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 June 30, 1996
Commission file Number 1-13424
Data Systems Network Corporation
Michigan 38-2649874
(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 by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12,13, or 15(d) of the Securities
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
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, $.01 Par Value - 2,715,000 shares as of June 31, 1996
Selected Financial Data
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
Net product sales $5,554,100 $6,401,025 $9,800,449 $13,006,339
Service revenue 744,474 647,818 1,511,989 1,118,504
--------- ----------- ---------- ---------
Total revenues 6,298,574 7,048,843 11,312,438 14,124,843
Cost of sales 4,945,583 5,736,550 8,661,808 11,475,798
Cost of service 327,886 329,794 561,686 647,093
---------- --------- ---------- ---------
Total cost of
revenues 5,273,469 6,066,344 9,236,093 12,122,891
Gross profit 1,025,105 982,499 2,076,345 2,001,952
Selling expenses 561,593 508,312 1,034,741 992,436
General and
administrative 449,448 234,678 853,805 490,707
expenses ---------- --------- --------- ---------
Total operating
expenses 1,011,041 742,990 1,888,546 1,483,143
Income from
operations 14,064 239,509 187,799 518,809
Other income(expenses)
Interest expense (102,427) (99,582) (194,805) (190,628)
Interest income 50,716 45,998 135,916 89,592
---------- --------- --------- ---------
Net income before minority
interest in subsidiary57,001 185,925 223,558 417,773
Minority interest in subsidiary
(income)/loss 11,880 (41,147)
-------- --------- --------- ----------
Net income 68,881 185,925 182,411 417,773
====== ====== ======== ========
Three Months Ended June 30,
1996 1995
--------------------------
Primary Fully Primary Fully
Diluted Diluted
Earnings per common
shares: $0.03 $0.03 $0.07 $0.06
Weighted number of
shares outstanding: 2,560,281 2,860,281 2,670,000 2,970,000
Six Months Ended June 30,
1996 1995
--------------------------------
Primary Fully Primary Fully
Diluted Diluted
Earnings per common
shares: $0.07 $0.06 $0.16 $0.14
Weighted number of
shares outstanding: 2,560,281 2,860,281 2,670,000 2,970,000
See Accompanying Notes to Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF
June 30, 1996 December 31, 1995
______________ ______________
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $2,466,481 $3,171,544
Accounts receivable (net of
allowance of $70,512 and
$67,086 at June 30, 1996 and
December 31, 1995, respectively) 4,613,823 5,249,771
Notes Receivable 548,693 692,387
Inventories,net 970,875 992,922
Other current assets 348,750 294,296
-------------- --------------
Total Current Assets 8,948,622 10,400,860
Service Parts, net 1,020,793 1,169,781
Property and Equipment, net 769,392 297,029
Other Assets 74,997 70,743
Goodwill, net (note 3) 999,078
---------------- --------------
TOTAL ASSETS $11,812,882 $11,938,413
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank line of credit(Note 2) $4,050,257 $3,956,000
Current portion of long-term debt 97,639 213,039
Accounts payable(Note 4) 2,911,733 3,449,520
Accrued liabilities 315,847 514,693
Deferred maintenance revenues 355,143 228,060
---------- ----------
Total Current Liabilities $7,730,619 $8,361,312
Long Term Debt, less current portion 381,604 100,000
Minority Interest In Subsidiary (41,147)
Stockholders' Equity
Preferred stock
Common stock par value $0.01 per share
Authorized 10,000,000 shares
Issued and outstanding - 2,715,000
shares 27,150 27,150
Additional paid-in capital 6,385,047 6,385,047
Accumulated deficit (2,752,685) (2,935,096)
----------- -----------
Total Stockholders' Equity $3,659,511 $3,477,101
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $11,812,882 $11,938,413
See Notes to Interim Consolidated Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1996 1995
(Unaudited)
Cash Flow From Operating Activities:
Income From Operations $182,411 $417,773
Adjustments To Reconcile Net
Income to Net Cash Provided by
Minority interest in subsidiary 41,147
Depreciation and amortization 189,188 168,382
Provision for doubtful receivables 30,545 (18,079)
Provision for inventory obsolescence 16,881 38,044
Changes in assets and liabilities, net of effects
From purchase of majority interest in subsidiary
Accounts receivable 605,683 116,314
Notes receivable (461,384)
Inventories 5,169 13,870
Other current assets (47,514) (166,721)
Service parts 148,986 131,053
Other assets (3,460) (162,304)
Accounts payable (802,650) 737,918
Accrued liabilities (223,652) (127,079)
Deferred maintenance revenues (23,483) 7,101
Net Cash provided by (used in)
operating activities $ (342,133) $1,256,272
Cash Flow From Investing Activities:
Acquisition of property,
plant & equipment $(516,391) $(244,459)
Purchase of capital stock of subsidiary
$(7,000)
Net Cash used in Investing Activities $(523,391) $(244,459)
Cash Flow From Financing Activities:
Net repayments under bank line of credit $94,257 $(495,575)
Payment of principal on long-term debt (115,440) (441,055)
Increase in long-term debt 181,605
Net Cash used by financing activities $160,462 $(936,630)
Net decrease in cash (705,063) 75,183
Cash at beginning of period $3,171,544 $3,196,038
Cash at end of period $2,466,481 $3,271,221
Supplemental Schedule of Noncash Investing and Financing Activities
The Company purchased common stock of UNS for $7,000. In conjunction with
the acquisition,liabilities were assumed as follows:
Fair value of assets acquired $204,745
Goodwill acquired $999,078
Cash Paid for Capital Stock $(7,000)
Liabilities Assumed $1,196,823
See Accompanying Notes to Financial Statements
DATA SYSTEMS NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated 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 reccurring adjustments, necessary for a fair presentation
of results 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 its majority-owned subsidiary, Unified
Network Services, ("UNS"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Note 2. Bank line of Credit
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 June 30, 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 service 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. 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).
Note 3. Goodwill
On February 22, 1996, the Company purchased 70% (7,000 shares) of UNS
for $7,000. 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
$999,078, which is being accounted for as goodwill and is being amortized
over 20 years using a straight-line method.
Note 4. Credit Line
On July 28, 1995, the Company entered into a secured financing agreement
with IBM Credit Corporation. For the period ending June 30, 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 financed under this
agreement 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
June 30, 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 should be read in conjunction with the
Company's consolidated financial statements and notes thereto included under
Item 1. Financial Statements.
Results of Operations
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995.
Revenues. Total revenues decreased 11% to $6.3 million for the three months
ended June 30, 1996 from $7.0 million for the same period in 1995.This decrease
was attributable to the 13% decrease in net sales, which resulted primarily
from the Company's continued focus on larger multiplatform integration
projects with longer sales cycles ranging from 120-180 days. Gross profit
increased to 17% of total revenue from 14% for the same period in 1995. 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 decreased in both dollars and
percentage of sales for the three months period in 1996 compared with the
same period in 1995, primarily due to the use of on-line configuration
software implemented to reduce multivendor compatibility errors. Product
returns decreased to $184,652 or 3% of total revenues in the three month
period in 1996 from $246,791 or 4% of total revenues for the same period
in 1995.
Service revenues increased $96,656 to 12% of total revenues in the three
month period ended June 30, 1996 from 9% 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.
Cost of Revenues. The total cost of revenues decreased to 83% of total
revenues for the three month period ended June 30, 1996 from 86% for the same
period in 1995. The cost of service revenue decreased to 44% of service
revenues for the three month period ended June 30, 1996 from 51% for the same
period in 1995, due to the significant increase in lower cost maintenance
revenues which typically represent a more profitable revenue stream than
product sales. The cost of sales decreased slightly to 89% of net sales
for the three month period ended June 30, 1996 compared to 89.6% for the same
period in 1995.
Operating Expenses. Selling, general and administrative expense increased by
$268,051 to 16% of total revenue for the three month period ended
June 30, 1996 compared to 11% of total revenues for the same period in 1995.
The increase was primarily attributable costs associated with the increase in
UNS sales force headcount at UNS and, to a lesser degree, the increase in
travel expenses required to market to a wider geographic base.
Other Income(Expense). Both interest income and interest expense remained
relatively stable for the three month period ending June 30, 1996 compared to
the same period in 1995.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995.
Revenues. Total revenues decreased 20% to $11.3 million for the six months
ended June 30, 1996 from $14.1 million for the same period in 1995. This
decrease was attributable to a 25% decrease in product sales, offset by the
35% increase in service revenues. These results illustrate the initial success
of the Company's ongoing effort to increase service revenues in both dollars
and as a percentage of total sales. Gross profit increased to 18% of total
revenue from 15% for the same period in 1995. Returns and allowances remained
stable at 3% percentage of total revenue for the six months period in ended
June 30, 1996 and 1995. Product returns decreased in dollars to
$371,551 for the six months ended June 30,1996 from $419,887 for the same
period in 1995.
Service revenues increased by 35% to 13% of total revenues in the six month
period ended June 30, 1996 from 8% 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. The Company will continue to focus on increasing service revenues in
dollars and percentage of sales as part of its 1996 product mix strategy.
Cost of Revenues. The cost of revenues decreased to 82% of total revenues
for the six month period ended June 30, 1996 from 84% for the same period in
1995. The cost of service revenue decreased to 37% of service revenues for
the six month period ended June 30, 1996 from 58% for the same period in 1995.
This significant decrease is primarily attributable to the successful
marketing of maintenance contract revenue which provides the Company with an
increased reoccurring revenue stream of more profitable service revenues.
The cost of sales increased to 89% of net sales for the six month period
ended June 30, 1996 compared to 86% for the same period in 1995 primarily
due to the industry's predictible erosion of product margins.
Operating Expenses. Selling, general and administrative expense increased by
$405,403 to 17% of total revenue for the six month period ended June 30, 1996
compared to 11% of total revenue for the same period in 1995. The increase
was primarily attributable to costs associated with the increase in the UNS
sales force, and to a lessor degree to the increase in travel expenses
required to market to a wider geographic base.
Other Income(Expense). Interest expense remained stable for the six months
ended June 30, 1996 compared to the same period in 1995. Interest income
increased by $46,324 as a result of increased earnings from the investment of
the remaining proceeds of the 1994 public offering and interest earned on
notes receivable accounts.
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 June 30, 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 service parts as designated by the
bank. The formula permitted total borrowings of up to $4,456,067 as of
June 30, 1996 with $4,050,257 outstanding. The Company believes that the
current permitted borrowing formula which increases borrowing availability
as the Company's sales growth generates new accounts receivable, will support
the continued growth of the Company. 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 and the continued sales 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.
In addition to the bank line of credit the Company is utilizing a secured
financing agreement. 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 June 30, 1996,
IBM Credit Corporation purchase transactions accounted for $177,602 of the
total accounts payable balance.
As of June 30, 1996, net cash flows decreased by $705,063 primarily resulting
from both the increase in property plant and equipment that was purchased to
automate the network management center currently under construction and
the decrease in trade payables outstanding. These changes were partially offset
by a significant decrease in accounts receivable. Working captial as of
June 30, 1996 was $1,218,002.
On June 18, 1996 the Company announced that it had signed a non-binding
letter of intent to acquire the operations of The Network Systems Group (NSG)
of Information Decisions Inc., a wholly owned subsidiary of SofTech. In
exchange for certain assets and liabilities, SofTech will receive cash and
Company common stock. The acquisition is subject to execution of a definitive
agreement, various customary conditions and approval of the Boards of
Directors of both companies. NSG has experience in client-server application
development and migration services. The Network Systems Group currently
has approximately 120 employees and operations in Michigan, North Carolina,
and New York.
The Company believes that the combination of present cash balances, future
operating cash flows, and credit facilities will be adequate to fund the
Company's internal growth and current short and long term cash flow
requirements. Future trends for revenue and profitability 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, financial 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 #4 Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 30, 1996, at
which time the shareholders considered and voted on the election of four
directors.
Each of the nominees for director at the meeting was an incumbent and all
nominees were elected. The following table sets forth the number of shares
voted for and withheld with respect to each nominee.
Nominee Votes For Votes Withheld
- ------------ ----------------- ----------------------
Walter Aspatore 2,303,683 16,500
Richard Burkhart 2,303,683 16,500
Jerry Dusa 2,303,683 16,500
Michael Grieves 2,303,683 16,500
Item #6 Exhibits and Reports on Form 8-K
A. Exhibits
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
August 14, 1996 /S/ Julie A. Vitale-Johnston
Date Julie A. Vitale-Johnston
Controller and Principal Accounting Officer
August 14, 1996 /S/ Michael W. Grieves
Date Michael W. Grieves
President and Chief Executive Officer
DATA SYSTEMS NETWORK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Period ending June 30, 1996 Period ending June 30, 1995
------------------------------------ -------------------------------
Primary Fully Diluted Primary Fully Diluted
-------- -------------- ------------- ------------
Number of
Shares Weighted
average of
shares issued 2,860,281 2,860,281 2,970,000 2,970,000
Less shares
held in escrow (300,000) (300,000)
---------- ----------- ------------ -------------
Weighted average
shares
outstanding 2,560,281 2,860,281 2,670,000 2,970,000
Earnings
Earnings before
minority
interest in UNS $223,558 $223,558 $417,773 $ 417,773
Minority interest
in UNS $ (41,147) $(41,147)
------------ ---------- ---------- ----------
Net earnings $182,411 $182,411 $417,773 $417,773
Earnings per share $.07 $.06 $0.16 $0.14
======== ======== ======= ======