UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
Commission file Number 1-13424
Data Systems Network Corporation
Michigan 38-92649874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34705 W. 12 Mile Rd., Suite 300 48331
Farmington Hills, Michigan
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code:
(810)489-7117
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
Common Stock, $1 Par Value - 2,715,000 shares as of
April 30, 1996
PART I. - FINANCIAL INFORMATION
Item 1. Financial statements.
DATA SYSTEMS NETWORK CORPORATION
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995
(Unaudited)
Three months ended
March 31
__________________
1996 1995
_________ __________
Net sales $4,246,349 $6,605,314
Service revenue 767,515 470,686
---------- ----------
Total revenues 5,013,864 7,076,000
Cost of sales 3,728,824 5,739,248
Cost of service revenues 233,800 317,299
---------- ---------
Total cost of revenues 3,962,624 6,057,547
Gross Profit 1,051,240 1,018,453
Selling expenses 473,148 484,124
General and administrative
expenses 404,357 256,029
---------- ---------
Total operating expenses 877,505 740,152
Income from operations 173,735 279,300
Other income(expenses)
Interest expense (92,378) (91,046)
Interest income 85,200 43,594
---------- ---------
Net income before minority
interest in subsidiary 166,557 231,848
Less minority interest
in subsidiary (53,027)
---------- ---------
Net income 113,530 231,848
Three Months Ended March 31,
1996 1995
------------------------ -----------------------
Primary Fully Diluted Primary Fully Diluted
Earnings per commmon
shares: $0.04 $0.04 $0.08 $0.09
Weighted number of
shares outstanding: 2,589,903 2,889,903 2,670,000 2,970,000
<FN>
See Accompanying Notes to Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996 December 31, 1995
______________ ______________
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $3,249,788 $3,171,544
Accounts receivable (net of
allowance of $61,088 and
$67,086 March 31, 1996 and
December 31, 1995, respectively) 4,788,864 5,249,771
Notes Receivable 412,409 692,387
Inventories,net 1,008,154 992,922
Other current assets 196,813 294,296
--------------- --------------
Total Current Assets 9,656,028 10,400,860
Service Parts, net 1,114,744 1,169,781
Property and Equipment, net 593,877 297,029
Other Assets 74,247 70,743
Goodwill, net (note 3) 999,350
---------------- --------------
TOTAL ASSETS $12,432,246 $11,938,413
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Bank line of credit(Note 2) $3,910,912 $3,956,000
Current portion of long-term debt 130,322 213,039
Accounts payable(Note 4) 3,431,327 3,449,520
Accrued liabilities 538,495 514,693
Deferred maintenance revenues 396,995 228,060
---------- ----------
Total Current Liabilities $8,408,051 $8,361,312
Long Term Debt,less current portion 380,537 100,000
Minority Interest In Subsidiary 53,027
Stockholders' Equity
Preferred stock
Common stock par value $0.01 per share
Authorized 10,000,000 shares
Issued and outstanding - 2,715,000
shares at March 31, 1996 and
December 31, 1995. 27,150 27,150
Additional paid-in capital 6,385,047 6,385,047
Accumulated deficit (2,821,566) (2,935,096)
----------- -----------
Total Stockholders' Equity $3,590,631 $3,477,101
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,432,246 $11,938,413
<FN>
See Accompanying Notes to Financial Statements
DATA SYSTEMS NETWORK CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
Cash Flow From Operating Activities:
Income From Operations $113,530 $231,848
_______ _______
Adjustments To Reconcile Net
Income to Net Cash Provided by
Operating Activities
Depreciation and amortization 90,351 85,694
Provision for doubtful receivables 21,121 2,925
Provision for inventory obsolesence 8,331 4,313
Asset contributions received (80,000)
Changes in assets & liabilities
Accounts and notes receivable 439,786 (874,105)
Investment in affiliate 279,978
Inventories (23,563) (857,682)
Other current assets 90,423 (34,917)
Service parts (5,019) 14,150
Other assets (3,504) (11,312)
Accounts payable (18,193) 1,774,884
Accrued liabilities 123,802 (98,890)
Deferred maintenance revenues 168,935 13,798
_______ _______
Net Cash generated by
operating activities $1,285,978 $170,716
_______ _______
Cash Flow From Investing Activities:
Acquisition of property, plant &
equipment $(54,012) $(32,736)
Purchase of subsidiary, net
of cash acquired $(1,025,917)
----------- --------
Net Cash used in Investing
Activities $(1,079,929) $(32,736)
Cash Flow From Financing Activities:
Net repayments under bank line
of credit $(45,088) $(9,407)
Payment of principal on long-
term debt (82,717) (39,447)
_______ _______
Net Cash used by
Financing Activities $(127,805) $(48,854)
_______ _______
Net increase in cash 78,244 89,116
Cash at Beginning of Year $3,171,544 $3,196,038
_______ _______
Cash at End of Period $3,249,788 $3,285,154
<FN>
See Accompanying Notes to Financial Statements
[FN]
DATA SYSTEMS NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
Note 1. Basis of Presentation
The accompanying unaudited interim financial statements of the Company,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and should be read in conjunction with
the Company's audited financial statements and Notes contained in the
Company's Form 10-K for the year ended December 31, 1995. The condensed
consolidated financial statements include all adjustments, consisting of
normal reocurring adjustments, necessary for a fair presentation of results
of of operations for the periods presented. The results of such interim
periods are not necessarily indicative of the results of operations for the
full year. The consolidated financial statements include the financial
statements of Data Systems Network Corporation and the majority-owned
subsidiary Unified Network Services. All significant intercompany balances
and transactions have been eliminated in consolidation.
[FN]
Note 2. Bank line
The Company has a bank line of credit of $7.5 million bearing interest at
.75% over the bank's prime rate (effective rate of 9% at March 31, 1996). The
current agreement extends until February 1, 1997 and can be terminated at any
time by the Company or the bank. Borrowings under the line of credit are due
on demand. Borrowing limits are determined based on a collateral formula
which includes 85% of qualified trade receivables less than 90 days old and
25% of eligible inventory and spare parts. The line is collateralized by
substantially all of the Company's assets. The line of credit agreement
contains certain covenants requiring the Company's receivables to be genuine
and free of all other encumbrances and requiring the Company's inventory
financed under the term agreement to be kept at designated locations and
free from all other encumbrances. Subsequent to July 28, 1995, the inventory
covenants are restricted to apply solely to the inventory financed through
this agreement, exclusive of any and all inventories financed under the IBM
Credit Corporation Agreement (see Note 4).
[FN]
Note 3. Acquisitions
On February 22, 1996, the Company purchaseed 70% (or 7,000 shares) of
Unified Network Services, Inc. for $7,000. As of March 31, 1996, the
Company's balance sheet and results of operations are consolidated, with
appropriate adjustments to reflect intercompany transactions and minority
interest. The acquisition of UNS was accounted for as a purchase.
Accordingly, the purchase price was allocated to the net assets acquired
based upon their estimated fair market value. The excess of the purchase
price over the estimated fair market value of the net assets acquired
amounted to approximately $999,000, which is being accounted for as
goodwill and is being amnortized over 20 years using a straight-line method.
This allocation was based on preliminary estimates and may be revised at
a later date.
[FN]
Note 4. Credit Line
On July 28, 1995, the Company entered into a secured finance agreement
with IBM Credit Corporation. For the period ending March 31, 1996, the
current agreement extends a maximum of $1,250,000 in secured funds to be used
exclusively for the acquisition of inventory for resale, limited to those
products manufactured by Apple, Compaq, Hewlett Packard, IBM and Lexmark. Use
of this credit line is at the Company's option. To secure payment of all
current debt under this agreement, IBM Credit Corporation was granted a first
security interest in the Company's inventory equal to the amount of the
outstanding debt. This agreement allows for interest-free financing if paid
within thirty days of invoicing. The agreement also provides for a variable
discount option, ranging from .5% to 1.0% off of the invoice ,if paid within
fifteen days. This agreement can be terminated at any time by the Company or
the lender. The terms and conditions of this financing agreement can be
changed at the discretion of IBM Credit Corporation.
DATA SYSTEMS NETWORK CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
March 31, 1996
Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis of financial condition and results of operations of
the Company shoud be read in conjunction with the Company's financial
statements and notes thereto included under Item 1. Financial Statements.
Results of Operations
Three Months Ended March 31, 1996 Compared to Three Months Ended
March 31, 1995.
Revenues. Total revenues decreased 29.6% to $5 million for the
three months ended March 31, 1996 from $7.1 million for the same period
in 1995. This decrease was attributable to the 35.7% decrease in net sales,
whcih resulted primarily from the Company's intensified
focus on larger projects with longer sales cycles, and substantially longer
sales lead time and gross profit increased to 21.8% of of total revenue
from 14.4% for the same period in 1995. After the February 22, 1996
acquisition of 70% of the outstanding common stock of Unified Network
Services ("UNS"), the operations of UNS also contributed to the overall
increase in gross profit through the addition of higher margin network
management product and service revenue. Returns and allowances increased in
both dollars and percentage of sales for the three months period in 1996
compared with the same period in 1995, primarily due to two projects that
required product exchanges to accomodate customer configuration
modifications. Product returns increased slightly to $186,899 or 3.7% of
total revenues in the three month period in 1995 from $173,096 or 2.4% of
total revenues for the same period in 1995.
Service revenues increased $297,000 to 15.3% of total revenues in the
three month period ended March 31, 1996 from 6.7% in the corresponding period
of 1995. A significant percentage of the service revenue increase resulted
from the sale of project design and installation service generated from both
DSNC and UNS. To a lesser extent, the completion of services related to 1995
hardware sales contracts contributed to the overall increase.
Cost of Revenues. The cost of revenues decreased to 79% of total
revenues for the three month period ended March 31, 1996 from 85.6% for the
same period in 1995. The cost of service revenue decreased to 30.5% of
service revenues for the three month period ended March 31, 1996 from
67.4% for the same period in 1995, due primarily to the Company's first
quarter success at managing the service revenue growth towards a mix of more
profitable installation, training and design offerings. The cost of sales
decreased to 87.8% of net sales for the three month period ended
March 31, 1996 compared to 95.2% for the same period in 1995. The Company
attributes this decrease both to the shift towards the sale of advanced
technology products and to the implementation of the 1996 sales compensation
plan that encourages increased product and service gross margins, in lieu of
increased sales volume. As a result of the improvements in cost of revenues,
the integration of UNS' focus on network management systems, and DSNC's
network engineering and installation expertise, the Company is establishing
a stong position in the rapidly growing area of remote monitoring systems.
Operating Expenses. Selling, general and administrative expense
increased $141,623 to 17.6% of total revenue for the three month period
ended March 31, 1996 compared to 4.8% of total revenue for the same period in
1995. The increase was primarily attributable to both one time and ongoing
costs associated with the addition of UNS and to a lesser degree, to the
costs associated with ongoing design and initialization phases of the
Company's enhanced internal dispatch, financial and distribution system. The
Company expects to install this system during the current fiscal year which
is expected to significantly improve its service dispatch and sales tracking
capabilities. The Company believes this implementation is a necessary
enhancement to its infrastructure to support its organizational growth goals,
to increase the quality of its customer service response time and to offer
a more efficient utilization of its technical resources.
Other (Expense) Income. Interest expense remained stable for the
three months ended March 31, 1996 compared to the same period in 1995.
Interest income increased by $41,606 for the three months ended March 31,
1996 as a result of short term investments of a portion of the public
offering proceeds and interest earned on the Company's 1995 UNS note
receivable.
Financial Condition
The Company finances its business primarily through funds generated
internally through operations, trade credit, and advances under its $7.5
million line of credit with NBD Bank N.A. (the "Bank"). The line of credit
is secured by substantially all of the Company's assets, bears interest
at .75% over the Bank's prime rate (effective rate of 9% at March 31, 1996)
and is due on demand of the Bank. Borrowing under the line of credit is
limited by a formula determined from time to time by the Bank and currently
is calculated as the sum of 85% of qualified receivables less than 90 days
old and 25% of eligible inventory and spare parts, as designated by the
Bank. The formula permitted total borrowings of up to $4,203,611
as of March 31, 1996 with $3,910,912 outstanding. The Company believes
that the current permitted borrowing forumula which increases borrowing
availability as the Company's sales growth generates new accounts receivable,
will support the continued growth of the Company. The term of the current
agreement extends to February 1, 1997, is renewable annually and can be
terminated at any time by the Company or the Bank.
The secured financing agreement with IBM Credit Corporation continues
to offer thirty day interest free financing on certain products (Note 4)
purchased by the Company for resale. As of March 31, 1996, IBM Credit
Corporation purchase transactions accounted for $193,465 of the total
accounts payable balance.
On February 22, 1996, the Company exercised its option to purchase
7,000 shares of common stock of UNS which represents 70% of the
issued and outstanding common stock of UNS on a fully diluted basis,
for a nominal cash consideration. The UNS acquisition had a net
negative effect on cash flow of $1,025,917 as a result of UNS' negative
net worth. The agreeent also requires the Company to make an
additional loan to UNS in an amount not exceeding a total loan
outstanding of $500,000 at any one time.
The Company had a positive net cash flow of $78,244, primarily resulting
from a decrease in trade and notes receivable, offset by the effect of
the purchase of UNS. Working capital as of March 31, 1996
was $1.35 million.
The Company believes that the combination of present cash balances,
future operating cash flows, and credit facilities will be adequte to fund
the Company's internal growth and current short and long term cash flow
requirements. Future trends for revenue and profitibility continue to be
difficult to predict. The foregoing statement is a "forward looking
statement" within the meaning of the Securities and Exchange act of 1934
and is subject to a number of risks and uncertainties. These include
general business conditions, the Company's ability to keep pace with
technology changes and the associated capital requirements, and the success
of the Company's strategy to shift its revenue mix away from product sales
towards service revenue.
PART II - OTHER INFORMATION
Item #1 Legal Proceedings
None
Item #6 Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.16(h) Shareholder Agreement dated February 22, 1996
among DSNC and Unified Network Services
Exhibit 10.16(i) Stock Purchase Agreement dated February 22, 1996
among DSNC and Unified Network Services
Exhibit 11. Computation of Earnings per share
Exhibit 27. Financial Data Schedule
B. Reports on Form 8-K
None filed
DATA SYSTEMS NETWORK CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant has duly cause this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Data Systems Network Corporation
Registrant
May 14, 1996 Julie A. Vitale-Johnston
Date Julie A. Vitale-Johnston
Controller and Principal Accounting Officer
May 14, 1996 Michael W. Grieves
Date Michael W. Grieves
President and Chief Executive Officer