shares of the TeamStaff Companies. On
December 17, 1998, the Company held a Special Meeting of Shareholders
in Somerset, New Jersey at which meeting the acquisition of the
TeamStaff Companies was approved by the Company's shareholders. The
acquisition is expected to be consummated in January, 1999 following
receipt of financing from the Company's primary lender, FINOVA in the
amount of upwards to $4,500,000. Pursuant to the terms of the
acquisition, the Company will issue 8,233,334 million shares of its
common stock in exchange for all of the common stock of the TeamStaff
Companies and $3.1 million in cash for all the preferred stock and for
payment of outstanding debt. The acquisition will be accounted for
utilizing the purchase method of accounting. The revenue and net loss
of the TeamStaff Companies for the twelve months ended December 31,
1997 were $105,246,000 and $352,000, respectively.
F-16
<PAGE> 47
SCHEDULE I
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(c)
Additions
Charged to
(b) (reversed (d) (e)
Balance from) Costs Deductions - Balance
at Beginning and Net Write- at End of
(a) Description of Year Expenses Offs Year
--------------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts, year ended-
September 30, 1998 $ 862,000 $ (247,000) $ (331,000) $ 284,000
=========== =========== =========== ===========
September 30, 1997 $ 339,000 $ 1,120,000 $ (597,000) $ 862,000
=========== =========== =========== ===========
September 30, 1996 $ 150,000 $ 462,000 $ (273,000) $ 339,000
=========== =========== =========== ===========
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.17
LOAN AND SECURITY AGREEMENT
DIGITAL SOLUTIONS, INC.
DSI-CONTRACT STAFFING, INC.
DSI-STAFF CONNXIONS-NORTHEAST, INC.
DSI-STAFF CONNXIONS-SOUTHWEST, INC.
DSI-STAFF RX, INC.
CO-BORROWERS
300 ATRIUM DRIVE, SOMERSET, NEW JERSEY 08873
$4,500,000
CREDIT LIMIT
APRIL 28, 1998
CORPORATE FINANCE
<PAGE> 2
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to
Loan Agreement (the "SCHEDULE") attached hereto, the "AGREEMENT") dated the date
set forth on the cover page, is entered into by and between the borrowers named
on the cover page (each individually, a "Borrower", and, collectively, the
"Borrowers"), whose address is set forth on the cover page and FINOVA CAPITAL
CORPORATION ("FINOVA"), whose address is 355 South Grand Avenue, Los Angeles,
California 90071.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
the definitions set forth below:
"ADA" has the meaning set forth in Section 4.1(aa) hereof.
"Additional Sums" has the meaning set forth in Section 2.9(a) hereof.
"Affiliate" means any Person controlling, controlled by or under common
control with any Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of any Person, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer or director of any Borrower, any subsidiary of any
Borrower, any other Person with whom or which any Borrower has common officers
or directors, any Person that owns more than five percent (5%) of the voting
stock of any Borrower (an "affiliate stockholder"), and any Person in which an
affiliate stockholder owns more than five percent (5%) of the voting stock.
"Agreement" has the meaning set forth in the preamble.
"Applicable Usury Law" has the meaning set forth in Section 2.9(b)
hereof.
"Blocked Account" has the meaning set forth in Section 2.10(c) hereof.
"Business Day" means any day on which commercial banks in both Los
Angeles, California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities
incurred for the acquisition of any fixed asset or improvement, replacement,
substitution or addition thereto which has a useful life of more than one year
and including, without limitation, those arising in connection with Capital
Leases.
"Capital Lease" means any lease of property by a Borrower that, in
accordance with GAAP, should be capitalized for financial reporting purposes and
reflected as a liability on the balance sheet of such Borrower.
"Cash Dominion Event" means (i) with respect to a Blocked Account
containing proceeds of Receivables attributable to the PEO Business, the
occurrence and continuation of an Event of Default described in Section 7.1(a),
7.1(b) (with respect to a breach of Section 2.10, 3.8, 6.1.13, 6.2.1, 6.2.2,
6.2.3, 6.2.5, 6.2.8, 6.2.11, 6.2.12, or 9.1 (b)), or 7.1(c) through 7.1(j) or
(ii) with respect to a Blocked Account not containing proceeds of Receivables
attributable to the PEO Business, either (A) the occurrence and continuation of
an Event of Default or (B) the passage of five (5) days after FINOVA gives
written notice to DSI that FINOVA has determined, in its Permitted Discretion,
that the transfer of Receivables collections to FINOVA is advisable to protect
FINOVA's rights and remedies and FINOVA intends to instruct the bank maintaining
the Blocked Account to transfer funds in the Blocked Account only to FINOVA.
"Change of Control" means (i) a "person" or a "group" (within the
meaning of Sections 13(d) and 14(d)(ii) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 30% of the total
voting power of the voting stock of DSI on a fully diluted basis or (ii) a
majority of the Board of Directors of DSI then in office shall not consist of
individuals who on the Closing Date constitute the Board of Directors of DSI, or
new directors whose election, or whose nomination for election by stockholders,
was approved by at least two thirds of the members of the Board of Directors
then in office who were either members of the Board of Directors on the Closing
Date or whose election or nomination was previously so approved.
"Closing Fee" has the meaning set forth in the Schedule.
"Closing Date" means the date of the initial advance made by FINOVA
pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in
the State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
"Current Assets" at any date means the amount at which the current
assets of DSI and its subsidiaries would be shown on a consolidated balance
sheet of DSI and its subsidiaries as at such date, prepared in accordance with
<PAGE> 3
GAAP, provided that amounts due from Affiliates and investments in Affiliates
shall be excluded therefrom.
"Current Liabilities" at any date means the amount at which the current
liabilities of DSI and its subsidiaries would be shown on a consolidated balance
sheet of DSI and its subsidiaries as at such date, prepared in accordance with
GAAP.
"Deposit Accounts" has the meaning set forth in Section 9105 of the
Code.
"Dominion Account" has the meaning set forth in Section 2.10(c) hereof.
"DSI" means Digital Solutions, Inc., a New Jersey corporation.
"Eligible Receivables" of a Borrower means Receivables of such Borrower
arising in the ordinary course of such Borrower's business from the sale of
goods or rendition of services, which FINOVA, in its Permitted Discretion, shall
deem eligible based on such considerations as FINOVA may from time to time deem
appropriate. Without limiting the foregoing, a Receivable shall not be deemed to
be an Eligible Receivable if (i) the account debtor has failed to pay the
Receivable within a period of sixty (60) days after invoice date, to the extent
of any amount remaining unpaid after such period; (ii) the account debtor has
failed to pay more than 25% of all outstanding Receivables owed by it to any
Borrower within sixty (60) days after invoice date; (iii) the account debtor is
an Affiliate of any Borrower; (iv) the services relating thereto are sold on
terms pursuant to which payment by the account debtor may be conditional; (v)
the account debtor is not located in the United States, unless the Receivable is
supported by a letter of credit or other form of guaranty or security, in each
case in form and substance satisfactory to FINOVA; (vi) the account debtor is
the United States or any department, agency or instrumentality thereof, unless
the applicable Borrower has complied with the Federal Assignment of Claims Act
with respect to such Receivable, or the account debtor is any state, city or
municipality of the United States, or any department, agency, or
instrumentability thereof, if any action other than pursuant to the Uniform
Commercial Code is required to perfect FINOVA's security interest in such
Receivable, unless such action has been taken to the satisfaction of FINOVA;
(vii) any Borrower is or may become liable to the account debtor for goods sold
or services rendered by the account debtor to any Borrower; (viii) the account
debtor's total obligations to any Borrower exceed 15% of all Eligible
Receivables of such Borrower, to the extent of such excess; (ix) the account
debtor disputes liability or makes any claim with respect thereto (up to the
amount of such liability or claim), or is subject to any insolvency or
bankruptcy proceeding, or becomes insolvent, fails or goes out of a material
portion of its business; (x) the amount thereof consists of late charges or
finance charges; (xi) the amount thereof consists of a credit balance more than
sixty (60) days past due; (xii) the face amount thereof exceeds $20,000, unless
accompanied by evidence of the performance of the services relating thereto
satisfactory to FINOVA in its Permitted Discretion; (xiii) the invoice
constitutes a progress billing on a project not yet completed, except that the
final billing at such time as the matter has been completed may be deemed an
Eligible Receivable; (xiv) the amount thereof is not yet represented by an
invoice or bill issued in the name of the applicable account debtor; (xv) the
Receivable relates to or arises from the PEO Business; or (xiv) the Receivable
represents amounts subject to any lien, security interest or other encumbrance
(except solely in favor of FINOVA), any trust or fiduciary obligation, or any
claim of beneficial right or interest of any third party, to the extent of the
amount so subject, as determined by FINOVA in its Permitted Discretion.
"Equipment" means all of a Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in such Borrower's operations (to the extent of such Borrower's
interest therein) or owned by such Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which any Borrower is a member and which is treated as a
single employer under ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"Examination Fee" has the meaning set forth in the Schedule.
"Excess Availability" means, as of the date of determination thereof,
the amount by which the average daily total principal balance of the Revolving
Credit Loans facility which Borrower would be permitted to have outstanding over
the prior 30 days, based on the formulas and reserves set forth in the Schedule,
plus cash on hand (determined in a manner acceptable to FINOVA) exceeds the sum
of the Revolving Credit Loans then actually outstanding, such excess then being
-2-
<PAGE> 4
reduced by an amount necessary to provide for the payment of all accounts
payable of Borrower which are more than 30 days past due date and all book
overdrafts (excluding overdrafts attributable to the PEO Business which are
expected to be funded by customer transfers or payments within three (3) days
after such overdraft is created).
"Excess Cash Flow" means Operating Cash Flow/Permitted less Total
Contractual Debt Service.
"FINOVA Affiliate" has the meaning set forth in Section 9.22 hereof.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time as set forth in the opinions
and pronouncements of the Accounting Principles Board and the American Institute
of Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
"General Intangibles" means all general intangibles of a Borrower,
whether now owned or hereafter created or acquired by such Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks, Licenses and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower to secure
payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Guarantor(s)" has the meaning set forth in the Schedule.
"Indebtedness for Borrowed Money" means all of a Borrower's present and
future obligations, liabilities, debts, claims and indebtedness, contingent,
fixed or otherwise, however evidenced, created, incurred, acquired, owing or
arising, whether under written or oral agreement, operation of law or otherwise:
(i) in respect of borrowed money (including, without limitation, pursuant to the
Loan Documents or Capital Leases); (ii) evidenced by a note, debenture, or
similar instrument (including, without limitation, all interest on the
Obligations); (iii) for the deferred purchase price of property (other than
trade payables arising in the ordinary course of business); or (iv) in respect
of obligations under conditional sales or other title retention agreements; and
all guaranties of any or all of the foregoing; provided, however, that
Indebtedness for Borrowed Money shall not include leases that are not Capital
Leases.
"Initial Term" has the meaning set forth on the Schedule.
"Inventory" means all of a Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease, all raw materials, work
in process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in such Borrower's business
or used in connection with the manufacture, packing, shipping, advertising,
selling or finishing of such goods, merchandise or other personal property, and
all documents of title or other documents representing them.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"L/C Fee" has the meaning set forth in Section 2.4 hereof.
"Letters of Credit" has the meaning set forth in Section 2.4. hereof.
"Loans" has the meaning set forth in Section 2.2 hereof.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by any Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to any
of the foregoing.
"Loan Party" means each Borrower, each Guarantor, and each other party
(other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, such amounts as
FINOVA may from time to
-3-
<PAGE> 5
time establish and revise in good faith reducing the amount of the facility for
Revolving Credit Loans which would otherwise be available to Borrower under the
lending formula(s) provided in the Schedule: (a) to reflect events, conditions,
contingencies or risks which, as determined by FINOVA in good faith, do or may
affect either (i) the Collateral or any other property which is security for the
Obligations or its value, (ii) the assets, business or prospects of any Borrower
or any Guarantor or (iii) the security interests and other rights of FINOVA in
the Collateral (including the enforceability, perfection and priority thereof)
or (b) to reflect FINOVA's good faith belief that any collateral report or
financial information furnished by or on behalf of any Borrower or any Guarantor
to FINOVA is or may have been incomplete, inaccurate or misleading in any
material respect or (c) in respect of any state of facts which FINOVA determines
in good faith constitutes an Event of Default or may, with notice or passage of
time or both, constitute an Event of Default.
"Loan Year" means each twelve month period commencing on the Closing
Date.
"Maximum Interest Rate" has the meaning set forth in Section 2.9(c)
hereof.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of any
Borrower or any ERISA Affiliate.
"Net Worth" at any date means the net worth of DSI and its subsidiaries
as determined on a consolidated basis in accordance with GAAP.
"Obligations" means all present and future loans, advances, debts,
liabilities, obligations, covenants, duties and indebtedness at any time owing
by any Borrower to FINOVA, whether evidenced by this Agreement, any note or
other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by FINOVA in any
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, Examination Fee, letter of credit fees, Closing Fee,
Termination Fee, Success Fee, and any other sums chargeable to Borrower
hereunder or under any other agreement with FINOVA.
"Operating Cash Flow/Actual" means, for any period net income or loss
of DSI and its subsidiaries (excluding the effect of any gains or losses
classified as extraordinary under GAAP), determined on a consolidated basis in
accordance with GAAP, plus or minus each of the following items, to the extent
deducted from or added to the revenues in the calculation of such net income or
loss: (i) depreciation; (ii) amortization and other non-cash charges; (iii)
interest expense and financing fees (including, without limitation, the Success
Fee, the Unused Line Fee, the L/C Fee, and the Examination Fee) paid or accrued;
and (iv) total federal and state income tax expense determined as the accrued
liability of DSI and its subsidiaries in respect of such period, regardless of
what portion of such expense has actually been paid by any of DSI and its
subsidiaries during such period; and after deduction for each of (a) federal and
state income taxes, to the extent actually paid during such period; (b) any
non-cash income; and (c) all actual Capital Expenditures made during such
period.
"Operating Cash Flow/Permitted" means, for any period, net income or
loss of DSI and its subsidiaries (excluding the effect of any gains or losses
classified as extraordinary under GAAP), determined on a consolidated basis in
accordance with GAAP, plus or minus each of the following items, to the extent
deducted from or added to the revenues of DSI and its subsidiaries in the
calculation of net income or loss: (i) depreciation; (ii) amortization and other
non-cash charges; (iii) interest expense and financing fees (including, without
limitation, the Success Fee, the Unused Line Fee, the L/C Fee, and the
Examination Fee) paid or accrued; and (iv) total federal and state income tax
expense determined as the accrued liability of DSI and its subsidiaries in
respect of such period, regardless of what portion of such expense has actually
been paid by any of DSI and its subsidiaries during such period; and after
deduction for each of (a) federal and state income taxes, to the extent actually
paid during such period; (b) any non-cash income; and (c) all Capital
Expenditures permitted hereunder (without regard to any waiver given by FINOVA
with respect to any limitation on such Capital Expenditures) actually made
during such period.
"Overadvance" has the meaning set forth in Section 2.3.
"Overline" has the meaning set forth in Section 2.3.
"PBGC" means the Pension Benefit Guarantee Corporation.
"PEO Business" means the professional employer organization, or
"employee leasing", line of business of Borrowers pursuant to which Borrowers
assume the employer responsibilities and obligations with respect a customer's
workforce and provide the services of such workforce to the customer on a
contractual basis.
"Permitted Discretion" means FINOVA's judgment exercised in good faith
based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could
-4-
<PAGE> 6
materially, adversely affect the value of any Collateral, the enforceability or
priority of FINOVA's liens thereon or the amount which FINOVA would be likely to
receive (after giving consideration to delays in payment and costs of
enforcement) in the liquidation of such Collateral; (ii) suggests that any
collateral report or financial information delivered to FINOVA by any Person on
behalf of any Borrower is incomplete, inaccurate or misleading in any material
respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving any Borrower, any other
Loan Party or any of the Collateral, or (iv) creates or reasonably could be
expected to create an Event of Default. In exercising such judgment, FINOVA may
consider such factors already included in or tested by the definition of
Eligible Receivables as well as any of the following: (i) the financial and
business climate of the Borrowers' industry and general macroeconomic
conditions, (ii) changes in collection history and dilution with respect to the
Receivables, (iii) changes in demand for, and pricing of, Borrowers' services,
(iv) changes in any concentration of risk with respect to Receivables, and (v)
any other factors that change the credit risk of lending to the Borrowers on the
security of the Receivables or on the basis of the Borrowers' cash flow. The
burden of establishing lack of good faith hereunder shall be on the Borrowers.
"Permitted Encumbrance" means each of the liens, mortgages and other
security interests set forth on the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
employees of any Borrower or any ERISA Affiliate, other than a Multiemployer
Plan.
"Prepared Financials" means the consolidated balance sheets of DSI and
its subsidiaries of the date set forth in the Schedule in the section entitled
'Reporting Requirements', and as of each subsequent date on which audited
balance sheets are delivered to FINOVA from time to time hereunder, and the
related statements of operations, changes in stockholder's equity and changes in
cash flow for the periods ended on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
"Prohibited Transaction" means any transaction described in Section 406
of ERISA which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Receivables" means all of a Borrower's now owned and hereafter
acquired accounts (whether or not earned by performance), proceeds of any
letters of credit naming such Borrower as beneficiary, contract rights, chattel
paper, instruments, documents and all other forms of obligations at any time
owing to such Borrower, all guaranties and other security therefor, whether
secured or unsecured, all merchandise returned to or repossessed by such
Borrower, and all rights of stoppage in transit and all other rights or remedies
of an unpaid vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section 4043
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4068(f)
of ERISA.
"Revolving Credit Loans" has the meaning set forth in the Schedule.
"Revolving Credit Limit" has the meaning set forth in the Schedule.
"Revolving Interest Rate" has the meaning set forth in the Schedule.
"Schedule" has the meaning set forth in the preamble.
"Start Date" has the meaning set forth in the Schedule.
"Success Fee" has the meaning set forth in the Schedule.
"Term Loan" has the meaning set forth in the Schedule.
"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
"Total Contractual Debt Service" means, for any period, the sum of
payments made or required to be made by the Borrowers during such period for (i)
interest and scheduled principal payments due on the Term Loan (excluding
voluntary prepayment and payments made from Excess Cash Flow, as required
pursuant to the Schedule), (ii) interest payments due on the Revolving Credit
Loans plus the Unused Line Fee, the Success Fee, the L/C Fee, and the
Examination Fee, and any other fees due to FINOVA, and (iii) interest and
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scheduled principal payments due or any other Indebtedness for Borrowed Money of
Borrower.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
"Trademarks, Copyrights, Licenses and Patents" means all of a
Borrower's right, title and interest in and to, whether now owned or hereafter
acquired: (i) trademarks, trademark registrations, trade names, trade name
registrations, and trademark or trade name applications, including without
limitation such as are listed on the Schedule, as the same may be amended from
time to time, and (a) renewals thereof, (b) all income, royalties, damages and
payments now and hereafter due and/or payable with respect thereto, including
without limitation, damages and payments for past or future infringements
thereof, (c) the right to sue for past, present and future infringements
thereof, (d) all rights corresponding thereto throughout the world, and (e) the
goodwill of the businesses operated by any or all of the Borrowers connected
with and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule, as the same may be amended from time to time, and
(a) renewals thereof, (b) all income, royalties, damages and payments now and
hereafter due and/or payable with respect thereto, including without limitation,
damages and payments for past or future infringements thereof, (c) the right to
sue for past, present and future infringements thereof, and (d) all rights
corresponding thereto throughout the world; (iii) license agreements, including
without limitation such as are listed on the Schedule, and the right to prepare
for sale, sell and advertise for sale any services or any Inventory now or
hereafter owned by any Borrower and now or hereafter covered by such licenses;
and (iv) patents and patent applications, registered or pending, including
without limitation such as are listed on the Schedule, together with all income,
royalties, shop rights, damages and payments thereto, the right to sue for
infringements thereof, and all rights thereto throughout the world and all
reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof.
"Unused Line Fee" has the meaning set forth in the Schedule.
1.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, FINOVA shall, upon DSI's request on behalf of the
Borrowers, make advances to Borrowers from time to time in an aggregate
outstanding principal amount not to exceed the Total Facility amount (the "TOTAL
FACILITY") set forth on the Schedule hereto, subject to deduction of reserves
for accrued interest and such other reserves as FINOVA deems proper from time to
time, and less amounts FINOVA may be obligated to pay in the future on behalf of
any Borrower. The Schedule is an integral part of this Agreement and all
references to "herein", "herewith" and words of similar import shall for all
purposes be deemed to include the Schedule.
2.2 Loans. Advances under the Total Facility ("LOANS" and individually,
a "LOAN") shall be comprised of the amounts shown on the Schedule.
2.3 Overlines; Overadvances. If at any time or for any reason the
outstanding amount of advances (including all Letters of Credit) extended or
issued pursuant hereto exceeds any of the dollar limitations ("OVERLINE") or
percentage limitations ("OVERADVANCE") in the Schedule, then the Borrowers
shall, jointly and severally, upon FINOVA's demand, immediately pay to FINOVA,
in cash, the full amount of such Overline or Overadvance which, at FINOVA's
option, may be applied to reduce the outstanding principal balance of the Loans
and/or cash collateralize all or any part of any outstanding Letters of Credit.
Without limiting Borrowers' obligation to repay to FINOVA on demand the amount
of any Overline or Overadvance, each Borrower jointly and severally agrees to
pay FINOVA interest on the outstanding principal amount of any Overline or
Overadvance, on demand, at the rate set forth on the Schedule and applicable to
the Revolving Credit Loans.
2.4 Letters of Credit. At the request of DSI on behalf of Borrowers,
FINOVA may, in its Permitted Discretion, arrange for the issuance of letter of
credit for the account of Borrowers and guarantees of payment of such letters of
credit, in each case in form and substance satisfactory to FINOVA in its sole
discretion (collectively, "LETTERS OF CREDIT"). The aggregate face amount of all
outstanding Letters of Credit from time to time shall not exceed the amount
shown on the Schedule, and shall be reserved against the availability of
Revolving Credit Loans. Borrowers shall jointly and severally pay all bank
charges for the issuance of Letters of Credit, together with an additional fee
to FINOVA equal to the percentage set forth on the Schedule of the aggregate
face amount of each Letter of Credit outstanding from time to time during the
term of this Agreement (the "L/C FEE"). The L/C Fee shall be deemed to be fully
earned upon the issuance of each Letter of Credit and
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shall be due and payable on the first Business Day of each month following a
month during which any Letter of Credit is outstanding. Any advance by FINOVA
under or in connection with a Letter of Credit shall constitute an Obligation
hereunder. Each Letter of Credit shall have an expiry date no later than thirty
(30) days prior to the last day of the Initial Term or, if issued during any
Renewal Term no later than thirty (30) days prior to the last day of such
Renewal Term. Immediately upon any termination of this Agreement, Borrowers
shall either: (i) provide cash collateral to FINOVA in an amount equal to 105%
of the maximum amount of FINOVA's obligations under or in connection with all
then outstanding Letters of Credit, or (ii) cause to be delivered to FINOVA
releases of all FINOVA's obligations under outstanding Letters of Credit. At
FINOVA's discretion, any proceeds of Collateral received by FINOVA may be held
as the cash collateral required by this Section 2.4. Each Borrower hereby agrees
jointly and severally to indemnify, save, and hold FINOVA harmless from any
loss, cost, expense, or liability, including payments made by FINOVA, expenses,
and reasonable attorneys' fees incurred by FINOVA arising out of or in
connection with any Letters of Credit. Each Borrower agrees to be bound by the
issuing bank's regulations and interpretations of any Letters of Credit
guarantied by FINOVA and opened for a Borrower's account or by FINOVA's
interpretations of any Letter of Credit issued by FINOVA for a Borrower's
account, and each Borrower understands and agrees that FINOVA shall not be
liable for any error, negligence, or mistake, whether of omission or commission,
in following any Borrower's instructions or those contained in the Letters of
Credit or any modifications, amendments, or supplements thereto. Each Borrower
understands that FINOVA may indemnify the bank issuing a Letter of Credit for
certain costs or liabilities arising out of claims by a Borrower against such
issuing bank. Each Borrower hereby agrees jointly and severally to indemnify and
hold FINOVA harmless with respect to any loss, cost, expense, or liability
incurred by FINOVA under any such indemnification by FINOVA to any issuing bank.
2.5 Loan Account. All advances made hereunder (including without
limitation all advances made by FINOVA under or in connection with any Letter of
Credit) shall be added to and deemed part of the Obligations when made. FINOVA
may from time to time charge all Obligations of Borrower to such Borrower's loan
account with FINOVA.
2.6 Interest; Fees. Borrower shall jointly and severally pay FINOVA
interest on the daily outstanding balance of the Obligations at the per annum
rates set forth on the Schedule. Borrowers shall also jointly and severally pay
FINOVA the fees set forth on the Schedule.
2.7 Default Interest Rate. Upon the occurrence and during the
continuation of an Event of Default, Borrowers shall jointly and severally pay
FINOVA interest on the daily outstanding balance of the Obligations and any L/C
Fee at a rate per annum which is two percent (2%) in excess of the rate which
would otherwise be applicable thereto pursuant to the Schedule.
2.8 Examination Fee. Borrowers agrees to pay jointly and severally to
FINOVA the Examination Fee in the amount set forth on the Schedule in connection
with each audit or examination of Borrowers performed by FINOVA prior to or
after the date hereof. Without limiting the generality of the foregoing,
Borrowers shall jointly and severally pay to FINOVA an initial Examination Fee
in an amount equal to the amount set forth on the Schedule. Such initial
Examination Fee shall be deemed fully earned at the time of payment and due and
payable upon the closing of this transaction, and shall be deducted from any
good faith deposit paid by Borrowers to FINOVA prior to the date of this
Agreement.
2.9 Excess Interest.
(a) The contracted for rates of interest of the loans contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rates set forth on the Schedule, calculated and applied to the principal balance
of the Obligations in accordance with the provisions of this Agreement; (ii)
interest after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Each Borrower agrees to pay an effective
contracted for rate of interest which is the sum of the above-referenced
elements. The Examination Fee, attorneys fees, expert witness fees, letter of
credit fees, Closing Fee, Termination Fee, Success Fee, other charges, goods,
things in action or any other sums or things of value paid or payable by
Borrower (collectively, the "ADDITIONAL SUMS"), whether pursuant to this
Agreement or any other documents or instruments in any way pertaining to this
lending transaction, or otherwise with respect to this lending transaction, that
under any applicable law may be deemed to be interest with respect to this
lending transaction, for the purpose of any applicable law that may limit the
maximum amount of interest to be charged with respect to this lending
transaction, shall be payable by Borrowers as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of the Additional
Sums.
(b) It is the intent of the parties to comply with the usury laws of
the State of Arizona (the "APPLICABLE USURY LAW"). Accordingly, it is agreed
that notwithstanding any provisions to the contrary in this Agreement, or in any
of the documents securing payment hereof or otherwise relating hereto, in no
event shall this Agreement or such documents require the payment or permit the
collection of interest in
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excess of the maximum contract rate permitted by the Applicable Usury Law (the
"MAXIMUM INTEREST RATE"). In the event (a) any such excess of interest otherwise
would be contracted for, charged or received from Borrowers or otherwise in
connection with the loans evidenced hereby, or (b) the maturity of the
Obligations is accelerated in whole or in part, or (c) all or part of the
Obligations shall be prepaid, so that under any of such circumstances the amount
of interest contracted for, charged or received in connection with the loans
evidenced hereby, would exceed the Maximum Interest Rate, then in any such event
(1) the provisions of this paragraph shall govern and control, (2) neither the
Borrowers nor any other Person now or hereafter liable for the payment of the
Obligations shall be obligated to pay the amount of such interest to the extent
that it is in excess of the Maximum Interest Rate, (3) any such excess which may
have been collected shall be either applied as a credit against the then unpaid
principal amount of the Obligations or refunded to Borrowers, at FINOVA's
option, and (4) the effective rate of interest shall be automatically reduced to
the Maximum Interest Rate. It is further agreed, without limiting the generality
of the foregoing, that to the extent permitted by the Applicable Usury Law; (x)
all calculations of interest which are made for the purpose of determining
whether such rate would exceed the Maximum Interest Rate shall be made by
amortizing, prorating, allocating and spreading during the period of the full
stated term of the loans evidenced hereby, all interest at any time contracted
for, charged or received from Borrowers or otherwise in connection with such
loan; and (y) in the event that the effective rate of interest on the loan
should at any time exceed the Maximum Interest Rate, such excess interest that
would otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law shall be paid to FINOVA from time to time, if and when the
effective interest rate on the loan otherwise falls below the Maximum Interest
Rate, to the extent that interest paid to the date of calculation does not
exceed the Maximum Interest Rate, until the entire amount of interest which
would otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law has been paid in full. Each Borrower further agrees that
should the Maximum Interest Rate be increased at any time hereafter because of a
change in the Applicable Usury Law, then to the extent not prohibited by the
Applicable Usury Law, such increases shall apply to all indebtedness evidenced
hereby regardless of when incurred; but, again to the extent not prohibited by
the Applicable Usury Law, should the Maximum Interest Rate be decreased because
of a change in the Applicable Usury Law, such decreases shall not apply to the
indebtedness evidenced hereby regardless of when incurred.
2.10 Principal Payments; Proceeds of Collateral.
(a) Principal Payments. Except where evidenced by notes or other
instruments issued or made by a Borrower to FINOVA specifically containing
payment provisions which are in conflict with this Section 2.10 (in which event
the conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Loans shall be payable jointly and severally by Borrowers to FINOVA
immediately upon the earliest of (i) the receipt by FINOVA or Borrowers of any
proceeds of any of the Collateral, to the extent of said proceeds during any
period when funds in a Blocked Account or Dominion Account are being transferred
to FINOVA in accordance with subsections (b) and (c) below, (ii) the occurrence
of an Event of Default in consequence of which FINOVA elects to accelerate the
maturity and payment of such loans, or (iii) any termination of this Agreement
pursuant to Section 9.2 hereof; provided, however, that any Overadvance or
Overline shall be payable on demand pursuant to the provisions of Section 2.3
hereof.
(b) Collections. Until FINOVA notifies Borrowers to the contrary,
Borrowers may make collection of all Receivables for FINOVA and shall receive
all such payments or sums as trustee of FINOVA and immediately cause all such
payments or sums to be deposited into a Blocked Account. No borrower shall
commingle collections of Receivables attributable to the PEO Business with
collections of any other Collateral. Whenever an Event of Default has occurred
and is continuing, FINOVA or its designee may, at any time, notify account
debtors that the Receivables have been assigned to FINOVA and of FINOVA's
security interest therein, and may collect the Receivables directly and charge
the collection costs and expenses to Borrowers' loan accounts. Each Borrower
agrees that, in computing the charges under this Agreement, all items of payment
shall be deemed applied by FINOVA on account of the Obligations on the Business
Day of receipt by FINOVA of good funds which have been finally credited to
FINOVA's account, whether such funds are received directly from a Borrower or
from the Blocked Account bank, pursuant to Section 2.10(c) hereof, and this
provision shall apply regardless of the amount of the Obligations outstanding or
whether any Obligations are outstanding; provided, that if any such good funds
are received after 12:00 p.m. noon (Los Angeles time) on any Business Day or at
any time on any day not constituting a Business Day, such funds shall be deemed
received on the immediately following Business Day. FINOVA is not, however,
required to credit any Borrower's account for the amount of any item of payment
which is unsatisfactory to FINOVA in its Permitted Discretion and FINOVA may
charge the applicable Borrower's loan account for the amount of any item of
payment which is returned to FINOVA unpaid.
(c) Establishment of a Blocked Account or Dominion Account. Unless each
Borrower shall be otherwise directed by FINOVA in writing, each Borrower shall
cause all proceeds of Collateral to be deposited into or such "blocked accounts"
as FINOVA may require (each, a "BLOCKED ACCOUNT") pursuant to an arrangement
with such bank as may
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be selected by Borrowers and be acceptable to FINOVA. Unless otherwise provided
herein, all proceeds in the Blocked Accounts shall be available to Borrowers in
accordance with the regulations of such bank for use in the ordinary course of
business. If a Cash Dominion Event has occurred and is continuing, then upon
written notice from FINOVA to the bank maintaining a Blocked Account all
proceeds in such Blocked Account shall be transferred on a regular basis in
immediately available funds only to FINOVA or for its account as FINOVA may
direct, and applied in payment of the Obligations in such order as FINOVA
determines in its sole discretion. Each Borrower shall issue to any such bank an
irrevocable letter of instruction directing said bank to make available or
transfer such funds so deposited as provided in the immediately preceding
sentence. All funds deposited in a Blocked Account shall be at all times subject
to FINOVA's security interest and Borrowers shall obtain the agreement by such
bank to waive any offset rights against the funds so deposited. FINOVA assumes
no responsibility for any Blocked Account arrangement, including without
limitation, any claim of accord and satisfaction or release with respect to
deposits accepted by any bank thereunder. Alternatively, if a Cash Dominion
Event described in clause (i) or (ii) (A) of the definition thereof has occurred
and is continuing, FINOVA may establish depository accounts in the name of
FINOVA at a bank or banks for the deposit of such funds (each, a "DOMINION
ACCOUNT") and each Borrower shall deposit all proceeds of Receivables and all
cash proceeds of any sale, to the extent permitted herein, of Equipment or cause
same to be deposited, in kind, in such Dominion Accounts of FINOVA in lieu of
depositing same to Blocked Accounts, and, unless otherwise provided herein, all
such funds shall be applied by FINOVA to the Obligations in such order as FINOVA
determines in its sole discretion.
(d) Payments Without Deductions. Each Borrower shall pay principal,
interest, and all other amounts payable hereunder, or under any other Loan
Document, without any deduction whatsoever, including, but not limited to, any
deduction for any setoff or counterclaim.
(e) Collection Days Upon Repayment. In the event any Borrower repays
the Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to such Borrower's loan account on
the Business Day of FINOVA's receipt thereof, determined in accordance with
Section 2.10(b).
(f) Monthly Accountings. FINOVA shall provide Borrowers monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrowers and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by FINOVA), unless DSI
notifies FINOVA in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or admissions.
2.11 Application of Collateral. Except as otherwise provided herein,
FINOVA shall have the continuing and exclusive right to apply or reverse and
re-apply any and all payments to any portion of the Obligations in such order
and manner as FINOVA shall determine in its sole discretion; provided, however,
that so long as no Event of Default has occurred and is continuing, any payment
designated by Borrowers as being made in respect of principal of or interest on
the Term Loan shall be applied as designated by Borrowers. To the extent that a
Borrower makes a payment or FINOVA receives any payment or proceeds of the
Collateral for any Borrower's benefit which is subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or any other party under any
bankruptcy law, common law or equitable cause, or otherwise, then, to such
extent, all Obligations or part thereof intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
FINOVA.
2.12 Application of Payments. The amount of all payments or amounts
received by FINOVA with respect to the Loans shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Default Interest; (ii) then, to any late fees,
overdue risk assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loans; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure Obligations relating to any Letters of Credit or other
contingent obligations arising under the Loan Documents and/or (y) applied to
amounts owed to FINOVA by Borrowers as FINOVA in its sole discretion may
determine. In calculating interest and applying payments as set forth above: (a)
interest shall be calculated and collected through the date a payment is
actually applied by FINOVA under the terms of this Agreement; (b) interest on
the outstanding balance shall be charged during any grace period permitted
hereunder; (c) at the end of each month, all accrued and unpaid interest and
other charges provided for hereunder shall be added to the principal balance of
the Loan; and (d) to the extent that any Borrower makes a payment or FINOVA
receives any payment or proceeds of the Collateral for such Borrower's benefit
that is subsequently invalidated, set aside or required to be repaid to any
other Person, then, to such extent, all Obligations to which such payment or
proceeds were applied or intended to be applied shall be revived and continue as
if such payment or proceeds had not been received by FINOVA, and FINOVA may
adjust the Loan balances as FINOVA, in its reasonable
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judgment, deems appropriate under the circumstances to reverse the effect of
such application.
2.13 Notification of Closing. DSI shall provide FINOVA with at least
forty-eight (48) hours prior written notice of the Closing Date, to enable
FINOVA to arrange for the availability of funds. In the event the closing does
not take place on the date specified in DSI's notice to FINOVA, other than
through the fault of FINOVA, each Borrower agrees jointly and severally to
reimburse FINOVA for FINOVA's costs to maintain the necessary funds available
for the closing, at the Term Interest Rate with respect to the amount of the
Term Loan, and at the Revolving Interest Rate with respect to an amount equal to
the initial advance under the Revolving Credit Loans facility which is to be
made on the Closing Date, for the number of days which elapse between the date
specified in DSI's notice and the date upon which the closing actually occurs
(which number of days shall not include the date specified in DSI's notice, but
shall include the Closing Date).
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, each Borrower hereby grants to FINOVA a
first priority security interest (subject only to Permitted Encumbrances) in all
of such Borrower's now owned or hereafter acquired or arising Inventory,
Equipment, Receivables, life insurance policies and the proceeds thereof,
Trademarks, Copyrights, Licenses and Patents, Investment Property (as defined in
Section 9-115 of the Code) and General Intangibles, including, without
limitation, all of such Borrower's Deposit Accounts, money, any and all property
now or at any time hereafter in FINOVA's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records and computer data related to any of the foregoing (all of the
foregoing, together with all other property in which FINOVA may be granted a
lien or security interest, is referred to herein, collectively, as the
"COLLATERAL").
3.2 Perfection and Protection of Security Interest. Each Borrower
shall, at its expense, take all actions requested by FINOVA at any time to
perfect, maintain, protect and enforce FINOVA's first priority security interest
and other rights in the Collateral and the priority thereof from time to time,
including, without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and delivering such
documents and titles in connection with motor vehicles as FINOVA shall require,
all in form and substance satisfactory to FINOVA, (ii) maintaining a perpetual
inventory and complete and accurate stock records, (iii) delivering to FINOVA
warehouse receipts covering any portion of the Collateral located in warehouses
and for which warehouse receipts are issued, and transferring Inventory to
warehouses designated by FINOVA, (iv) placing notations on such Borrower's books
of account to disclose FINOVA's security interest therein and (v) delivering to
FINOVA all letters of credit on which such Borrower is named beneficiary. FINOVA
may file, without any Borrower's signature, one or more financing statements
disclosing FINOVA's security interest under this Agreement. Each Borrower agrees
that a carbon, photographic, photostatic or other reproduction of this Agreement
or of a financing statement is sufficient as a financing statement. If any
Collateral is at any time in the possession or control of any warehouseman,
bailee or any of a Borrower's agents or processors, the applicable Borrower
shall notify such Person of FINOVA's security interest in such Collateral and,
upon FINOVA's request, instruct them to hold all such Collateral for FINOVA's
account subject to FINOVA's instructions. From time to time, each Borrower
shall, upon FINOVA's request, execute and deliver confirmatory written
instruments pledging the Collateral to FINOVA, but any Borrower's failure to do
so shall not affect or limit FINOVA's security interest or other rights in and
to the Collateral. Until the Obligations have been fully satisfied and FINOVA's
obligation to make further advances hereunder has terminated, FINOVA's security
interest in the Collateral shall continue in full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted
Discretion, at any time discharge any lien or encumbrance on the Collateral or
bond the same, pay any insurance, maintain guards, pay any service bureau,
obtain any record or take any other action to preserve the Collateral and charge
the cost thereof to the applicable Borrower's loan account as an Obligation.
3.4 Insurance. Each Borrower will maintain and deliver evidence to
FINOVA of such insurance as is required by FINOVA, written by insurers, in
amounts, and with lender's loss payee, additional insured, and other
endorsements, satisfactory to FINOVA. All premiums with respect to such
insurance shall be paid by each Borrowers as and when due. Accurate and
certified copies of the policies shall be delivered by each Borrower to FINOVA.
If a Borrower fails to comply with this Section, FINOVA may (but shall not be
required to) procure such insurance and endorsements at the Borrowers' expense
and charge the cost thereof to the Borrowers' loan accounts as an Obligation.
3.5 Collateral Reporting; Inventory.
(a) Invoices. No Borrower shall re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
Borrowers' industry, or otherwise extend or modify the term of any Receivable.
If a Borrower becomes aware of any matter materially affecting any Receivable,
including information
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affecting the credit of the account debtor thereon, such Borrower shall promptly
notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes evidenced by
a promissory note, trade acceptance or any other instrument for the payment of
money, the applicable Borrower shall immediately deliver such instrument to
FINOVA appropriately endorsed to FINOVA and, regardless of the form of any
presentment, demand, notice of dishonor, protest and notice of protest with
respect thereto, such Borrower shall remain liable thereon until such instrument
is paid in full.
3.6 Receivables.
(a) Eligibility. (i) Each Borrower represents and warrants that each of
its Receivables covers and shall cover a bona fide sale or lease and delivery by
it of goods or the rendition by it of services in the ordinary course of its
business, and shall be for a liquidated amount and FINOVA's security interest
shall not be subject to any offset, deduction, counterclaim, rights of return or
cancellation, lien or other condition. If any representation or warranty herein
is breached as to any Receivable or any Receivable ceases to be an Eligible
Receivable for any reason other than payment thereof, then FINOVA may, in
addition to its other rights hereunder, designate any and all Receivables owing
by that account debtor as not Eligible Receivables; provided, that FINOVA shall
in any such event retain its security interest in all Receivables, whether or
not Eligible Receivables, until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder has terminated.
(ii) FINOVA at any time shall be entitled to (i) establish and increase
or decrease reserves against Eligible Receivables, (ii) reduce the advance rates
in the Schedule or restore such advance rates to any level equal to or below the
advance rates set forth in the Schedule or (iii) impose additional restrictions
(or eliminate the same) to the standards of eligibility set forth in the
definitions of "Eligible Receivables", in the exercise of its Permitted
Discretion. FINOVA may but shall not be required to rely on the schedules and/or
reports delivered to FINOVA in connection herewith in determining the then
eligibility of Receivables. Reliance thereon by FINOVA from time to time shall
not be deemed to limit the right of FINOVA to revise advance rates or standards
of eligibility as provided above.
(b) Disputes. Each Borrower shall notify FINOVA promptly of all
material disputes or claims and settle or adjust such disputes or claims at no
expense to FINOVA, but no discount, credit or allowance shall be granted to any
account debtor without FINOVA's consent, except for discounts, credits and
allowances made or given in the ordinary course of a Borrower's business. FINOVA
may, at any time after the occurrence of an Event of Default, settle or adjust
disputes or claims directly with account debtors for amounts and upon terms
which FINOVA considers advisable in its reasonable credit judgment and, in all
cases, FINOVA shall credit Borrowers' loan accounts with only the net amounts
received by FINOVA in payment of any Receivables.
3.7 Equipment. Each Borrower shall keep and maintain the Equipment in
good operating condition and repair and make all necessary replacements thereto
to maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrowers' past practice, ordinary wear and tear excepted. No
Borrower shall permit any item of Equipment to become a fixture (other than a
trade fixture) to real estate or an accession to other property.
3.8 Other Liens; No Disposition of Collateral. Each Borrower
represents, warrants and covenants that except for FINOVA's security interest,
Permitted Encumbrances, and such other liens, claims and encumbrances as may be
permitted by FINOVA in its sole discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever and (b) no Borrower shall, without FINOVA's
prior written approval, sell, encumber or dispose of or permit the sale,
encumbrance or disposal of any Collateral or all or any substantial part of any
of its other assets (or any interest of a Borrower therein). In the event FINOVA
gives any such prior written approval with respect to any such sale of
Collateral, the same may be conditioned on the sale price being equal to, or
greater than, an amount acceptable to FINOVA. The proceeds of any such sales of
Collateral shall be remitted to FINOVA pursuant to this Agreement for
application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan
secured by the Collateral. FINOVA may, in its sole discretion, in accordance
with the Loan Documents and applicable law, (i) exchange, enforce, waive or
release any of the Collateral, (ii) apply Collateral and direct the order or
manner of sale thereof as it may determine, and (iii) settle, compromise,
collect or otherwise liquidate any Collateral in any manner without affecting
its right to take any other action with respect to any other Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial
advance hereunder or to issue or arrange for the issuance of the initial Letter
of Credit hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following
Loan Documents: (i) the
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Agreement fully and properly executed by Borrower; (ii) a promissory note in
such amounts and on such terms and conditions as FINOVA shall specify, executed
by Borrower; (iii) Guaranties executed by each of the Guarantors and Support
Agreement executed by the applicable parties; (iv) such security agreements,
intellectual property assignments, pledge agreements, mortgages and deeds of
trust as FINOVA may require with respect to this Agreement and any Guaranties,
executed by each of the parties thereto and, if applicable, duly acknowledged
for recording or filing in the appropriate governmental offices; (v) such
Blocked Account agreements as it shall reasonably determine; and (vi) such other
documents, instruments and agreements in connection herewith as FINOVA shall
require, executed, certified and/or acknowledged by such parties as FINOVA shall
designate;
(b) Minimum Excess Availability. Borrowers shall have Excess
Availability under the Revolving Credit Loans facility of not less than the
amount specified in the Schedule, after giving effect to the initial advance and
the initial Letter of Credit hereunder and after giving effect to any applicable
Loan Reserves against borrowing availability under the Revolving Credit Loans.
(c) Terminations by Existing Lender. Borrowers' existing lender shall
have executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the assets of
Borrowers;
(d) Charter Documents. FINOVA shall have received copies of each
Borrower's By-laws and Articles or Certificate of Incorporation, as amended,
modified, or supplemented to the Closing Date, certified by the Secretary of the
applicable Borrower;
(e) Good Standing. FINOVA shall have received a certificate of
corporate status with respect to each Borrower, dated within ten (10) days of
the Closing Date, by the Secretary of State of the state of incorporation of
such Borrower, which certificate shall indicate that such Borrower is in good
standing in such state;
(f) Foreign Qualification. FINOVA shall have received certificates of
corporate status with respect to each Borrower and each other Loan Party, each
dated within ten (10) days of the Closing Date, issued by the Secretary of State
of each state in which such party's failure to be duly qualified or licensed
would have a material adverse effect on its financial condition or assets,
indicating that such party is in good standing;
(g) Authorizing Resolutions and Incumbency. FINOVA shall have received
a certificate from the Secretary of each Borrower attesting to (i) the adoption
of resolutions of such Borrower's Board of Directors, and shareholders or
members if necessary, authorizing the borrowing of money from FINOVA and
execution and delivery of this Agreement and the other Loan Documents to which
such Borrower is a party, and authorizing specific officers of such Borrower to
execute same, and (ii) the authenticity of original specimen signatures of such
officers;
(h) Insurance. FINOVA shall have received the insurance certificates
and certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel, together with an additional
insured endorsement in favor of FINOVA with respect to all liability policies
and a lender's loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel;
(i) Searches; Certificates of Title. FINOVA shall have received
searches reflecting the filing of its financing statements and fixture filings
in such jurisdictions as it shall determine, and shall have received
certificates of title with respect to the Collateral which shall have been duly
executed in a manner sufficient to perfect all of the security interests granted
to FINOVA;
(j) Landlord, Bailee and Mortgagee Waivers. FINOVA shall have received
landlord, bailee and/or mortgagee waivers from the lessors, bailees and/or
mortgagees of all locations where any Collateral is located;
(k) Fees. Borrowers shall have paid all fees payable by them on the
Closing Date pursuant to this Agreement;
(l) Opinion of Counsel. FINOVA shall have received an opinion of
Borrowers' counsel covering such matters as FINOVA shall determine in its sole
discretion;
(m) Officer Certificate. FINOVA shall have received a certificate of
the President and the Chief Financial Officer or similar officer of DSI,
attesting to the accuracy of each of the representations and warranties of
Borrowers set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(n) Solvency Certificate. If requested, FINOVA shall have received a
signed certificate of the DSI's duly elected Chief Financial Officer concerning
the solvency and financial condition of Borrowers, on FINOVA's standard form;
(o) Blocked Account. The Blocked Accounts referred to in Section
2.10(c) hereof shall have been established to the satisfaction of FINOVA in its
sole discretion;
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(p) [Intentionally Omitted]
(q) Environmental Certificate. FINOVA shall have received an
Environmental Certificate from Borrowers, in form and substance satisfactory to
FINOVA in its discretion, with respect to all locations of Collateral;
(r) Search and References. FINOVA shall have received and approved the
results of UCC, tax lien, litigation, judgment, and bankruptcy searches
regarding Borrowers, and members of the senior management of Borrowers, and
shall have received satisfactory customer, vendor and credit reference checks on
Borrowers.
(s) No Material Adverse Changes. Prior to the Closing Date, there shall
have occurred no material adverse change in the financial condition of any
Borrower, or in the condition of the assets of any Borrower, from that shown on
the Prepared Financials. At the closing, Borrowers shall deliver to FINOVA an
officer's certification confirming that Borrowers are unaware of the existence
of any such material adverse change.
(t) Material Agreements. FINOVA shall have received, reviewed and
approved all material agreements to which any Borrower shall be a party.
(u) Projections. Borrowers shall submit cash flow projections and pro
forma balance sheet with adjusting entries (i) showing that the proposed
financing will provide sufficient funds for the Borrowers' projected working
capital needs, and (ii) showing: (1) that the Borrowers will have reasonably
sufficient capital for the conduct of business following the initial funding,
and (2) that no Borrower will incur debts beyond its ability to pay such debts
as they mature.
(v) Opinions. To the extent any Person other than Borrowers shall be
parties to the Loan Documents, FINOVA reserves the right to require satisfactory
opinions of counsel for each such Person concerning the proper organization of
such Person and the due authorization, execution, delivery, enforceability,
validity and binding effect of the Loan Documents to which such Person is a
party. Each such opinion of counsel shall confirm, to the satisfaction of
FINOVA, that the opinion is being delivered to FINOVA at the instruction of the
party represented by such counsel, that FINOVA is entitled to rely on such
opinion and that for purposes of such reliance, FINOVA is deemed to be in
privity with the opining counsel.
(w) ADA Compliance. If necessary, as of the Closing Date, each Borrower
shall be in compliance with the Americans with Disabilities Act of 1990 ("ADA"),
or, if any renovations of a Borrower's facilities or modifications of a
Borrower's employment practices shall be required to bring them into compliance
with the ADA, review and approval by FINOVA of such Borrower's proposed plan to
come into such compliance. Each Borrower shall deliver representations and
warranties to FINOVA concerning such Borrower's compliance with the ADA, and no
evidence shall have come to the attention of FINOVA indicating that any Borrower
is not in compliance with the ADA (except to the extent that FINOVA has reviewed
and approved such Borrower's plan to come into compliance).
(x) Transaction Costs. Borrowers shall provide to FINOVA a complete,
itemized summary of all transaction costs paid or incurred by any Person in
connection with the making of the Loans, which transaction costs shall not
exceed the amount set forth in the Schedule, as well as appropriate
documentation evidencing such costs and the payment thereof. All such
information must be acceptable to FINOVA, in FINOVA's sole discretion, exercised
in good faith.
(y) Schedule Conditions. Borrowers shall have complied with all
additional conditions precedent as set forth in the Schedule attached hereto.
(z) Other Matters. All other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance reasonably satisfactory
to FINOVA and its counsel including, without limitation, each of the items
listed on the Closing Checklist attached as EXHIBIT A hereto.
4.2 Subsequent Advances. The obligation of FINOVA to make any advance
or issue or cause any Letter of Credit to be issued hereunder (including the
initial advance or Letter of Credit) shall be subject to the further conditions
precedent that, on and as of the date of such advance or Letter of Credit
issuance: (a) the representations and warranties of Borrowers set forth in this
Agreement shall be accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof; (b) no Event of Default
and no event which, with notice or passage of time or both, would constitute an
Event of Default has occurred and is continuing, or would result from such
advance or issuance or from the application of any proceeds thereof; (c) no
material adverse change has occurred in any Borrower's business, operations,
financial condition, in the condition of the Collateral or other assets of any
Borrower or in the prospect of repayment of the Obligations; and (d) FINOVA
shall have received such other approvals, opinions or documents as FINOVA shall
reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly
existing and in good standing under the
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laws of the State set forth on the Schedule, is qualified and authorized to do
business and is in good standing in all states in which such qualification and
good standing are necessary in order for it to conduct its business and own its
property, and has all requisite power and authority to conduct its business as
presently conducted, to own its property and to execute and deliver each of the
Loan Documents to which it is a party and perform all of its Obligations
thereunder, and has not taken any steps to wind-up, dissolve or otherwise
liquidate its assets;
5.2 Other Names. Except as set forth on the Schedule, it has not,
during the preceding five (5) years, been known by or used any other corporate
or fictitious name except as set forth on the Schedule, nor has it been the
surviving corporation of a merger or consolidation or acquired all or
substantially all of the assets of any Person during such time;
5.3 Due Authorization. The execution, delivery and performance by it of
the Loan Documents to which it is a party have been authorized by all necessary
corporate action and do not and shall not constitute a violation of any
applicable law or of its Articles or Certificate of Incorporation or By-Laws or,
after giving effect to the application of the proceeds of the initial Loans, any
other document, agreement or instrument to which any Borrower is a party or by
which any Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which it is a
party is its legal, valid and binding obligation, enforceable against it in
accordance with its terms;
5.5 Intangible Property. It possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications and
trade names for the present and planned future conduct of its business without
any known conflict with the rights of others;
5.6 Capital. It has capital sufficient to conduct its business, is able
to pay its debts as they mature, and owns property having a fair salable value
greater than the amount required to pay all of its debts (including contingent
debts);
5.7 Material Litigation. It has no pending or overtly threatened
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. It has good, indefeasible and
merchantable title to the Collateral and, upon the execution and delivery of the
Loan Documents, the filing of UCC-1 Financing Statements, delivery of the
certificate(s) evidencing any pledged securities, the filing of any collateral
assignments or security agreements regarding Trademarks, Copyrights, Licenses
and Patents, if any, with the appropriate governmental offices, in each case in
the appropriate offices, this Agreement and such documents shall create valid
and perfected first priority liens in the Collateral, subject only to Permitted
Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. It is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to any
labor dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA in writing prior
to the date hereof;
5.10 Laws. It is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise. It
has all licenses, permits, registrations, and governmental approvals necessary
to conduct its business, and a complete and accurate list thereof is set forth
on the Schedule;
5.11 Consents. It has obtained or caused to be obtained or issued any
required consent of a governmental agency or other Person in connection with the
financing contemplated hereby;
5.12 Defaults. It is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly present the
financial condition and results of operations of DSI and its subsidiaries as of
the date and for the periods thereof in accordance with GAAP; there are no
material omissions from the Prepared Financials or other facts or circumstances
not reflected in the Prepared Financials; and there has been no material and
adverse change in such financial condition or operations since the date of the
initial Prepared Financials delivered to FINOVA hereunder;
5.14 ERISA. None of Borrowers, any ERISA Affiliate, or any Plan is or
has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a) or any of the published
interpretations thereunder, nor has any Borrower or any ERISA Affiliate received
any notice to such effect. No notice of intent to terminate a Plan has been
filed under Section 4041 of ERISA, nor has any Plan been terminated under ERISA.
The PBGC has not instituted proceedings to terminate, or appointed a trustee to
administer, a Plan. No lien upon the assets of any
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Borrower has arisen with respect to a Plan. No prohibited transaction or
Reportable Event has occurred with respect to a Plan. Neither any Borrower nor
any ERISA Affiliate has incurred any withdrawal liability with respect to any
Multiemployer Plan. Each Borrower and each ERISA Affiliate have made all
contributions required to be made by them to any Plan or Multiemployer Plan when
due. There is no accumulated funding deficiency in any Plan, whether or not
waived;
5.15 Taxes. It has filed all tax returns and such other reports as it
is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
5.16 Locations; Federal Tax ID No. Its chief executive office and the
offices and locations where it keeps the Collateral (except for Inventory in
transit) are at the locations set forth on the Schedule, except to the extent
that such locations may have been changed after notice to FINOVA in accordance
with Section 6.4 hereof. Its federal tax identification number is as shown on
the Schedule;
5.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between it and any customer or any group of customers
whose purchases individually or in the aggregate are material to the business of
Borrowers, or with any material supplier, and there exists no present condition
or state of facts or circumstances which would materially and adversely affect
it or prevent it from conducting such business after the consummation of the
transactions contemplated by this Agreement in substantially the same manner in
which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by a Borrower
pursuant to this Agreement shall constitute (i) an automatic representation and
warranty by each Borrower to FINOVA that there does not then exist any Event of
Default and (ii) a reaffirmation as of the date of said request of all of the
representations and warranties of each Borrower contained in this Agreement and
the other Loan Documents.
6. COVENANTS.
6.1 AFFIRMATIVE COVENANTS. Each Borrower covenants that, so long as any
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate
provision for the payment of all taxes, assessments and other charges on or
prior to the date when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of
any litigation, suit or administrative proceeding which may materially and
adversely affect the Collateral or its business, assets, operations, prospects
or condition, financial or otherwise, whether or not the claim is covered by
insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the
occurrence of any event described in Paragraph 4043 of ERISA, other than a
termination, partial termination or merger of a Plan or a transfer of a Plan's
assets and (ii) prior to any termination, partial termination or merger of a
Plan or a transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45)
days prior to any change in the location of its chief executive office or the
location of any Collateral, or its opening or closing of any other place of
business;
6.1.5 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, permits, registrations, governmental approvals, patents,
copyrights, trademarks and trade names for the conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any
material labor dispute to which it is or may become subject and the expiration
of any labor contract to which it is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency thereof, applicable to it which may materially and
adversely affect the Collateral or its business, assets, prospects, operations
or condition, financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business
Days of its default under any note, indenture, loan agreement, or mortgage, or
under any lease or other agreement material to its business, to which it is a
party or by which it is bound, or of any other default under any of its
Indebtedness;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of
the making of any Capital Expenditure materially affecting its business, assets,
prospects, operations or condition, financial or otherwise, except to the extent
permitted in the Schedule;
6.1.10 Books and Records. Keep adequate records and books of
account with respect to its business activities in which proper entries are made
in accordance with GAAP, reflecting all of its financial transactions;
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6.1.11 Leases; Warehouse Agreements. Provide FINOVA with (i) copies
of all agreements between it and any landlord, warehouseman or bailee which owns
any premises at which any Collateral may, from time to time, be located (whether
for processing, storage or otherwise), and (ii) without limiting the landlord,
bailee and/or mortgagee waivers to be provided pursuant to Section 4.1(j)
hereof, additional landlord, bailee and/or mortgagee waivers in form acceptable
to FINOVA with respect to all locations where any Collateral is hereafter
located;
6.1.12 Employment Agreement. Within 60 days after the Closing Date,
Borrowers shall enter into an Employment Agreement with Donald W. Kappauf
substantially in the form reviewed by FINOVA on or prior to the Closing Date.
6.1.13 Additional Documents. At FINOVA's request, promptly execute
or cause to be executed and delivered to FINOVA any and all documents,
instruments or agreements deemed necessary by FINOVA to facilitate the
collection of the Obligations or the Collateral or otherwise to give effect to
or carry out the terms or intent of this Agreement or any of the other Loan
Documents. Without limiting the generality of the foregoing, if any of the
Receivables with a face value in excess of $10,000 arises out of a contract with
the United States of America or any department, agency, subdivision or
instrumentality thereof, it shall promptly notify FINOVA of such fact in writing
and shall execute any instruments and take any other action required or
requested by FINOVA to comply with the provisions of the Federal Assignment of
Claims Act; and
6.1.14 Financial Covenants. Comply with the financial covenants set
forth on the Schedule.
6.2 Negative Covenants. Without FINOVA's prior written consent, which
consent FINOVA may withhold in its sole discretion, so long as any Obligation
remains outstanding and this Agreement is in effect, it shall not:
6.2.1 Mergers. Merge or consolidate with or acquire any other
Person, or make any other material change in its capital structure or in its
business or operations which might adversely affect the repayment of the
Obligations;
6.2.2 Loans. Make advances, loans or extensions of credit to, or
invest in, any Person, except for loans or cash advances to employees which are
permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends upon any of its
stock or distribute any of its property or redeem, retire, purchase or acquire
directly or indirectly any of its stock;
6.2.4 Adverse Transactions. Enter into any transaction which
materially and adversely affects the Collateral or its ability to repay the
Obligations in full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
continently liable for the Indebtedness of any Person, except by endorsement of
instruments for deposit and except for the existing guarantees made by it prior
to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis;
6.2.7 Name. Use any corporate or fictitious name other than its
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade payables
and other than the Obligations;
6.2.9 Capital Expenditure. Make or incur any Capital Expenditure
if, after giving effect thereto, the aggregate amount of all Capital
Expenditures by all Borrowers in any fiscal year would exceed the amount set
forth on the Schedule;
6.2.10 [Intentionally Omitted]
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
Indebtedness for Borrowed Money, (including in connection with Capital Leases)
in excess of the amount set forth on the Schedule, other than (i) the
Obligations, (ii) trade payables and other contractual obligations to suppliers
and customers incurred in the ordinary course of business, and (iii) other
Indebtedness for Borrowed Money existing on the date of this Agreement and
reflected in the Schedule;
6.2.12 Affiliate Transactions. Except as set forth below, sell,
transfer, distribute or pay any money or property to any Affiliate, or invest in
(by capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, it may pay compensation permitted by Section 6.23
to employees who are Affiliates and, if no Event of Default has occurred, it may
engage in transactions with Affiliates in the normal course of business, in
amounts and upon terms which are fully disclosed to FINOVA and which are no less
favorable to it than would be obtainable in a comparable arm's length
transaction with a Person who is not an Affiliate;
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6.2.13 Nature of Business. Enter into any new business or make any
material change in any of its business objectives, purposes or operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with any
of its business or activities, except in connection with internal business
matters or as required in dealings with governmental agencies and financial
institutions or with its trade creditors, solely for credit reference purposes;
6.2.15 Margin Security. It will not (and has not in the past)
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation G or Regulation U issued by the Board of Governors of
the Federal Reserve System), and no proceeds of any Loan or other advance will
be used to purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock, or in any manner which
might cause such Loan or other advance or the application of such proceeds to
violate (or require any regulatory filing under) Regulation G, Regulation T,
Regulation U, Regulation X or any other regulation of the Board of Governors of
the Federal Reserve System, in each case as in effect on the date or dates of
such Loan or other advance and such use of proceeds. Further, no proceeds of any
Loan or other advance will be used to acquire any security of a class which is
registered pursuant to Section 12 of the Securities Exchange Act of 1934;
6.2.16 Real Property. Purchase or acquire any real property without
FINOVA's prior written consent, a condition of which consent shall include
delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel; or
6.2.17 Business Activities of Subsidiaries. Permit any Guarantor
to engage in any business activity or own any material assets unless (i) it
gives FINOVA at least 30 days prior written notice thereof and (ii) causes such
Guarantor to execute and deliver such security agreement and other agreements
and instruments as FINOVA may reasonably request to create and perfect in favor
of FINOVA a security interest in the assets of such Guarantor of the type
constituting Collateral hereunder.
7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Any Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
(b) (i) any Borrower or any other Loan Party fails to perform any of
the covenants contained in Section 6.1.1, 6.1.2, 6.1.3, 6.1.6, 6.1.7, 6.1.9,
6.1.10, 6.1.11, and 6.1.13 of this Agreement and such failure shall continue for
ten (10) days; provided, however, that such ten (10) day period shall not apply
in the case of: (A) any failure to observe any such covenant which is not
capable of being cured at all or within such ten (10) day period or which has
been the subject of a prior failure within a six (6) month period or (B) an
intentional breach of a Borrower or any other Loan Party of any such covenant;
or (ii) any Borrower or any other Loan Party fails or neglects to perform, keep,
or observe any Obligation including, but not limited to, any term, provision,
condition, covenant or agreement contained in any Loan Document to which
Borrower or such other Loan Party is a party, other than those described in
Section 7.1(a) or 7.1(b)(i);
(c) Any material adverse change occurs in any Borrower's business,
assets, operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Any portion of any Borrower's assets is seized, attached, subjected
to a writ or distress warrant, is levied upon or comes into the possession of
any judicial officer;
(f) Any Borrower shall generally not pay its debts as they become due
or shall enter into any agreement (whether written or oral), or offer to enter
into any agreement, with all or a significant number of its creditors regarding
any moratorium or other indulgence with respect to its debts or the
participation of such creditors or their representatives in the supervision,
management or control of its business;
(g) Any bankruptcy or other insolvency proceeding is commenced by any
Borrower, or any such proceeding is commenced against any Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with
respect to any of any Borrower's assets and is not discharged or bonded to
FINOVA's satisfaction within five (5) days after the filing thereof and prior to
any action to enforce or collect such lien, levy or assessment;
(i) Any judgments are entered against any Borrower in an aggregate
amount exceeding $100,000 in any
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fiscal year and are not vacated or discharged within 30 days after entry or
execution thereon is not effectively stayed;
(j) Any default shall occur under (i) any material agreement between
any Borrower and any third party including, without limitation, any default
which would result in a right by such third party to accelerate the maturity of
any Indebtedness of any Borrower to such third party, or (ii) any Subordinated
Debt;
(k) Any representation or warranty made or deemed to be made by any
Borrower, any Affiliate or any other Loan Party in any Loan Document or any
other statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Any Guarantor terminates or attempts to terminate its Guaranty or
any security therefor or becomes subject to any bankruptcy or other insolvency
proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of any Borrower; any lien upon the assets of any Borrower in
connection with any Plan shall arise; any Borrower or any of its ERISA
Affiliates shall fail to make full payment when due of all amounts which any
Borrower or any of its ERISA Affiliates may be required to pay to any Plan or
any Multiemployer Plan as one or more contributions thereto; any Borrower or any
of its ERISA Affiliates creates or permits the creation of any accumulated
funding deficiency, whether or not waived
(n) Borrowers fails to satisfy any undertaking in the Conditions
Subsequent Agreement, if any, executed and delivered on the Closing Date;
(o) Donald T. Kelly shall cease to be employed by Borrowers, and his
successor, within thirty (30) days after being employed by Borrowers, shall not
have entered into a Support Agreement substantially identical to the Support
Agreement executed by Donald T. Kelly on the Closing Date; or
(p) Any Change of Control occurs; or any transfer occurs of any
percentage of shares of common stock or other evidence of ownership of any
Borrower other than DSI.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE
RIGHT TO CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND
THEREAFTER IF AN EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may,
at its option and in its sole discretion and in addition to all of its other
rights under the Loan Documents, cease making Loans, terminate this Agreement
and/or declare all of the Obligations to be immediately payable in full. Each
Borrower agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default each Borrower hereby consents to the appointment of a receiver by FINOVA
in any action initiated by FINOVA pursuant to this Agreement and to the
jurisdiction and venue set forth in Section 9.25 hereof, and each Borrower
waives notice and posting of a bond in connection therewith. Further, FINOVA
may, at any time, take possession of the Collateral and keep it on each
Borrower's premises, at no cost to FINOVA, or remove any part of it to such
other place(s) as FINOVA may desire, or each Borrower shall, upon FINOVA's
demand, at Borrowers' sole cost, assemble the Collateral and make it available
to FINOVA at a place reasonably convenient to FINOVA. FINOVA may sell and
deliver any Collateral at public or private sales, for cash, upon credit or
otherwise, at such prices and upon such terms as FINOVA deems advisable, at
FINOVA's discretion, and may, if FINOVA deems it reasonable, postpone or adjourn
any sale of the Collateral by an announcement at the time and place of sale or
of such postponed or adjourned sale without giving a new notice of sale. Each
Borrower agrees that FINOVA has no obligation to preserve rights to the
Collateral or marshall any Collateral for the benefit of any Person. FINOVA is
hereby granted a license or other right to use, without charge, each Borrower's
labels, patents, copyrights, name, trade secrets, trade names, trademarks and
advertising matter, or any similar property, in completing production,
advertising or selling any Collateral and each Borrower's rights under all
licenses and all franchise agreements shall inure to FINOVA's benefit. Any
requirement of reasonable notice shall be met if such notice is mailed postage
prepaid to DSI at its address set forth in the heading to this Agreement at
least ten (10) days before sale or other disposition. The proceeds of sale shall
be applied, first, to all attorneys fees and other expenses of sale, and second,
to the Obligations in such order as FINOVA shall elect, in its sole discretion.
FINOVA shall return any excess to the applicable Borrower and each Borrower
shall remain jointly and severally liable for any deficiency to the fullest
extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Each Borrower
and FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed
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unreasonable): Any public or private disposition: (i) as to which on no later
than the tenth calendar day prior thereto written notice thereof is mailed or
personally delivered to DSI and, with respect to any public disposition, on no
later than the tenth calendar day prior thereto notice thereof describing in
general non-specific terms, the Collateral to be disposed of is published once
in a newspaper of general circulation in the county where the sale is to be
conducted (provided that no notice of any public or private disposition need be
given to any Borrower or published if the Collateral is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized
market); (ii) which is conducted at any place designated by FINOVA, with or
without the Collateral being present; and (iii) which commences at any time
between 8:00 a.m. and 5:00 p.m. Without limiting the generality of the
foregoing, each Borrower expressly agrees that, with respect to any disposition
of accounts, instruments and general intangibles, it shall be commercially
reasonable for FINOVA to direct any prospective purchaser thereof to ascertain
directly from the applicable Borrower any and all information concerning the
same, including, but not limited to, the terms of payment, aging and
delinquency, if any, the financial condition of any obligor or account debtor
thereon or guarantor thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Each Borrower covenants that, so long as any Obligation
remains outstanding and this Agreement remains in effect, it shall promptly
reimburse FINOVA jointly and severally for all costs, fees and expenses incurred
by FINOVA in connection with the negotiation, preparation, execution, delivery,
administration and enforcement of each of the Loan Documents, including, but not
limited to, the reasonable attorneys' and paralegals' fees of in-house and
outside counsel, expert witness fees, lien, title search and insurance fees,
appraisal fees, all charges and expenses incurred in connection with any and all
environmental reports and environmental remediation activities, and all other
costs, expenses, taxes and filing or recording fees payable in connection with
the transactions contemplated by this Agreement, including without limitation
all such costs, fees and expenses as FINOVA shall incur or for which FINOVA
shall become obligated in connection with (i) any inspection or verification of
the Collateral, (ii) any proceeding relating to the Loan Documents or the
Collateral, (iii) actions taken with respect to the Collateral and FINOVA's
security interest therein, including, without limitation, the defense or
prosecution of any action involving FINOVA and any Borrower or any third party,
(iv) enforcement of any of FINOVA's rights and remedies with respect to the
Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed or the
issues are peculiar to federal bankruptcy or state insolvency laws. Each
Borrower shall also jointly and severally pay all FINOVA charges in connection
with bank wire transfers, forwarding of loan proceeds, deposits of checks and
other items of payment, returned checks, establishment and maintenance of
lockboxes and other Blocked Accounts, and all other bank and administrative
matters, in accordance with FINOVA's schedule of bank and administrative fees
and charges in effect from time to time.
8.2 Environmental Matters. The Environmental Certificate dated on or
about the date of this Agreement is incorporated herein for all purposes as if
fully stated in this Agreement.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
(a) Examinations. FINOVA shall at all reasonable times have full access
to and the right to examine, audit, make abstracts and copies from and inspect
each Borrower's records, files, books of account and all other documents,
instruments and agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Each Borrower shall deliver to FINOVA any
instrument necessary for FINOVA to obtain records from any service bureau
maintaining records for any Borrower. All instruments and certificates prepared
by any Borrower showing the value of any of the Collateral shall be accompanied,
upon FINOVA's request, by copies of related purchase orders and invoices. FINOVA
may, at any time after the occurrence of an Event of Default, remove from each
Borrower's premises such Borrower's books and records (or copies thereof) or
require such Borrower to deliver such books and records or copies to FINOVA.
FINOVA may, without expense to FINOVA, use such of each Borrower's personnel,
supplies and premises as may be reasonably necessary for maintaining or
enforcing FINOVA's security interest.
(b) Reporting Requirements. Each Borrower shall furnish FINOVA, upon
request, such information and statements as FINOVA shall reasonably request from
time to time regarding such Borrower's business affairs, financial condition and
the results of its operations. Without limiting the generality of the foregoing,
DSI on behalf of all Borrowers shall provide FINOVA with: (i) FINOVA's standard
form collateral and loan report for all Borrowers, weekly, and upon FINOVA's
request, copies of sales journals, cash receipt journals, and deposit slips;
(ii) upon FINOVA's request, copies of sales invoices, customer statements and
credit memoranda issued, remittance advices and reports; (iii) copies of
shipping and delivery documents, upon request; (iv) on or prior to the date set
forth on the Schedule, monthly agings (aged from invoice date) and
reconciliations of all Borrowers' Receivables (with listings of concentrated
accounts), payables
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reports, compliance certificates and unaudited financial statements with respect
to the prior month prepared on a basis consistent with such statements prepared
in prior months and otherwise in accordance with GAAP; (v) on or prior to the
date set forth in the Schedule, audited annual consolidated financial statements
of DSI and its subsidiaries, prepared in accordance with GAAP applied on a basis
consistent with the most recent Prepared Financials provided to FINOVA by
Borrowers, including balance sheets, income and cash flow statements,
accompanied by the unqualified report thereon of independent certified public
accountants acceptable to FINOVA; and (vi) such certificates relating to the
foregoing as FINOVA may request, including, without limitation, a monthly
certificate from the president and the chief financial officer of DSI in the
form of EXHIBIT B hereto, showing Borrowers' compliance with each of the
financial covenants set forth in this Agreement, and stating whether any Event
of Default has occurred or event which, with giving of notice or the passage of
time, or both, would constitute an Event of Default, and if so, the steps being
taken to prevent or cure such Event of Default. All reports or financial
statements submitted by Borrowers shall be in reasonable detail and shall be
certified by the principal financial officer of DSI or the applicable Borrower
as being complete and correct.
9.2 Term; Termination.
(a) Term. The Initial Term of the Revolving Credit Loans facility and
the obligation of FINOVA to made advances with respect thereto in accordance
with this Agreement shall be as set forth on the Schedule, and the Revolving
Credit Loans facility and this Agreement shall be renewed for one or more
Renewal Term(s) as set forth in the Schedule, unless earlier terminated as
provided herein.
(b) Prior Notice. Each party shall have the right to terminate this
Agreement effective at the end of the Initial Term or at the end of any Renewal
Term by giving the other party written notice not less than sixty (60) days
prior to the effective date of such termination, by registered or certified
mail.
(c) Payment in Full. Upon the effective date of termination, the
Obligations shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure
set forth in Section 9.2(b), Borrowers may terminate this Agreement as to all of
the Borrowers (and not less than all of the Borrowers) at any time but only upon
thirty (30) days' prior written notice and prepayment of the Obligations
(including, without limitation, the Term Loan). Upon any such early termination
by Borrowers or any termination of this Agreement by FINOVA upon the occurrence
of an Event of Default, then, and in any such event, Borrowers shall jointly and
severally pay to FINOVA upon the effective date of such termination the Success
Fee and a fee (the "TERMINATION FEE") in an amount equal to the amount shown on
the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be
payable by Borrowers as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time. Each
Borrower waives presentment and protest of any instrument and notice thereof,
notice of default and, to the extent permitted by applicable law, all other
notices to which any Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any
right, remedy or option under this Agreement, any supplement, the Loan Documents
or other agreement between FINOVA and any Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and each Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be
prohibited or invalid under applicable law, it shall be ineffective only to such
extent, without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified,
altered or amended, except by an agreement in writing signed by each Borrower
and FINOVA. No Borrower may sell, assign or transfer any interest in this
Agreement or any other Loan Document, or any portion thereof, including, without
limitation, any of a Borrower's rights, title, interests, remedies, powers and
duties hereunder or thereunder. Each Borrower hereby consents to FINOVA's
participation, sale, assignment, transfer or other disposition, at any time or
times hereafter, of this Agreement and any of the other Loan Documents, or of
any portion hereof or thereof, including, without limitation, FINOVA's rights,
title, interests, remedies, powers and duties hereunder or thereunder. In
connection therewith, FINOVA may disclose all documents and information which
FINOVA now or hereafter may have relating to any Borrower or any Borrower's
business. To the extent that FINOVA assigns its rights and obligations hereunder
to a third party, FINOVA shall thereafter be released from such assigned
obligations to Borrowers and such assignment shall effect a novation between
Borrowers and such third party.
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9.8 Integration. This Agreement, together with the Schedule (which is a
part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of each
Borrower contained in this Agreement shall survive the execution, delivery and
acceptance of this Agreement by the parties. No termination of this Agreement or
of any guaranty of the Obligations shall affect or impair the powers,
obligations, duties, rights, representations, warranties or liabilities of the
parties hereto and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's
discretion, be evidenced by notes or other instruments issued or made by one or
more Borrowers to FINOVA. If not so evidenced, such Obligation shall be
evidenced solely by entries upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a Loan by any
Person who purports to be any employee, officer or authorized agent of DSI shall
be made to FINOVA on or prior to 11:00 a.m., Eastern time on the Business Day on
which the proceeds thereof are requested to be paid to any Borrower and shall be
conclusively presumed to be made by a Person authorized by each Borrower to do
so and the crediting of a loan to a Borrower's operating account shall
conclusively establish each Borrower's obligation to repay such loan. Unless and
until DSI otherwise directs FINOVA in writing, all loans shall be wired to the
applicable Borrower's operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and
addressed to the applicable Borrower and FINOVA at their addresses set forth at
the beginning of this Agreement. A copy of any notice to a Borrower shall be
sent to Goldstein & DiGioia LLP, 369 Lexington Avenue, New York, New York 10017,
Attn: Victor J. DiGioia. Notices hereunder shall be deemed received on the
earlier of receipt, whether by mail, personal delivery, facsimile, or otherwise,
or upon deposit in the United States mail, postage prepaid.
9.13 Brokerage Fees. Each Borrower represents and warrants to FINOVA
that, with respect to the financing transaction herein contemplated, no Person,
other than EJ Advisors, is entitled to any brokerage fee or other commission,
and Borrower agrees to indemnify and hold FINOVA harmless against any and all
such claims.
9.14 Disclosure. No representation or warranty made a Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to any
Borrower or which reasonably should be known to any Borrower which Borrowers has
not disclosed to FINOVA in writing with respect to the transactions contemplated
by this Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of any Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are
without substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Each Borrower recognizes that, in the event a
Borrower fails to perform, observe or discharge any of its Obligations under
this Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed
in one or more counterparts, each of which taken together shall constitute one
and the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall also
deliver a manually executed counterpart of this Agreement, but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments
or exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
each Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Each Borrower agrees that any claim or
cause of action by such Borrower against FINOVA, or any of FINOVA's directors,
officers, employees, agents, accountants or attorneys, based upon, arising from,
or relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause
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or thing whatsoever, whether or not relating hereto or thereto, occurred, done,
omitted or suffered to be done by FINOVA, or by FINOVA's directors, officers,
employees, agents, accountants or attorneys, whether sounding in contract or in
tort or otherwise, shall be barred unless asserted by such Borrower by the
commencement of an action or proceeding in a court of competent jurisdiction by
the filing of a complaint within one year after any Borrower has knowledge, or
with the exercise of reasonable diligence should have had knowledge, of the
first act, occurrence or omission upon which such claim or cause of action, or
any part thereof, is based and service of a summons and complaint on an officer
of FINOVA or any other Person authorized to accept service of process on behalf
of FINOVA, within 30 days thereafter. Each Borrower agrees that such one-year
period of time is a reasonable and sufficient time for Borrowers to investigate
and act upon any such claim or cause of action. The one-year period provided
herein shall not be waived, tolled, or extended except by a specific written
agreement of FINOVA. This provision shall survive any termination of this Loan
Agreement or any other agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong relating to this Agreement or
the Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by a Borrower through the ordinary negligence of FINOVA, or
any FINOVA Affiliate. "FINOVA AFFILIATE" shall mean FINOVA's directors,
officers, employees, agents, attorneys or any other Person or entity affiliated
with or representing FINOVA.
9.23 Notice of Breach by FINOVA. Each Borrower agrees to give FINOVA
written notice of (i) any action or inaction by FINOVA or any attorney of FINOVA
in connection with any Loan Documents that may be actionable against FINOVA or
any attorney of FINOVA or (ii) any defense to the payment of the Obligations for
any reason, including, but not limited to, commission of a tort or violation of
any contractual duty or duty implied by law. Each Borrower agrees that unless
such notice is fully given as promptly as possible (and in any event within
thirty (30) days) after any Borrower has knowledge, or with the exercise of
reasonable diligence should have had knowledge, of any such action, inaction or
defense, no Borrower shall assert, and each Borrower shall be deemed to have
waived, any claim or defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of any
casualty insurance insuring the Collateral, after deducting all costs and
expenses (including attorneys' fees) of collection, shall be applied, at
FINOVA's option, either toward replacing or restoring the Collateral, in a
manner and on terms satisfactory to FINOVA, or toward payment of the
Obligations. Any proceeds applied to the payment of Obligations shall be applied
in such manner as FINOVA may elect. In no event shall such application relieve
any Borrower from payment in full of all installments of principal and interest
which thereafter become due in the order of maturity thereof.
9.25 Power of Attorney. Each Borrower appoints FINOVA and its designees
as such Borrower's attorney, with the power to endorse such Borrower's name on
any checks, notes, acceptances, money orders or other forms of payment or
security that come into FINOVA's possession; to sign such Borrower's name on any
invoice or bill of lading relating to any Receivable, on drafts against
customers, on assignments of Receivables, on notices of assignment, financing
statements and other public records, on verifications of accounts and on notices
to customers or account debtors; to send requests for verification of
Receivables to customers or account debtors; after the occurrence of any Event
of Default, to notify the post office authorities to change the address for
delivery of such Borrower's mail to an address designated by FINOVA and to open
and dispose of all mail addressed to such Borrower; and to do all other things
FINOVA deems necessary or desirable to carry out the terms of this Agreement.
Each Borrower hereby ratifies and approves all acts of such attorney. Neither
FINOVA nor any of its designees shall be liable for any acts or omissions nor
for any error of judgment or mistake of fact or law while acting as such
Borrower's attorney. This power, being coupled with an interest, is irrevocable
until the Obligations have been fully satisfied and FINOVA's obligation to
provide loans hereunder shall have terminated.
9.26 GOVERNING LAW; WAIVERS. THIS AGREEMENT, INCLUDING WITHOUT
LIMITATION ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF
ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. EACH
BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE
SOLE OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL
OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE
MATTER IN CONTROVERSY. EACH BORROWER WAIVES ANY OBJECTION OF FORUM
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NON CONVENIENS AND VENUE. EACH BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY
AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE
IN THE MANNER SET FORTH IN SECTION 9.12 HEREOF FOR THE GIVING OF NOTICE. EACH
BORROWER FURTHER WAIVES ANY RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK
ANY JUDGMENT ENTERED AGAINST IT.
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND EACH BORROWER
HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; (II) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND ANY BORROWER; OR
(III) ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR ANY BORROWER OR ANY OF THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH FINOVA OR ANY BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
9.28 Nonpublic Information. FINOVA agrees that if, in the course of the
transactions contemplated by this Agreement, it comes into possession of any
material non-public information regarding DSI and its subsidiaries, it will use
all reasonable efforts to maintain the confidentiality of such information and
will not disclose any of such information to any person except to its employees,
advisors, and agents as necessary or advisable in connection with the
negotiation, administration, and enforcement of the Loan Documents. The
foregoing undertaking will not apply to any such information after such time as
it becomes generally available to the public.
[SIGNATURES FOLLOW]
-23-
<PAGE> 25
BORROWERS:
DIGITAL SOLUTIONS, INC., a New Jersey corporation
Fed. Tax ID #: 22-1899798
By: ______________________________
Name:
Title:
DSI-CONTRACT STAFFING, INC., a New York corporation
Fed. Tax ID #: 13-2878077
By: ______________________________
Name:
Title:
DSI-STAFF CONNXIONS-NORTHEAST, INC., a New Jersey corporation
Fed. Tax ID #: 22-3405060
By: ______________________________
Name:
Title:
DSI-STAFF Rx, INC., a Texas corporation
Fed. Tax ID #: 76-0451040
By: ______________________________
Name:
Title:
DSI- STAFF CONNXIONS-SOUTHWEST, INC., a Texas corporation
Fed. Tax ID #: 76-0422152
By: ______________________________
Name:
Title:
[LOAN AGREEMENT]
<PAGE> 26
LENDER:
FINOVA CAPITAL CORPORATION
By: ______________________________
Name: Ilene Gerber
Title: Vice President
[LOAN AGREEMENT]
<PAGE> 27
EXHIBIT A
( CLOSING CHECKLIST - SECTION4.1(z) )
<PAGE> 28
EXHIBIT B
( COMPLIANCE CERTIFICATE - SECTION 9.19(b) )
<PAGE> 1
EXHIBIT 10.18
SECURED PROMISSORY NOTE
$2,500,000 Phoenix, Arizona
April 28, 1998
FOR VALUE RECEIVED, DIGITAL SOLUTIONS, INC., a New Jersey
Corporation, DSI-CONTRACT STAFFING, INC., a New York corporation, DSI-STAFF
CONNXIONS-NORTHEAST, INC., a New Jersey corporation, DSI-STAFF
CONNXIONS-SOUTHWEST, INC., a Texas corporation, and DSI-STAFF Rx, INC., a Texas
corporation (collectively, "Borrower"), jointly and severally promise to pay to
the order of FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), at
its offices at 355 South Grand Avenue, Suite 2400, Los Angeles, California
90071, or at such other place or places as FINOVA may from time to time
designate in writing, the principal sum of TWO MILLION FIVE HUNDRED THOUSAND
Dollars ($2,500,000), plus interest in the manner and upon the terms and
conditions set forth below. This Secured Promissory Note ("Note") is made
pursuant to that certain Loan and Security Agreement of even date between FINOVA
and Borrower (the "Loan Agreement"), the provisions of which are incorporated
herein by this reference. Capitalized terms herein, unless otherwise noted,
shall have the meaning set forth in the Loan Agreement.
1.0 SCHEDULE OF PAYMENTS; RATE AND PAYMENT OF INTEREST; PREPAYMENT.
1.1 The principal balance of this Note shall be payable as
follows:
a. thirty-five (35) equal successive monthly installments of
principal of Forty-One Thousand Six Hundred Sixty-Seven Dollars ($41,667.00)
each on the first day of each month, beginning June 1, 1998, and continuing
through and including April 1, 2001; and
b. A final installment equal to the then unpaid principal
balance hereof on the last Business Day of April, 2001.
1.2 Prepayment may be made under this Note in whole or in
part, subject to, in the case of prepayment in whole, the Termination Fee and
Success Fee set forth in the Loan Agreement, provided that such prepayment is
preceded by not less than five (5) business days prior written notice to FINOVA
and accompanied by all accrued but unpaid interest and the full amount of the
applicable Termination Fee, if any, and Success Fee. Notwithstanding anything
herein to the contrary, in the event the Loan Agreement is terminated by
Borrower, by FINOVA or by any other person at any time in accordance with its
terms, or the Revolving Credit Loans facility is otherwise terminated for any
reason, then the entire unpaid principal balance of this Note, together with all
accrued and unpaid interest hereon and the full amount of the applicable
Termination Fee and Success Fee, shall become immediately due and payable in
full on the effective date of such termination, without presentment, notice or
demand of any kind.
1.3 Interest shall be computed on the basis of a 360-day year
for the actual number of days elapsed, and shall be at the rate of three (3%)
percentage points above the Prime Rate (as hereinafter defined), computed on the
basis of a 360-day year; provided, however, upon
<PAGE> 2
the occurrence and during the continuance of an event of default (as hereinafter
defined), interest shall accrue on the outstanding principal balance of this
Note at a default rate (the "Default Rate") of five (5%) percentage points above
the Prime Rate, and shall be payable on demand. "Prime Rate" means, for any day,
the rate of interest per annum (over a year of 360 days) announced by Citibank,
N.A. (the "Bank"), from time to time, as its "base rate" (or any successor
thereto) in effect on such day. The Prime Rate is not necessarily the lowest
rate charged by the Bank. As of the date of this Note, the Prime Rate is
________ percent (__%) per annum. The applicable rate of interest assessed
hereunder will be increased or decreased from time to time hereafter in an
amount equal to any increase or decrease hereafter made by the Bank in the Prime
Rate. A change in the Prime Rate shall be effective on the first day following
such change. Accrued interest shall be payable monthly in arrears on the first
day of each month, commencing June 1, 1998, and upon the final payment in full
of the principal balance hereof.
2.0 EVENTS OF DEFAULTS; REMEDIES.
2.1 Upon the occurrence of any Event of Default under and as
defined in the Loan Agreement, in addition to FINOVA's right to charge interest
on the Obligations at the Default Rate: (a) at the option of FINOVA, the entire
unpaid amount of this Note and all of the other Obligations, including without
limitation the Termination Fee, shall become immediately due and payable without
demand, notice or legal process of any kind; (b) FINOVA may, at its option,
without demand, notice or legal process of any kind, exercise any and all rights
and remedies granted to it by the Loan Agreement or by any other agreement now
or hereafter existing between FINOVA and Borrower or between FINOVA and any
guarantor of part or all of Borrower's liabilities to FINOVA; and (c) FINOVA may
at its option exercise from time to time any other rights and remedies available
to it under the Uniform Commercial Code or other law of the State of Arizona.
2.2 The remedies of FINOVA as provided herein and in the Loan
Agreement shall be cumulative and concurrent, and may be pursued singularly,
successively, or together, at the sole discretion of FINOVA. No act of omission
or commission of FINOVA, including specifically any failure to exercise any
right, remedy or recourse, shall be deemed to be a waiver or release of the
same, such waiver or release to be effected only through a written document
executed by FINOVA and then only to the extent specifically recited therein. A
waiver or release with reference to any one event shall not be construed as
continuing, as a bar to, or as a waiver or release of, any subsequent right,
remedy or recourse as to a subsequent event.
3.0 GENERAL PROVISIONS.
3.1 Borrower warrants and represents to FINOVA that Borrower
has used and will continue to use the loans and advances represented by this
Note solely for proper business purposes, and consistent with all applicable
laws and statutes.
3.2 This Note is secured by the Collateral described in the
Loan Agreement.
3.3 Borrower waives presentment, demand and protest, notice of
protest, notice of presentment and all other notices and demands in connection
with the enforcement of
2
<PAGE> 3
FINOVA's rights hereunder, except as specifically provided and called for by
this Note, and hereby consents to, and waives notice of, the release, addition,
or substitution, with or without consideration, of any collateral or of any
person liable for payment of this Note. Any failure of FINOVA to exercise any
right available hereunder or otherwise shall not be construed as a waiver of the
right to exercise the same or as a waiver of any other right at any other time.
3.4 If this Note is not paid when due or upon the occurrence
of an Event of Default, Borrower further promises to pay all costs of
collection, foreclosure fees, reasonable attorneys fees and expert witness fees
incurred by FINOVA, whether or not suit is filed hereon, and the fees, costs and
expenses as provided in the Loan Agreement.
3.5 The contracted for rate of interest of the loan
contemplated hereby, without limitation, shall consist of the following: (i) the
interest rate set forth on the Schedule, calculated and applied to the principal
balance of this Note in accordance with the provisions of this Note: (ii)
interest after an Event of Default, calculated and applied to the amounts due
under this Note in accordance with the provisions hereof; and (iii) all
Additional Sums (as herein defined), if any. Borrower agrees to pay an effective
contracted for rate of interest which is the sum of the above-referenced
elements. All examination fees, attorneys fees, expert witness fees, letter of
credit fees, collateral monitoring fees, closing fees, facility fees,
Termination Fees, Minimum Interest Charges, other charges, goods, things in
action or any other sums or things of value paid or payable by Borrower
(collectively, the "Additional Sums"), whether pursuant to this Note, the Loan
Agreement or any other documents or instruments in any way pertaining to this
lending transaction, or otherwise with respect to this lending transaction, that
under any applicable law may be deemed to be interest with respect to this
lending transaction, for the purpose of any applicable law that may limit the
maximum amount of interest to be charged with respect to this lending
transaction, shall be payable by Borrower as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of the Additional
Sums.
3.6 It is the intent of the parties to comply with the usury
law of the State of Arizona (the "Applicable Usury Law"). Accordingly, it is
agreed that notwithstanding any provisions to the contrary in this Note, or in
any of the documents securing payment hereof or otherwise relating hereto, in no
event shall this Note or such documents require the payment or permit the
collection of interest in excess of the maximum Interest Rate, then in any such
event (1) the provisions of the paragraph shall govern and control, (2) neither
Borrower nor any other person or entity now or hereafter liable for the payment
hereof shall be obligated to pay the amount of such interest to the extent that
it is in excess of the Maximum Interest Rate, (3) any such excess which may have
been collected shall be either applied as a credit against the then unpaid
principal amount hereof or refunded to Borrower, at FINOVA's option, and (4) the
effective rate of interest shall be automatically reduced to the Maximum
Interest Rate. It is further agreed, without limiting the generality of the
foregoing, that to the extent permitted by the Applicable Usury Law; (x) all
calculations of interest which are made for the purpose of determining whether
such rate would exceed the Maximum Interest Rate shall be made by amortizing,
prorating, allocating and spreading during the period of the full stated term of
the loan evidenced hereby, all interest at any time contracted for, charged or
received from Borrower
3
<PAGE> 4
or otherwise in connection with such loan; and (y) in the event that the
effective rate of interest on the loan should at any time exceed the Maximum
Interest Rate, such excess interest that would otherwise have been collected had
there been no ceiling imposed by the Applicable Usury Law shall be paid to
FINOVA from time to time, if and when the effective interest rate on the loan
otherwise fall below the Maximum Interest Rate, until the entire amount of
interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable Usury Law, then to the extent not
prohibited by the Applicable Usury Law, such increases shall apply to all
indebtedness evidenced hereby regardless of when incurred; but, again to the
extent not prohibited by the Applicable Usury Law, should the maximum Interest
Rate be decreased because of a change in the Applicable Usury Law, such
decreases shall not apply to the indebtedness evidenced hereby regardless of
when incurred.
3.7 FINOVA may at any time transfer this Note and FINOVA's
rights in any or all collateral securing this Note, and FINOVA thereafter shall
be relieved from all liability with respect to such collateral arising after the
date of such transfer.
3.8 This Note shall be binding upon Borrower and its legal
representatives, successors and assigns. Wherever possible, each provision of
this Note shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Note shall be prohibited by or
invalid under such law, such provision shall be severable, and be ineffective to
the extent of such prohibition or invalidity, without invalidating the remaining
provision of this Note.
THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY FINOVA IN
PHOENIX, ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF
ARIZONA, AS THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT
LIMITATION, THE UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. BORROWER HEREBY
(i) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED IN MARICOPA COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS NOTE; (ii) WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND CONSENTS THAT ALL SUCH SERVICE
OF PROCESS BE MADE BY MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO
BORROWER AT THE ADDRESS SET FORTH BELOW AND SERVICE SO MADE SHALL BE DEEMED TO
BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME
SHALL HAVE BEEN POSTED TO BORROWER'S ADDRESS; (iii) IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) AGREES THAT A
FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER
MANNER PROVIDED BY LAW; (v) AGREES
4
<PAGE> 5
NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST FINOVA OR ANY OF
FINOVA'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY
MATTER ARISING OUT OF OR RELATING TO THIS NOTE IN ANY COURT OTHER THAN ONE
LOCATED IN MARICOPA COUNTY, ARIZONA; AND (vi) IRREVOCABLY WAIVES ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION ARISING UNDER OR IN CONNECTION WITH THIS NOTE.
NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR FINOVA'S RIGHT TO SERVE LEGAL
PROCESS IN ANY MANNER PERMITTED BY LAW OR FINOVA'S RIGHT TO BRING ANY ACTION OR
PROCEEDING AGAINST BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION.
[Signatures Follow]
5
<PAGE> 6
DIGITAL SOLUTIONS, INC., a New Jersey corporation
Fed. Tax ID #: 22-1899798
By: ______________________________
Name:
Title:
Address: 300 Atrium Drive, Somerset, New Jersey 08773
DSI-CONTRACT STAFFING, INC., a New York corporation
Fed. Tax ID #: 13-2878077
By: ______________________________
Name:
Title:
Address: 245 Fifth Avenue, Suite 1003, New York, New York 10016
DSI-STAFF CONNXIONS-NORTHEAST, INC., a New Jersey corporation
Fed. Tax ID #: 22-3405060
By: ______________________________
Name:
Title:
Address: 300 Atrium Drive, Somerset, New Jersey 08773
DSI-STAFF RX, INC., a Texas corporation
Fed. Tax ID #: 76-0451040
By: ______________________________
Name:
Title:
Address: 2 Northpoint Drive, Suite 110, Houston, Texas 77060
DSI-STAFF CONNXIONS-SOUTHWEST, INC., a Texas corporation
Fed. Tax ID #: 76-0422152
By: ______________________________
Name:
Title:
Address: 2 Northpoint Drive, Suite 110, Houston, Texas 77060
[SECURED PROMISSORY NOTE]
<PAGE> 1
Exhibit 10.19
STOCK PLEDGE AGREEMENT
(SECURITY AGREEMENT)
STOCK PLEDGE AGREEMENT (SECURITY AGREEMENT), dated
April 28, 1998, between FINOVA CAPITAL CORPORATION, a Delaware corporation, with
an office at 355 South Grand Avenue, Suite 2400, Los Angeles, California 90071
("Pledgee"), and DIGITAL SOLUTIONS, INC., a New Jersey corporation with an
office at 300 Atrium Drive, Somerset, New Jersey 08873 ("Pledgor").
Pledgor and Pledgee are entering into a Loan and
Security Agreement, dated as of the date hereof (the "Loan Agreement"), pursuant
to which Pledgee will make revolving and term loans and provide other financial
accommodations to Borrower (collectively, the "Loans") on the terms and
conditions set forth in the Loan Agreement. It is a condition precedent to
Pledgee's obligation to make the Loans that Pledgor pledge to Pledgee and grant
Pledgee a security interest in all of the outstanding voting stock of each of
Pledgor's subsidiaries now owned or hereafter acquired by Pledgor, and certain
related rights and property, as more fully described below.
Accordingly, Pledgor hereby agrees with Pledgee as
follows:
1. Security Interest. In consideration of any loan,
advance, or other extension of credit heretofore or hereafter made by Pledgee
under the Loan Agreement or otherwise to, or for the account or benefit of
Borrower, and as security for the Obligations (as hereinafter defined), Pledgor
hereby pledges, transfers and assigns to Pledgee and grants to Pledgee a
security interest (the "Security Interest") in the following:
(a) all of the currently owned and hereafter
acquired shares of the stock of each Subsidiary (as
hereinafter defined) of the Borrower, now existing or
hereafter created or acquired (the "Pledged Stock"),
including, without limitation, the shares of stock described
on EXHIBIT A hereto and all shares of capital stock of each
Subsidiary which Pledgor receives by reason of any stock
split, bonus, dividend, distribution, or other form of issue;
(b) all warrants, rights, or options to
acquire, or securities convertible into, any capital stock of
any Subsidiary, now or hereafter issued to or acquired by
Pledgor;
(c) all dividends declared or paid upon the
Pledged Stock or any of the other stock or securities
described above;
(d) all increases and profits from the
foregoing and all replacements and substitutions for the
foregoing; and
(e) all proceeds of the foregoing including,
without limitation, all securities or other property acquired
with any proceeds.
<PAGE> 2
The property described in subsections (a) through (e) above is
referred to hereinafter collectively as the "Collateral". When used herein,
"Subsidiary" means any corporation, limited liability company, or other entity
of which at least a majority of the securities or other ownership interests
having ordinary voting power for the election of directors is owned or
controlled by the Pledgor or one or more Subsidiaries or by Pledgor and one or
more Subsidiaries. Pledgor is delivering to Pledgee herewith physical possession
of the Pledged Stock listed on Exhibit A, accompanied by appropriate instruments
of transfer executed in blank, and Pledgee herewith acknowledges receipt of the
Pledged Stock.
2. Obligations Secured. The Collateral secures
payment and performance by Pledgor of all of the Obligations as defined in the
Loan Agreement, including, without limitation, all current and future debts,
liabilities, agreements, covenants, and obligations of Pledgor to Pledgee under
or pursuant to this Agreement (all of the foregoing referred to collectively
herein as the "Obligations").
3. Representations and Warranties of Pledgor. Pledgor
represents and warrants that: (a) each Instrument and document constituting
Collateral is genuine and in all respects what it purports to be; (b) Pledgor is
the legal and beneficial owner of the Collateral free of all pledges, security
interests, charges, liens, or other encumbrances, except under this Agreement,
and has the power and authority to convey any or all of its rights and interests
in the Collateral; (c) the Pledged Stock constitutes all of the issued and
outstanding capital stock of Pledgor's Subsidiaries; (d) there are no options,
warrants, calls, or other rights or commitments of any character giving any
person the right to purchase any of the Pledged Stock or other Collateral from
Pledgor; (e) the Pledged Stock has been duly authorized and validly issued, is
fully paid and non-assessable, and was not issued in violation of the preemptive
or other rights of any person; (f) there are no restrictions on the voting
rights or upon the transfer of any of the Collateral other than those contained
in this Agreement or appearing on the certificates evidencing the Collateral;
(g) the instruments of transfer delivered with the Pledged Stock herewith are
duly executed and give Pledgee the power they purport to confer; (h) Pledgor has
no Subsidiary on the date hereof that is not listed on Exhibit A; and (i) the
execution, delivery and performance by Pledgor of this Agreement does not and
will not result in any violation of or conflict with the terms of any agreement,
indenture, instrument, license, judgment, decree, order, law, statute, ordinance
or other governmental rule or regulation applicable to or binding upon Pledgor.
4. Covenants of Pledgor. So long as this Agreement is
in effect, Pledgor: (a) will defend the Collateral against the claims and
demands of all other parties; will keep the Collateral free from all security
interests or other encumbrances, except under this Agreement; and will not sell,
transfer, assign, deliver or otherwise dispose of any Collateral or any interest
therein or right thereunder or grant to any person any option, warrant, or other
rights to acquire any of the Collateral or any interest therein or right
thereunder, without the prior written consent of Pledgee; (b) in connection
herewith, will execute and deliver to Pledgee such financing statements,
assignments, registrations, and other documents and do such other things
relating to the Collateral and the Security Interest as Pledgee may reasonably
request, and pay all costs of lien searches and filing financing statements,
assignments and other documents in all
2
<PAGE> 3
public offices reasonably requested by Pledgee; (c) will notify Pledgee promptly
in writing of any change in Pledgor's address; (d) if Pledgor organizes or
acquires any Subsidiary after the date hereof, or if Pledgor receives any
additional Instrument or document constituting or evidencing any Collateral,
Pledgor will immediately notify Pledgee thereof and immediately deliver such
Instrument or document to Pledgee, duly endorsed as Pledgee requests or
accompanied by an appropriate instrument of transfer executed in blank; and (e)
will pay or reimburse Pledgee for all taxes, assessments and other charges of
every nature which may be imposed, levied or assessed on Pledgee in respect of
the Collateral.
5. Voting Rights; Irrevocable Proxy. So long as no
Event of Default (as hereinafter defined) has occurred and is continuing,
Pledgor shall be entitled to exercise any and all voting and other consensual
rights pertaining to the Collateral or any part thereof for any purpose not
inconsistent with the terms of this Agreement and the Loan Agreement; provided,
however, that (i) Pledgor shall notify Pledgee in writing of each instance when
Pledgor is entitled to exercise such voting or consensual rights and of the
action Pledgor proposes to take and (ii) Pledgor shall not exercise or refrain
from exercising any such right if, in Pledgee's judgment reasonably exercised,
such action would have a material adverse effect on the value of the Collateral
or any part thereof. Pledgee shall execute and deliver (or cause to be executed
and delivered) to Pledgor all such proxies and other instruments as Pledgor may
reasonably request for the purpose of enabling Pledgor to exercise its voting
and other rights as provided in the preceding sentence. If an Event of Default
occurs, and so long as it continues, then, at Pledgee's election in its sole
discretion indicated by written notice to Pledgor, all of Pledgor's rights to
exercise any voting or other consensual rights pertaining to the Collateral or
any part thereof shall cease, and all such rights shall thereupon become vested
in Pledgee, which shall thereupon have the sole right to exercise such voting
and other consensual rights. In furtherance of the immediately preceding
sentence, Pledgor irrevocably constitutes and appoints Pledgee, effective upon
Pledgee's giving of the foregoing notice after the occurrence and during the
continuance of any Event of Default, as Pledgor's proxy with full power, in the
same manner, to the same extent and with the same effect as if Pledgor were to
do the same, and whether or not the Collateral has been transferred into the
name of Pledgee or its nominee: (a) to attend all meetings of stockholders of
any Subsidiary and to vote the Collateral at such meetings in such manner as
Pledgee shall, in its sole discretion, deem appropriate, including, without
limitation, in favor of the liquidation of any Subsidiary; (b) to consent, in
the sole discretion of Pledgee, to any and all action by or with respect to any
Subsidiary for which the consent of the stockholders of any Subsidiary is or may
be necessary or appropriate; and (c) without limitation, to do all things which
Pledgor can or could do as a stockholder of any Subsidiary, giving to Pledgee
full power of substitution and revocation. The foregoing proxy shall terminate
when this Agreement is no longer in full force and effect as hereinafter
provided. Pledgor hereby revokes any proxy or proxies heretofore given by
Pledgor to any person or persons whatsoever and agrees not to give any other
proxies in derogation hereof until this Agreement is no longer in full force and
effect as hereinafter provided.
6. Notice to and Acknowledgment by Borrower;
Registered Holder of Collateral.
3
<PAGE> 4
(a) Contemporaneously herewith, as an additional
condition precedent to Pledgee's obligation to make the Loans, and upon the
creation or acquisition of any Subsidiary on or after the date hereof, Pledgor
shall execute and deliver, and cause each Subsidiary to execute and deliver,
Notice and Acknowledgment in the form of EXHIBIT B attached hereto.
(b) At any time, either before or after an Event of
Default has occurred and is continuing, Pledgee is authorized to transfer the
Collateral or any part thereof into its own name or that of its nominee so that
Pledgee or its nominee may appear of record as the sole owner thereof.
7. Dividends and Other Income from Collateral;
Additional Shares.
(a) So long as no Event of Default hereunder has
occurred and is continuing, Pledgor shall be entitled to receive any and all
dividends or other income paid in respect of the Collateral. If an Event of
Default has occurred and is continuing, then Pledgor's entitlement to receive
dividends or other income in respect of the Collateral shall cease, and, until
such Event of Default has been cured or the Obligations are fully and finally
paid, any and all such dividends and other income shall be paid directly to
Pledgee without deduction, credit, or setoff for any reason; Pledgee shall, at
its sole election, either hold them as Collateral or apply the same to the
Obligations in such order and manner as Pledgee determines.
(b) Any and all dividends paid or payable other than
in cash in respect of, and instruments, stock and other property received,
receivable or otherwise distributed in respect of, upon the subdivision or
combination of, or in exchange for, any Collateral, shall constitute Collateral,
and shall forthwith be paid or delivered directly to Pledgee to hold as
Collateral.
(c) Any and all dividends and other distributions
paid or payable in cash in respect of any Collateral in connection with a
partial or total liquidation or dissolution, and any and all cash paid, payable
or otherwise distributed in respect to redemption of, or in exchange for, any
Collateral, shall be paid or delivered directly to Pledgee, which, at Pledgee's
sole election, shall be held as Collateral or applied to the Obligations in such
order and manner as Pledgee determines.
(d) If Pledgor receives, or becomes entitled to
receive, any additional shares of Pledged Stock or any other property, other
than as contemplated in subsections (a), (b), and (c) of this Section 7 (whether
by reclassification, readjustment, stock split or other change in the capital
structure of any Subsidiary, or in any other manner), such shares or other
property shall constitute Collateral, and Pledgor shall direct the applicable
Subsidiary to deliver certificates representing such shares and all such other
property directly to Pledgee to be held as Collateral, and Pledgor shall deliver
to Pledgee appropriate instruments of transfer executed in blank with respect
thereto.
(e) If, notwithstanding the foregoing, Pledgor
receives any dividend or other property payable or deliverable directly to
Pledgee in accordance with the foregoing subsections, Pledgor shall receive it
in trust for the benefit of Pledgee, segregate it
4
<PAGE> 5
from the other property or funds of Pledgor, and deliver it immediately to
Pledgee in the form received (with any necessary endorsement).
8. Increases, Profits, Payments or Distributions.
(a) Whether or not an Event of Default has
occurred, Pledgor authorizes Pledgee: (i) to receive any increase in or profits
on the Collateral (which, for the purposes hereof, shall not include cash
dividends) and to hold the same as part of the Collateral; and (ii) to receive
any payment or distribution on the Collateral upon redemption by, or dissolution
and liquidation of, any Subsidiary; to surrender the Collateral or any part
thereof in exchange therefor; and, at Pledgee's sole election, to hold the net
cash receipts from any such payment or distribution as part of the Collateral,
or to apply them to the Obligations in such order and manner as Pledgee
determines.
(b) If Pledgor receives any such increase,
profits, payments or distributions, Pledgor will receive and deliver the same
promptly to Pledgee on the same terms and conditions set forth in Section 7(e).
9. Events of Default. It shall be an Event of Default
hereunder if any Event of Default under the Loan Agreement occurs.
10. Remedies.
(a) Whenever an Event of Default occurs
(after taking into account the applicable cure period, if any) and so long as it
continues, Pledgee shall have, and may exercise with respect to the Collateral,
in such order and manner as it determines, all rights and remedies of a secured
party under the Uniform Commercial Code and under any other applicable law, as
the same may from time to time be in effect, as well as those rights granted
herein, under the Loan Agreement, and in any other agreement now or hereafter in
effect between Pledgor and Pledgee. Without limiting the generality of the
foregoing, whenever an Event of Default exists, Pledgee may sell or otherwise
dispose of all or any part of the Collateral by public or private sale, in one
or more transactions, and in such order as Pledgee determines. Proceeds realized
from such sales and dispositions shall be applied first to Pledgee's costs and
expenses in connection therewith and then to the Obligations in such order as
Pledgee determines. Pledgor recognizes that Pledgee may be unable to effect a
public sale of all or a part of the Collateral by reason of certain provisions
contained in the Securities Act of 1933, as amended (the "Securities Act") and
the securities laws of various states, and may be compelled to resort to one or
more private sales to a restricted group of purchasers who will be obliged to
agree, among other things, to acquire the Collateral for their own account, for
investment and without a view to the distribution or resale thereof. Pledgor
understands that private sales so made may be at prices and other terms less
favorable than if the Collateral were sold at public sales, and agrees that
Pledgee has no obligation to delay the sale of the Collateral for the period of
time necessary to permit Pledgee to register the Collateral for sale under the
Securities Act or such state laws. Pledgor agrees that private sales under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
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<PAGE> 6
(b) Without in any way requiring notice to
be given in the following time and manner, Pledgor agrees that any notice by
Pledgee of a sale, disposition or other intended action hereunder or in
connection herewith, whether required by the Uniform Commercial Code or
otherwise, shall constitute reasonable notice to Pledgor if such notice is
mailed by registered or certified mail, return receipt requested, postage
prepaid, or delivered personally against receipt, or sent by a recognized
overnight delivery service, at least ten (10) days prior to such action, to
Pledgor's address set forth in the caption of this Agreement or to such other
address as is specified in writing to Pledgee as the address to which notices
shall be given to Pledgor.
(c) Pledgor shall pay on demand all costs
and expenses incurred by Pledgee in enforcing this Agreement, in realizing upon
or protecting any Collateral and in enforcing and collecting any Obligations or
any guaranty thereof, including, without limitation, if Pledgee retains counsel
for advice, suit, appeal, insolvency or other proceedings under the federal
Bankruptcy Code or otherwise, or for any of the above purposes, the reasonable
attorneys' and paralegals' fees incurred by Pledgee, and all such costs and
expenses are secured by the Collateral, as well as by all other property serving
as security for the Obligations.
11. Miscellaneous.
(a) Pledgor hereby expressly waives: (i)
notice of the acceptance by Pledgee of this Agreement; (ii) notice of the
existence, creation, payment, nonpayment, performance or nonperformance of all
or any of the Obligations; (iii) presentment, demand, notice of dishonor,
protest, notice of protest and all other notices whatsoever with respect to the
payment or performance of the Obligations or the amount hereof or any payment or
performance by Pledgor hereunder, except as otherwise expressly provided in the
Loan Agreement; (iv) all diligence in collection or protection of or realization
upon the Obligations or any thereof, any obligation hereunder or any security
for or guaranty of any of the foregoing; (v) any right to direct or affect the
manner or timing of Pledgee's enforcement of its rights or remedies; (vi) any
and all defenses which would otherwise arise upon the occurrence of any event or
contingency or upon the taking of any action by Pledgee permitted hereunder;
(vii) any defense, right of set-off, claim or counterclaim whatsoever and any
and all other rights, benefits, protections and other defenses available to
Pledgor now or at any time hereafter; and (viii) all other principles or
provisions of law, if any, that conflict with the terms of this Agreement,
including, without limitation, the effect of any circumstances that may or might
constitute a legal or equitable discharge of a guarantor or surety. Pledgor
hereby further waives all rights to revoke this Agreement at any time, and all
rights to revoke any agreement executed by Pledgor at any time to secure further
the payment and performance of the Obligations. Pledgor waives all rights and
defenses arising out of an election of remedies by Pledgee, even though that
election of remedies, such as a nonjudicial foreclosure with respect to security
for a guaranteed obligation, has destroyed Pledgor's rights of subrogation and
reimbursement against Borrower by the operation of any applicable law or
otherwise.
(b) Pledgor hereby appoints Pledgee as
Pledgor's attorney-in-fact (without requiring Pledgee) to perform all acts which
Pledgee deems appropriate in accordance with this Agreement to perfect and
continue its interests hereunder in the
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<PAGE> 7
Collateral and to protect, preserve and realize upon the Collateral. Pledgor
further appoints Pledgee as its attorney-in-fact to execute such orders and
receipts for payment of the Collateral in accordance with this Agreement as
Pledgee deems appropriate in its sole discretion. These powers of attorney are
coupled with an interest and shall be irrevocable and are given to secure
performance by Pledgor of the Obligations and are irrevocable. Pledgor ratifies
and approves all acts of such attorney, and Pledgee shall not be liable for any
acts or omissions or any error of judgment or mistake of fact or law other than
resulting from Pledgee's bad faith or willful misconduct. Subject to the terms
of this Agreement, Pledgee may demand, collect, and sue on the Collateral (in
either its or Pledgor's name, at Pledgee's sole option), and enforce,
compromise, settle, or discharge the Collateral, without discharging the
Obligations or any part thereof and whether or not any such action results in
the imposition of any penalty. Pledgor authorizes and directs Borrower to make
any payments in respect of the Collateral as Pledgee may direct and hereby
releases Borrower from any liability to Pledgor for making such payments.
(c) Upon Pledgor's failure to perform any of
its duties hereunder, Pledgee may, but shall not be obligated to, perform any or
all such duties, and Pledgor shall pay an amount equal to the cost thereof to
Pledgee on demand. Payment of such amount shall be secured by the Collateral, as
well as by all other property serving as security for the Obligations.
(d) No course of dealing between Pledgor and
Pledgee and no delay or omission by Pledgee in exercising any right or remedy
hereunder or with respect to any Obligations shall operate as a waiver thereof
or of any other right or remedy, and no single or partial exercise thereof shall
preclude any other or further exercise thereof or the exercise of any other
right or remedy. Pledgee may remedy any default by Pledgor hereunder or with
respect to any Obligations in any manner without waiving the default remedied
and without waiving any other prior or subsequent default by Pledgor. All rights
and remedies of Pledgee hereunder are cumulative.
(e) Pledgee shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if such Collateral is accorded treatment substantially equal to
that which Pledgee accords its own property, it being understood that Pledgee
shall not have responsibility for (i) ascertaining or taking action with respect
to any matters relative to any Collateral, whether or not Pledgee has or is
deemed to have knowledge of such matters, or (ii) taking any necessary steps to
preserve rights against any parties with respect to any Collateral. Pledgor
shall have the sole responsibility for taking any and all steps to preserve
rights against any and all parties to any Collateral, whether or not in
Pledgee's possession. Pledgee shall not be responsible for loss or damage
resulting from Pledgee's failure to enforce or collect any Collateral or to
collect any moneys due or to become due thereunder. Pledgor waives protest of
any Instrument constituting Collateral at any time held by Pledgee on which
Pledgor is in any way liable and waives notice of any other action taken by
Pledgee.
(f) If any provision of this Agreement shall
be prohibited or invalid under applicable law, it shall be ineffective only to
such extent, without invalidating the remainder of this Agreement.
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<PAGE> 8
(g) Upon any assignment by Pledgee of its
rights and obligations, or any part thereof, in accordance with the Loan
Agreement, such assignee shall become vested with Pledgee's rights and benefits
hereunder to the extent of such assignment.
(h) If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of the Obligations,
Pledgee is required to surrender or return such payment or proceeds to any
person for any reason, then the Obligations intended to be satisfied by such
payment or proceeds shall be reinstated and continue and this Agreement shall
continue in full force and effect as if such payment or proceeds had not been
received by Pledgee. Pledgor shall be liable to pay to Pledgee, and does
indemnify and hold Pledgee harmless for the amount of any payments or proceeds
surrendered or returned. This subsection shall remain effective notwithstanding
any contrary action which may be taken by Pledgee in reliance upon such payment
or proceeds. This subsection shall survive the termination or revocation of this
Agreement.
(i) Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Pledgee. Pledgee shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Pledgee. Any such waiver shall be enforceable only to the extent specifically
set forth therein. A waiver by Pledgee of any right, power or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
or remedy which Pledgee would otherwise have on any future occasion, whether
similar in kind or otherwise.
(j) Pledgee shall not have liability to
Pledgor (whether in tort, contract, equity or otherwise) for losses suffered by
Pledgor in connection with, arising out of, or in any way related to the
transactions or relationships contemplated by this Agreement, or any act,
omission or event occurring in connection herewith, unless it is determined by a
final and non-appealable judgment or court order binding on Pledgee that the
losses were the result of acts or omissions constituting gross negligence or
willful misconduct. In any such litigation, Pledgee shall be entitled to the
benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of the Loan
Agreement and the other agreements entered into in connection therewith.
(k) This Agreement represents the entire
agreement and understanding of the parties concerning the subject matter hereof,
and supersedes all other prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.
(l) This Agreement shall be binding upon
Pledgor and its representatives, successors and assigns and shall inure to the
benefit of Pledgee and its successors, endorsees, transferees and assigns.
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<PAGE> 9
(m) THIS AGREEMENT SHALL BE INTERPRETED IN
ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE
STATE OF ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
PLEDGOR HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF LOS ANGELES IN THE STATE OF CALIFORNIA, THE
COUNTY OF MARICOPA IN THE STATE OF ARIZONA, THE COUNTY OF NEW YORK IN THE STATE
OF NEW YORK OR, AT THE SOLE OPTION OF PLEDGEE, IN ANY OTHER COURT IN WHICH
PLEDGEE SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. PLEDGOR WAIVES ANY OBJECTION
OF FORUM NON CONVENIENS AND VENUE. PLEDGOR FURTHER WAIVES PERSONAL SERVICE OF
ANY AND ALL PROCESS UPON HIM, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE IN THE MANNER SET FORTH IN SECTION 11(o) HEREOF FOR THE GIVING OF NOTICE.
(n) PLEDGEE AND PLEDGOR EACH HEREBY WAIVES
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN PLEDGEE AND PLEDGOR; OR (iii) ANY
CONDUCT, ACTS OR OMISSIONS OF PLEDGEE OR PLEDGOR OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
PLEDGEE OR PLEDGOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.
(o) Any notice required hereunder shall be
in writing and addressed to Pledgor and to Pledgee (to the attention of John
Bonano) at their addresses set forth at the beginning of this Agreement with
simultaneous copies sent to FINOVA Capital Corporation, 1850 N. Central Avenue,
P.O. Box 2209, Phoenix, Arizona 85002-2209, Attention: Joseph R. D'Amore, Esq.
and 1060 First Avenue, King of Prussia, Pennsylvania 19406, Attention: Beth
Egan. Notices hereunder shall be deemed received on the earlier of receipt,
whether by mail, personal delivery, facsimile, or otherwise, or two (2) days
after deposit in the United States mail, postage prepaid. A copy of any notice
to Pledgor shall be sent to Goldstein & DiGioia, LLP, 369 Lexington Avenue, New
York, New York 10017, Attn: Victor J. DiGioia, Esq.
(p) All defined terms, unless otherwise
defined in this Agreement, shall have the definitions set forth in the Uniform
Commercial Code adopted in Arizona, as the same may from time to time be in
effect.
(q) This Agreement may be executed in one or
more counterparts, each of which taken together shall constitute one and the
same instrument.
(r) This Agreement shall remain in full
force and effect until all of the Obligations have been indefeasibly paid and
performed in full and the Loan Agreement
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<PAGE> 10
and all other agreements, documents and instruments referred to therein or at
any time executed and/or delivered in connection therewith or related thereto,
including, but not limited to, this Agreement, have been terminated, at which
time Pledgee shall release and return the Pledged Stock then being held by it to
Pledgor.
[ Signatures Follow ]
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<PAGE> 11
IN WITNESS WHEREOF, Pledgor has executed and
delivered this Agreement on April 28, 1998.
PLEDGOR
DIGITAL SOLUTIONS, INC.
By: ___________________________
Name:
Title:
PLEDGEE
Accepted at _______________, ________
this 28th day of April, 1998
FINOVA CAPITAL CORPORATION
By: ____________________________
Name: Ilene Gerber
Title: Vice President
[ STOCK PLEDGE AGREEMENT - DSI ]
<PAGE> 12
EXHIBIT A
Shares Pledged of Each Subsidiary
<PAGE> 13
EXHIBIT B
Digital Solutions, Inc.
300 Atrium Drive
Somerset, New Jersey 08873
RE: PLEDGE OF COMMON STOCK
Ladies and Gentlemen:
You have advised us that, pursuant to a Stock Pledge
Agreement (Security Agreement) dated April , 1998 with FINOVA Capital
Corporation ("Pledgee"), a copy of which is attached hereto (the "Pledge
Agreement"), you have pledged to Pledgee and granted Pledgee a security interest
in shares of the common stock of
(the "Shares"), and in certain other property described therein. In connection
therewith, we hereby acknowledge and agree, for your benefit and for the benefit
of Pledgee, as follows:
1. We hereby acknowledge notice that you have pledged
to Pledgee and granted to Pledgee a security interest in the Shares and the
other Collateral (as defined in the Pledge Agreement). We agree to mark our
books and records accordingly to reflect such pledge and security interest.
2. Until Pledgee notifies us in writing to the
contrary, we agree to: (i) pay directly to Pledgor when due and payable all
dividends on the Shares; (ii) pay directly to Pledgee when due and payable (a)
all payments in respect of the redemption of all or any part of the Shares, (b)
all payments in respect of the Shares upon our liquidation, dissolution, or
winding-up, and (c) all other sums at any time due in respect of the Collateral;
and (ii) deliver directly to Pledgee any certificate, instrument, or other
tangible evidence of any other Collateral, including, without limitation, any
additional shares of our capital stock, or any warrant, right or option to
acquire, or any security convertible into, any of our capital stock, to the
extent at any time issued or issuable to you.
3. We agree that, upon the sole written instructions
of Pledgee at any time, when an Event of Default (as defined in the Pledge
Agreement) has occurred and is continuing, we shall register the Shares and
other Collateral, or any part thereof, in the name of Pledgee or Pledgee's
designee or transferee, either for the purposes of further perfecting Pledgee's
security interest or enforcing the same, and shall accord to Pledgee or such
designee or transferee all of the rights and benefits of ownership of such
Shares or other Collateral.
4. We shall not, without Pledgee's prior written
consent, register on our books or otherwise give effect to any transfer of the
Shares or other Collateral or any pledge thereof, security interest therein, or
other encumbrance thereon.
5. We will send to Pledgee a copy of each notice,
report, or other communication that we send or are required to send to you in
connection with any of the
<PAGE> 14
Collateral, at the same time that we send or are required to send such notice,
report, or other communication to you.
6. We agree that none of the terms of this letter may
be modified in any respect without the prior written consent of Pledgee, and we
further agree that such terms shall continue in full force and effect until
Pledgee notifies us in writing that the pledge and security interest under the
Pledge Agreement has terminated.
7. You hereby agree that we may comply with the terms
of this letter without any obligation to inquire into the propriety or validity
of any action taken or omitted by Pledgee and without any liability to you
whatsoever for any action or inaction hereunder on our part.
8. This letter shall be governed by and construed and
enforced in accordance with the internal laws of the State of Arizona. This
letter may be signed in one or more counterparts and by each party in separate
counterparts, each of which shall be an original and all of which together
constitute one agreement.
Very truly yours,
___________________________________
By:
Name:
Title:
Accepted and Agreed:
DIGITAL SOLUTIONS, INC.
By: ______________________________
Name:
Title:
FINOVA CAPITAL CORPORATION
By: ___________________________
Name:
Title:
<PAGE> 1
Exhibit 10.20
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of January, 1998, by and between
Donald W. Kappauf, residing at 10044 Tullo Farm Road, Bridgewater, NJ 08807
(hereinafter referred to as the "Employee") and DIGITAL SOLUTIONS, INC., a New
Jersey corporation with principal offices located at 300 Atrium Drive, Somerset,
NJ 08873 (hereinafter referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company and its subsidiaries are engaged in
the business of providing Human Resource Administrative Services; and
WHEREAS, the Company employs and desires to continue the employment of
the Employee for the purpose of securing for the Company the experience, ability
and services of the Employee; and
WHEREAS, the Employee desires to continue employment with the Company,
pursuant to the terms and conditions herein set forth, superseding all prior
agreements between the Company, its subsidiaries and/or predecessors and
Employee;
NOW, THEREFORE, it is mutually agreed by and between the parties
hereto as follows:
ARTICLE I
EMPLOYMENT
Subject to and upon the terms and conditions of this Agreement, the
Company hereby employs and agrees to continue the
<PAGE> 2
employment of the Employee, and the Employee hereby accepts such continued
employment in his capacity as President and Chief Executive Officer.
ARTICLE II
DUTIES
(A) The Employee shall, during the term of his employment with the
Company, and subject to the direction and control of the Company's Board of
Directors, perform such duties and functions as he may be called upon to perform
by the Company's Board of Directors during the term of this Agreement.
(B) The Employee agrees to devote full business time and his best
efforts in the performance of his duties for the Company and any subsidiary
corporation of the Company.
(C) The Employee shall perform, in conjunction with the Company's
Executive Management, to the best of his ability the following services and
duties for the Company and its subsidiary corporations (by way of example, and
not by way of limitation):
(i) Those duties attendant to the position with the
Company for which he is hired;
(ii) Establish and implement current and long range objectives,
plans, and policies, subject to the approval of the Board of Directors;
(iii) Financial planning including the development of, liaison
with, financing sources and investment bankers;
(iv) Managerial oversight of the Company's business;
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<PAGE> 3
(v) Shareholder's relations;
(vi) Ensure that all Company activities and operations are
carried out in compliance with local, state and federal regulations and laws
governing business operations.
(vii) Business expansion of the Company including
acquisitions, joint ventures, and other opportunities; and
(viii) Promotion of the relationships of the Company and its
subsidiaries with their respective employees, customers, suppliers and others in
the business community.
(D) Employee shall be based in the New Jersey area, and shall
undertake such occasional travel, within or without the United States as is or
may be reasonably necessary in the interests of the Company.
ARTICLE III
COMPENSATION
(A) Commencing the date hereof and during the term hereof, Employee
shall be compensated initially at the rate of $165,000 per annum subject to such
increases as the Board of Directors shall determine as of each August 27 during
the term of this Agreement (the "Base Salary") which shall be paid to Employee
as in accordance with the Company's regular payroll periods.
(B) Employee shall be entitled to receive a bonus (the "Bonus") in
accordance with the Company's Senior Management Incentive Program to be
determined at the commencement of each fiscal year; provided, however, for the
fiscal year ended September 30, 1998, Employee shall be entitled to be paid as a
Bonus 6%
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<PAGE> 4
percent of the net pre-tax profit of the Company as determined by the Company's
independent auditors no later than 90 days following the end of the Company's
fiscal year without giving effect to tax loss carry forwards or the payment of a
bonus under this agreement (the "EBT") up to $2,500,000 of EBT, plus 8% of the
EBT over $2,500,000; provided that in the event the EBT is less than $1,500,000,
no bonus shall be paid by the Company to the Employee pursuant to this
subparagraph (B). Such determination, for Bonus purposes only, shall be made in
accordance with generally accepted accounting principles, as modified by these
resolutions.
(C) Employee may receive such other additional compensation as
may be determined from time to time by the Board of Directors. Nothing herein
shall be deemed or construed to require the Board to award any bonus or
additional compensation.
(D) The Company shall deduct from Employee's compensation all
federal, state and local taxes which it may now or may hereafter be required to
deduct.
ARTICLE IV
BENEFITS
(A) During the term hereof, the Company shall (i) provide
Employee with group health care and insurance benefits as generally made
available to the Company's senior management; (ii) provide such other insurance
benefits obtained by the Company, and made generally available to the Company's
senior management; (iii) reimburse Employee for expenses associated with an
annual physical
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<PAGE> 5
examination; (iv) reimburse the Employee, upon presentation of appropriate
vouchers, for all reasonable business expenses incurred by the Employee on
behalf of the Company upon presentation of suitable documentation; and (v) pay
to Employee the sum of $800 per month as and for an automobile allowance.
(B) In the event the Company wishes to obtain Key Man life
insurance on the life of Employee, Employee agrees to cooperate with the Company
in completing any applications necessary to obtain such insurance and promptly
submit to such physical examinations and furnish such information as any
proposed insurance carrier may request.
(C) For each year of the term hereof, Employee shall be
initially entitled to four weeks paid vacation increasing to five weeks for the
second year of this agreement.
ARTICLE V
NON-DISCLOSURE
The Employee shall not, at any time during or after the termination of
his employment hereunder except when acting on behalf of and with the
authorization of the Company, make use of or disclose to any person,
corporation, or other entity, for any purpose whatsoever, any trade secret or
other confidential information concerning the Company's business, finances,
marketing, computerized payroll, accounting and information business, personnel
and/or employee leasing business of the Company and its subsidiaries including
information relating to any customer
5
<PAGE> 6
of the Company or pool of temporary employees, or any other nonpublic business
information of the Company and/or its subsidiaries learned as a consequence of
Employee's employment with the Company (collectively referred to as the
"Proprietary Information"). For the purposes of this Agreement, trade secrets
and confidential information shall mean information disclosed to the Employee or
known by him as a consequence of his employment by the Company, whether or not
pursuant to this Agreement, and not generally known in the industry. The
Employee acknowledges that trade secrets and other items of confidential
information, as they may exist from time to time, are valuable and unique assets
of the Company, and that disclosure of any such information would cause
substantial injury to the Company.
ARTICLE VI
RESTRICTIVE COVENANT
(A) In the event of the voluntary termination of employment with the
Company prior to the expiration of the term hereof, or Employee's discharge in
accordance with Article IX, or the expiration of the term hereof, Employee
agrees that he will not, for a period of one year following such termination (or
expiration, as the case may be) directly or indirectly enter into or become
associated with or engage in any other business (whether as a partner, officer,
director, shareholder, employee, consultant, or otherwise), which business is
located in the states of New Jersey, New York and Texas and is involved in the
professional
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<PAGE> 7
employer organization business, or is otherwise engaged in the same or similar
business as the Company shall be engaged and is in direct competition with the
Company, or which the Company is in the process of developing, during the tenure
of Employee's employment by the Company. Notwithstanding the foregoing, the
ownership by Employee of less than 5% of the shares of any publically held
corporation shall not violate the provisions of this Article VI.
(B) In furtherance of the foregoing, Employee shall not during
the aforesaid period of non-competition, directly or indirectly, in connection
with any computerized payroll, employee leasing, or permanent or temporary
personnel business, or any business similar to the business in which the Company
was engaged, or in the process of developing during Employee's tenure with the
Company, solicit any customer or employee of the Company who was a customer or
employee of the Company during the tenure of his employment.
(C) If any court shall hold that the duration of
non-competition or any other restriction contained in this paragraph is
unenforceable, it is our intention that same shall not thereby be terminated but
shall be deemed amended to delete therefrom such provision or portion
adjudicated to be invalid or unenforceable or in the alternative such judicially
substituted term may be substituted therefor.
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<PAGE> 8
ARTICLE VII
TERM
(A) This Agreement shall be for a term of two (2) years
commencing January 1, 1998 and terminating on December 31, 1999 unless sooner
terminated as provided for herein (the "Expiration Date".
(B) Unless this Agreement is earlier terminated pursuant to
the terms hereof, the Company agrees to notify Employee in writing whether it
intends to negotiate a renewal of this Agreement by notice three months prior to
the Expiration Date (the "Three Month Notice"). In the event the Company fails
to so notify the Employee, the term of this Agreement shall be extended for an
additional one year.
(C) If the Company elects not to seek to renegotiate a renewal
as provided in paragraph (B) above, or if the Company fails to reach agreement
with Employee as to the terms of renewal, upon the termination of Employee's
employment with the Company for any reason after the Expiration Date, the
Company shall pay to Employee, in addition to any other payments due hereunder,
a severance payment equal to twelve months of Employee's Base Salary ("Severance
Payments") payable in twelve equal monthly installments commencing on the first
day of the first month following the date of such termination; provided,
however, if Employee secures alternate employment within such twelve month
period, the Company will be responsible only for the negative difference between
payments, will continue only through the month in which such new employment
begins.
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<PAGE> 9
ARTICLE VIII
DISABILITY DURING TERM
In the event Employee becomes totally disabled so that he is unable or
prevented from performing any one or all of his usual duties hereunder for a
period of four (4) consecutive months, and the Company elects to terminate this
agreement in accordance with Article IX, paragraph (B) then, and in that event,
Employee shall receive his Base Salary as provided under Article III of this
Agreement for a period of twelve (12) months commencing from the date of such
total disability. The obligation of the Company to make the aforesaid payments
shall be modified and reduced and the Company shall receive a credit for all
disability insurance payments which Employee may receive from insurance policies
provided by the Company.
ARTICLE IX
TERMINATION
The Company may terminate this Agreement:
(A) Upon the death of Employee during the term hereof,
except that the Employee's legal representatives, successors, assigns and heirs
shall have those rights and interests as otherwise provided in this Agreement,
including the right to receive accrued but unpaid incentive compensation and
special bonus compensation on a pro rata basis.
(B) Subject to the terms of Article VIII herein, upon written notice
from the Company to the Employee, if Employee
9
<PAGE> 10
becomes totally disabled and as a result of such total disability, has been
prevented from and unable to perform all of his duties hereunder for a
consecutive period of four (4) months.
(C) Upon written notice from the Company to the Employee, at
any time for "Cause". For purposes of this Agreement "Cause" shall be defined
as: (i) willful disobedience by the Employee of a material and lawful
instruction of the Chairman of the Board or the Board of Directors of the
Company; or (ii) conviction of the Employee of any misdemeanor involving fraud
or embezzlement or similar crime, or any felony; (iii) breach by the Employee of
any material provision of this Agreement; or (iv) conduct amounting to fraud,
dishonesty, negligence, willful misconduct, recurring insubordination,
inattention to or unsatisfactory performance of duties which adversely affects
operations of the Company, or excessive absences from work; provided that the
Company shall not have the right to terminate the employment of Employee
pursuant to the foregoing clause (i) or clause (iii) unless written notice
specifying such breach shall have been given to the Employee and, in the case of
breach which is capable of being cured, the Employee shall have failed to cure
such breach within thirty (30) days after his receipt of such notice.
(D) In the event the Company demotes, substantially reduces
the duties of or reduces the salary or benefits of the employee, the employee
may elect to treat this Agreement as terminated for "good reason." In the event
of termination of this Agreement for good reason, the employee shall be entitled
to
10
<PAGE> 11
payment of the greater of all salary, benefits and stock grants or options due
for the remaining term of the Agreement or the severance payments as defined in
Article VII(C) herein, in addition to any rights or remedies available to the
employee at law or in equity.
(E) In the event of the termination of this Agreement and the
discharge of Employee by the Company in breach and violation of this Agreement,
Employee shall not be obligated to mitigate damages by seeking or obtaining
alternate employment.
ARTICLE X
STOCK OPTIONS
As an inducement to Employee to enter into this Agreement the Company
hereby grants to Employee options to purchase shares of the Company's Common
Stock, $.001 par value, upon and subject to the following conditions:
(a) Subject to the terms and conditions of the Company's Senior
Management Incentive Plan (the "Plan"), and the terms and conditions set forth
in the Stock Option Certificate which are incorporated herein by reference, the
Employee is hereby granted options to purchase 100,000 shares of the Company's
Common Stock of which options to purchase 50,000 shares shall be vested on the
first anniversary hereof, and the remaining options to purchase 50,000 shares
shall be vested on the second anniversary hereof. The option shall contain such
other terms and conditions as set forth in the stock option agreement. The
exercise price of the
11
<PAGE> 12
options shall be $1.9375. The foregoing options are not qualified as incentive
stock options. The Options provided for herein are not transferable by Employee
and shall be exercised only by Employee, or by his legal representative or
executor, as provided in the Plan. Such Option shall terminate as provided in
the Plan.
ARTICLE XI
EXTRAORDINARY TRANSACTIONS
The Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Employee, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company. A "Change in Control" of
the Company shall be deemed to have occurred if there shall be consummated
(i)(x) any consolidation or merger of the Company in which the Company is not
the continuing or surviving corporation or pursuant to which shares of the
Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for
12
<PAGE> 13
the liquidation or dissolution of the Company, or (iii) any person (as such term
is used in Sections 13(d) and l3(d)(2) of the Securities Exchange Act of l934,
as amended (the "Exchange Act")), shall become the beneficial owner (within the
meaning of Rule l3d-3 under the Exchange Act) of 20% or more of the Company's
outstanding Common Stock, or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board of
Directors shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
The Company agrees that, if during the term hereof, or during
such time as the Employee is otherwise employed by the Company, a Change in
Control shall occur, all options to purchase Common Stock of the Company held by
Employee, either pursuant to this Agreement or otherwise, shall immediately vest
and become exercisable on the first day following a Change in Control. Further,
the options shall be deemed amended to provide that in the event of termination
after an event enumerated in this Article X, the options shall remain
exercisable for the duration of their term; and further, at the Employee's
option, an amount equal to three times the aggregate annual compensation paid to
the Employee during the calendar year preceding the Change in Control shall be
credited against the exercise price of any options held by Employee at the time
Employee elects to exercise such options; provided, however, that if the
13
<PAGE> 14
lump sum severance payment under this Article XI, either alone or together with
other payments which the Employee has the right to receive from the Company,
would constitute a "parachute payment" (as defined in Section 280G of the
Internal Revenue Code of l954, as amended (the "Code")), such credit shall be
reduced to the largest amount as will result in no portion of the credit under
this Article XI being subject to the excise tax imposed by Section 4999 of the
Code.
ARTICLE XII
TERMINATION OF PRIOR AGREEMENTS
This Agreement sets forth the entire agreement between the
parties and supersedes all prior agreements between the parties, whether oral or
written, without prejudice to Employee's right to all accrued compensation prior
to the effective date of this Agreement.
ARTICLE XIII
ARBITRATION AND INDEMNIFICATION
(a) Any dispute arising out of the interpretation, application
and/or performance of this Agreement with the sole exception of any claim,
breach or violation arising under Articles V or VI hereof shall be settled
through final and binding arbitration before a single arbitrator in the State of
New Jersey in accordance with the rules of the American Arbitration Association.
The arbitrator shall be selected by the Association
14
<PAGE> 15
and shall be an attorney at law experienced in the field of corporate law. Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties.
(b) The Company hereby agrees to indemnify, defend and hold
harmless the employee for any and all claims arising from or related to his
employment by the Company at any time asserted, at any place asserted and to the
fullest extent permitted by law. The Company shall maintain such insurance as is
necessary and reasonable to protect the employee from any and all claims arising
from or in connection with his employment by the Company; provided such
insurance can be obtained without unreasonable effort and expense.
ARTICLE XIV
SEVERABILITY
If any provision of this Agreement shall be held invalid and
unenforceable, the remainder of this Agreement shall remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall remain in full force and effect in all other
circumstances.
ARTICLE XV
NOTICE
All notices required to be given under the terms of this Agreement
shall be in writing and shall be deemed to have been duly given only if
delivered to the addressee in person, with written
15
<PAGE> 16
acknowledgment received, or mailed by certified mail, return receipt requested,
as follows:
IF TO THE COMPANY: Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
IF TO THE EMPLOYEE: Donald W. Kappauf
10044 Tullo Farm Road
Bridgewater, NJ 08807
or to any such other address as the party to receive the notice shall advise by
due notice given in accordance with this paragraph. Notice shall be effective
three (3) days after delivery or mailing.
ARTICLE XVI
BENEFIT
This Agreement shall inure to, and shall be binding upon, the parties
hereto, the successors and assigns of the Company, and the heirs and personal
representatives of the Employee.
ARTICLE XVII
WAIVER
The waiver by either party of any breach or violation of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach of construction and validity.
ARTICLE XVIII
GOVERNING LAW
This Agreement has been negotiated and executed in the State of New
Jersey, and New Jersey law shall govern its
16
<PAGE> 17
construction and validity.
ARTICLE XIX
JURISDICTION
Any or all actions or proceedings which may be brought by the Company
or Employee under this Agreement shall be brought in courts having a situs
within either the State of New Jersey, and Employee and the Company each hereby
consent to the jurisdiction of any local, state or federal court located within
the State of New Jersey.
ARTICLE XX
ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties
hereto. No change, addition or amendment shall be made hereto, except by written
agreement signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
and affixed their hands and seals the day and year first above written.
(Corporate Seal)
DIGITAL SOLUTIONS, INC.
By
--------------------------------
Karl W. Dieckmann
Chairman of the Board
--------------------------------
Donald W. Kappauf (Employee)
17
<PAGE> 1
EXHIBIT 21
DIGITAL SOLLUTIONS, INC.
SUBSIDIARIES OF THE REGISTRANT
DSI-Contract Staffing, Inc.
DSI-Staff Connxions-Northeast, Inc.
DSI-Staff Connxions-Southwest, Inc.
DSI-Staff Rx, Inc.
DSI-Staff Connxions, Inc.
DSI-Insurance Services, Inc.
Digital Solutions of New York
Page 1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K for the year ended September 30, 1998,
into Digital Solutions, Inc.'s previously filed Registration Statements on Form
S-3 File No. 33-85526, 33-70928, 33-91700, and 33-09313.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 6, 1999
31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,530,000
<SECURITIES> 0
<RECEIVABLES> 6,607,000
<ALLOWANCES> (284,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,112,000
<PP&E> 3,383,000
<DEPRECIATION> (2,591,000)
<TOTAL-ASSETS> 16,648,000
<CURRENT-LIABILITIES> 5,793,000
<BONDS> 0
0
0
<COMMON> (19,000)
<OTHER-SE> (7,855,000)
<TOTAL-LIABILITY-AND-EQUITY> 16,648,000
<SALES> 0
<TOTAL-REVENUES> 139,675,000
<CGS> 0
<TOTAL-COSTS> 129,747,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 247,000
<INTEREST-EXPENSE> (554,000)
<INCOME-PRETAX> 1,407,000
<INCOME-TAX> (1,296,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,703,000
<EPS-PRIMARY> .14<F1>
<EPS-DILUTED> .14
<FN>
<F1>Amount reflects EPS-Basic not EPS-Primary
</FN>
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