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 September 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
Exchange 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 - 3,255,000 shares as of September 30, 1996
Part I Financial Information
Item 1. Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
Net product sales $5,015,491 $7,792,443 $14,815,940 $20,798,782
Service revenue 1,360,273 461,580 2,872,262 1,580,084
----------- ------------ ------------ ---------
Total revenues 6,289,612 8,254,023 17,688,202 22,378,866
Cost of product
sales 4,509,696 7,421,474 13,184,103 18,897,272
Cost of services 806,088 289,807 1,367,774 936,900
---------- --------- ---------- ---------
Total cost of
revenues 5,315,784 7,711,281 14,551,877 19,834,172
------------ ----------- ----------- -----------
Gross profit 1,059,980 542,742 3,136,325 2,544,694
Selling expenses 897,423 487,062 1,932,164 1,479,498
General and
administrative
expenses 608,696 325,219 1,462,501 815,926
---------- --------- --------- ---------
Total operating
expenses 1,506,119 812,281 3,394,665 2,295,424
----------- ---------- ------------ -----------
Income (loss) from
operations (446,139) (269,539) (258,340) 249,270
Other income(expenses):
Interest expense (142,704) (88,380) (337,448) (279,008)
Interest income 82,248 47,254 218,164 136,846
Other income 208,194 304,122
---------- --------- --------- ---------
Income(loss)
before minority
interest and extraordinary
items (297,121) (310,665) (73,563) 107,108
Minority interest in
subsidiary 44,147 3,000
Income (loss) before
extraordinary items (252,976) (310,665) (70,563) 107,108
Extraordinary items (Note 5):
Loss on settlement
of Bankruptcy (164,666) (164,666)
Gain recognized upon
extinguishment of debt 75,494 75,494
-------- --------- --------- ----------
Net income(loss) $(342,146) $ (310,665) $(159,735) $107,108
======== ========= ========= ========
Three Months Ended September 30,
1996 1995
--------------------------
Primary Primary
Loss per common
share before extraordinary items: ($0.10) ($0.12)
Extraordinary items ($0.03)
Net loss ($0.13) ($0.12)
Weighted number of ====== ======
shares outstanding: 2,665,993 2,670,000
Nine Months Ended September 30,
1996 1995
----------------------
Primary Primary Fully
Diluted
Earnings (loss) per common
share before extraordinary items: ($0.03) $0.04 $0.04
Extraordinary items ($.03)
-------- -------- -------
Net earnings (loss) ($0.06) $0.04 $0.04
======= ======= =======
Weighted number of
shares outstanding: 2,595,885 2,670,000 2,970,000
See Notes to Interim Consolidated Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF
September 30, 1996 December 31, 1995
______________ ______________
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $1,572,672 $3,171,544
Accounts receivable (net of
allowance of $51,815 and
$67,086 at September 30, 1996 and
December 31, 1995, respectively) 5,751,677 5,249,771
Notes receivable 648,548 692,387
Inventories,net 2,326,115 992,922
Other current assets 742,616 294,296
-------------- --------------
Total current assets 11,041,624 10,400,860
Service parts, net 1,609,708 1,169,781
Property and equipment, net 1,736,861 297,029
Other assets 76,247 70,743
Goodwill, net (note 3) 4,510,847
---------------- --------------
TOTAL ASSETS $18,975,287 $11,938,413
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit(Note 2) $5,358,506 $3,956,000
Current portion of long-term debt -0- 213,039
Accounts payable(Note 4) 5,337,200 3,449,520
Accrued liabilities 1,001,805 514,693
Deferred maintenance revenues 1,100,843 228,060
---------- ----------
Total current liabilities $12,798,355 $8,361,312
Long term debt, less current portion 100,000 100,000
Stockholders' Equity
Preferred stock -0- -0-
Common stock par value $0.01 per share
Authorized 10,000,000 shares
Issued and outstanding - 3,255,000
shares at September 30, 1996; 2,715,000
shares at December 31, 1995 32,550 27,150
Additional paid-in capital 9,139,153 6,385,047
Accumulated deficit (3,094,771) (2,935,096)
----------- -----------
Total Stockholders' Equity $6,076,932 $3,477,101
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $18,975,287 $11,938,413
=========== ===========
See Notes to Interim Consolidated Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
1996 1995
(Unaudited)
Cash Flows From Operating Activities:
Net income (loss) $159,735 $107,108
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in subsidiary (3,000)
Depreciation and amortization 299,077 251,348
Extraordinary gain (75,494)
Provision for doubtful receivables 17,191 31,093
Provision for inventory obsolescence 45,817 54,743
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (203,300) (2,453,617)
Notes receivable (561,235)
Inventories (1,379,010) (554,833)
Other current assets (359,978) (244,519)
Service parts (31,112) 136,719
Other assets (5,504) (195,265)
Accounts payable 1,471,967 2,837,890
Accrued liabilities (439,443) 46,021
Deferred maintenance revenues 13,071 34,382
Net cash provided by (used in)
operating activities $ (1,370,688) $50,070
Cash Flows From Investing Activities:
Acquisition of property,
plant, and equipment $(520,651) $(292,710)
Purchase of capital stock of subsidiary (7,000)
Cash paid for net assets acquired (890,000)
Net cash used in investing activities $(1,417,651) $(292,710)
Cash Flows From Financing Activities:
Net borrowings under bank line
of credit $1,402,506 $995,878
Payment of principal on long-term debt (394,644) (630,241)
Increase in long-term debt 181,605
Net cash provided by financing
activities $1,189,467 $365,637
Net decrease in cash and
cash equivalents (1,598,872) 122,977
Cash and cash equivalents
at beginning of period $3,171,544 $3,196,038
------------- --------------
Cash and cash equivalents
at end of period $1,572,672 $3,319,035
=========== ===========
Supplemental disclosure
cash paid during the
period for interest $337,448 $192,156
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
The Company purchased the net assets of The Network Systems Group (NSG) of
Information Decisions, Inc., a wholly owned subsidiary of SofTech, Inc. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $1,857,742
Goodwill acquired $3,539,000
Common stock issued to seller $(2,835,000)
Cash paid for net assets $(890,000)
Transactional costs-capitalized $(160,850)
Liabilities Assumed $1,510,892
See Notes to Interim Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 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 recurring 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"). The statements also reflect the activity of the
Network Services Group ("NSG") of Information Decisions Incorporated ("IDI"),
a wholly owned subsidiary of SofTech, Inc.("SofTech") from the acquisition
date of September 3, 1996. All significant intercompany balances and
transactions have been eliminated in consolidation.
Note 2. Bank line of Credit
As of September 30, 1996, 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
September 30, 1996). The current agreement has been amended effective
November 1, 1996 to, among other things, increase the maximum borrowing
amount under the line of credit to $15 million and to reduce the interest
rate to .25% over the bank's prime rate. The line of credit expires on
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. Acquisitions
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. Operating results of these
acquired operations are included in the financial statements from the date
of purchase.
Effective September 3, 1996, the Company purchased the operations of NSG,
including certain assets and assumed certain liabilities from SofTech. The
acquisition has been accounted for as a purchase. In exchange for certain
assets and liabilities, SofTech received $890,000 in cash and 540,000 shares
of the Company's common stock valued at approximately $2,835,000. 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
$3,539,000, which is being accounted for as goodwill and is being amortized
over 20 years using a straight-line method.
The allocations of the purchase prices have been made on a preliminary basis
and are subject to change upon final determination regarding the fair market
values of assets acquired and liabilities assumed.
The following unaudited pro forma income statements were prepared to
illustrate the effects of the acquisition as if it had occurred on
January 1, 1995. The pro forma adjustments are based on the available
information and upon certain assumptions the Company believes are reasonable.
The pro forma income statements do not purport to represent what the
Company's income statements would actually have been if such transaction in
fact had occurred on January 1, 1995, or to project the Company's income
statements for any future period. The information below reflects an
adjustment for the amortization of goodwill based upon the new cost basis of
the Company, as well as an adjustment to the income tax provision to reflect
the tax effect of the aforementioned adjustment. The 1996 amounts exclude the
extraordinary items for purposes of comparability.
Nine Months Ended September 30,
1996 1995
(in thousands)
Revenues $ 37,888 $ 49,679
Cost of Revenues 30,589 40,538
----------- ---------
Gross profit 7,299 9,141
Selling expenses 3,905 3,580
General and administrative expenses 3,338 3,173
Amortizatin of goodwill 133 133
---------- ---------
Income(loss) from operations (77) 2,255
Other income 185 (143)
---------- ---------
Income before income taxes 108 2,112
Income taxes 37 510
---------- ----------
Net income $ 71 $ 1,602
====== ======
Note 4. Credit Line
On July 28, 1995, the Company entered into a secured financing agreement with
IBM Credit Corporation. For the period ending September 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 each 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.
Note 5. Extraordinary Items
During the course of 1995 and 1996, the Company has negotiated with certain
creditors to accelerate the payment of unsecured debt providing the creditors
agree to certain terms, such as forgiveness of a portion of unsecured debt and
contingent liabilities and of sale the fully paid warrants. Under the terms
of the 1992 Plan of Reorganization, the unsecured creditors were granted
fully paid warrants of 170,000 shares of the Company's authorized common
stock and contingent payments of up to a total of $650,000. This contingent
liabiity was not previously recorded as the amount could not be reasonably
estimated. As a result of these extensive negotiations, the Company has
purchased approximately 110,000 warrants in 1995 and 10,400 in 1996. In
addition, the Company requested the authority to settle claims and obtained
final approval of the bankruptcy court to enter into a settlement agreement
whereby aggregate payments of approximately $114,000 will be made subsequent
to September 1996 to conclude the reorganization plan.
The extraordinary gain of approximately $75,000 represents the purchase of
the 10,400 warrants and the extinguishment of the related debt. The
extraordinary loss of approximately $165,000 represents the bankruptcy
contingent liability payments to be made and the related professional fees
incurred to conclude the bankruptcy reorganization plan.
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 September 30, 1996 Compared to Three Months Ended September
30, 1995. Revenues. Total revenues decreased 23% to $6.3 million for the
three months ended September 30, 1996 from $8.3 million for the same period
in 1995. This decrease is primarily attributable the Company's sales and
sales management personnel decision to shift their attention away from the
current quarter's activity to address the needs of both the NSG acquisition
due diligence process and the resulting personnel training and orientation
programs. The Company believes that its decision to allocate considerable
resources to the process of integrating the NSG employees into the Company's
operations is an important key to the Company's long term success and
retention of these employees. To a lesser degree, this decrease was a result
of a net product sales decrease of 40% resulting primarily from the
shifting of Company sales and support resources to UNS in an effort to
support initial third quarter sales expectations. The initial forecast for
UNS included the delivery and installation of certain large projects that
were either rescheduled for implementation in the fourth quarter, or canceled
due to customer budgetary constraints.
Product returns and allowances decreased to $199,000 or 3% of total revenues in
the three month period in 1996 from $223,000 or 3% of total revenues for the
same period in 1995. Gross profits for the period increased to $1,060,000, or
17% of total revenue, from $983,000, or 12% of total revenue, for the same
period in 1995. This increase is attributable to a 190% increase in service
revenue in 1996 over the same period in 1995.
Service revenue increased $898,000 to 14% of total revenues in the three
month period ended September 30, 1996 from 6% in the corresponding period of
1995. A majority of the service revenue increase resulted from the
recognition of network installations, training and hardware maintenance
income generated from the service base acquired with NSG.
Cost of Revenues. The total cost of revenues decreased to 83% of total
revenues for the three month period ended September 30, 1996 from 93% for the
same period in 1995. The cost of service revenue decreased to 59% of service
revenues for the three month period ended September 30, 1996 from 63% 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 time and materials revenues. The cost of product sales decreased
significantly to 90% of net sales for the three month period ended September
30, 1996 compared to 95% for the same period in 1995. This decrease is
primarily attributable to the increased sales mix of advanced technology
products which typically result in higher gross margins than the sale of
widely distributed commodity products. This shift in mix is consistent with
the Company's overall marketing plan to concentrate its efforts on leading
edge technology, such as network management, remote network monitoring and
imaging.
Operating Expenses. Selling, general and administrative expense increased by
$694,000 to 24% of total revenue for the three month period ended
September 30, 1996 compared to 10% of total revenues for the same period in
1995. This increase was primarily attributable to costs associated with the
Company's decision to expand its geographic presence into New York,
Massachusetts, New Jersey, Rhode Island and Connecticut. The Company's
expansion plan targets geographic areas where significant government and
institutional contract opportunities exist. An aggressive expansion posture
and its related effect on operating expenses are expected to continue through
the fourth quarter. The foregoing statement is a "forward looking statement"
within the meaning of the Securities Exchange Act of 1934 and is subject to a
number of risks and uncertainties. These include the continuance of
favorable economic and business conditions, the availability of adequate
financing from the Company's cash resources and bank line of credit, and the
ability of the Company to continue to identify and recruit sales and service
professionals within its future geographic target areas.
Other Income(Expense). Other income for the quarter increased by $210,000
resulting primarily from non-recurring services rendered by UNS not related
to the Company's continuing operations and to a lesser degree to the Company's
recognition of an accrual established in 1991 to satisfy the unsecured
creditors' debt liability. Both interest income and interest expense
remained relatively stable for the three month period ended September 30,
1996 compared to the same period in 1995.
Extraordinary Gain and Loss. The extraordinary gain of approximately $75,000
represents the purchase of the 10,400 warrants and the extinguishment of the
related debt. The extraordinary loss of about $160,000 represents the
bankruptcy contingent payments to be made and the related professional fees
to conclude the bankruptcy reorganization plan.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995.
Revenues. Total revenues decreased 21% to $17.7 million for the nine months
ended September 30, 1996 from $22 million for the same period in 1995. This
decrease was attributable to a 29% decrease in product sales, offset by an
82% increase in service revenue. These results illustrate the continued
success of the Company's ongoing effort to increase service revenues in both
dollars and as a percentage of total sales. Returns and allowances remained
stable at 3% percentage of total revenue for the nine months period in ended
September 30, 1996 and 1995. Product returns decreased in dollars to
$383,000 for the nine months ended September 30,1996 from $649,000 for the
same period in 1995. Gross profit increased to 18% of total revenue from 11%
for the same period in 1995, primarily attributable to the increase in
service revenues as a percentage of total sales.
Service revenue increased by 82% to 16% of total revenue in the nine month
period ended September 30, 1996 from 7% in the corresponding period of 1995.
The majority of the service revenue percentage increase resulted from the
second quarter sale of project design and installation service generated from
both DSNC and UNS activities, and to a lessor degree to the third quarter
maintenance, implementation and training revenues contributed by the newly
acquired NSG operation. The Company will continue to focus on increasing
service revenue in dollars and percentage of sales as part of its 1996
product mix strategy. The Company expects the NSG division to materially
contribute to that strategy through increased state contract service revenue.
Cost of Revenue. The cost of revenue decreased to 82% of total revenues for
the nine month period ended September 30, 1996 from 89% for the same period
in 1995. The cost of service revenue decreased to 48% of service revenues
for the nine month period ended September 30, 1996 from 59% 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 more profitable recurring service revenue than time and material
services. The cost of product sales decreased to 89% of net sales for the
nine month period ended September 30, 1996 compared to 91% for the same
period in 1995 primarily due to the Company's shift to an increased mix of
higher margin advanced technology products.
Operating Expenses. Selling, general and administrative expense increased by
$1,098,000 to 19% of total revenue for the nine month period ended
September 30, 1996 compared to 10% of total revenue for the same period in
1995. This increase is attributable to a variety of factors in order of
materiality, including the addition of the NSG staff, the increased costs
associated with the UNS staff recruitment and development, the increased
travel expenses required to service a geographically expanding customer base,
and to a lesser degree, to the third quarter sales office expansion activities.
Other Income(Expense). Interest expense increased for the nine months ended
September 30, 1996 compared to the same period in 1995 resulting primarily
from notes payable interest paid and an in the Company's business financing
line of credit. Interest income increased by $82,000 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. Other
income for the nine month period ended September 30, 1996 increased by
$304,000 resulting primarily from non-recurring services rendered by UNS
not related to the Company's continuing operations, and to a lesser degree to
the Company's recognition of accruals for income taxes and unsecured
creditors' debt liability established in prior years.
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 September 30, 1996) and is due on
demand of the Bank. The current agreement has been amended effective November
1, 1996 to, among other things, increase the maximum borrowing amount under
the line of credit to $15 million and to reduce the interest rate to .25%
over the bank's prime rate. The line of credit expires on February 1, 1997
and can be terminated at any time by the Company or 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 $5,540,000 as of September 30, 1996 with $5,360,000 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 Exchange Act of 1934 and is subject to a number of risks and
uncertainties. These include the continuance of favorable economic and
business conditions and the Company's future rate of sales growth.
In addition to the bank line of credit, the Company is utilizing a secured
financing agreement with IBM Credit Corporation which offers thirty day
interest free financing on certain products (Note 4) purchased by the Company
for resale. As of September 30, 1996, IBM Credit Corporation purchase
transactions accounted for $270,000 of the total accounts payable balance.
As of September 30, 1996, net cash flows decreased by $700,000 resulting from
an increase in both the bank line of credit and accounts payable, materially
offset by an increase in inventories and accounts receivable. To a lesser
degree, the decrease in working capital can be attributed to a $704,000
increase in deferred maintenance revenue. Working capital as of September 30,
1996 was ($1,601,000).
The Company has recorded the creditor committee settlement of approximately
$114,000 as a payable at September 30, 1996. This amount represents the
negotiation of the potential contingent payment due in 1997 of $650,000. The
amounts will be paid to the creditors and the related warrants will be issued
subsequent to September 30, 1996.
On September 3, 1996 the Company acquired the operations of the Network
Systems Group (NSG) of Information Decisions Incorporated, a wholly owned
subsidiary of SofTech. In exchange for certain assets and liabilities,
SofTech, Incorporated received $890,000 and 540,000 shares of Company common
stock valued at approximately $2,835,000. 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 $3,539,000, which is being accounted for as
goodwill and is being amortized over 20 years using a straight-line method.
At the time of the acquisition, NSG had approximately 100 employees with
operations in Michigan, North Carolina, and New York.
On February 22, 1996, the Company purchased 70% (or 7,000 shares) of common
stock of Unified Network Services, Inc. for $7,000 in cash and assumed
approximately $1,200,000 in liabilities. 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 $999,078, which is being accounted
for as goodwill and is being amortized over 20 years using a straight-line
method. This allocation was based on preliminary estimates and may be
revised at a later date.
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. The payment of the unsecured creditors' claims, pursuant to
the recent settlement agreement, is expected to have minimal effect on the
Company's cash flows. 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 Exchange Act of 1934 and is
subject to a number of risks and uncertainties. These include the continuance
of favorable economic and business conditions, the financial requirements of
the newly acquired operations and offices, and the success of the Company's
strategy to shift its revenue mix away from product sales towards service
revenue and thereby improve operating margin.
PART II - OTHER INFORMATION
Item #1 Legal Proceedings
None
Item #2 Change in Securities
On September 12, 1996, the Company issued 540,000 shares of its Common Stock
and paid $890,000 in cash to SofTech, Inc. in connection with the Company's
acquisition of certain of the assets and liabilities of SofTech's Network
Systems Group. The shares were issued in a transaction not involving a
public offering which was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The exemption is
available because: (1) the shares were issued to one accredited offeree and
purchaser, (2) no general solicitation or advertising was utilized in making
the offering, (3) the purchaser represented in writing that it was not
acquiring the shares with a view to or for the transfer, assignment, resale
or unregistered distribution except in compliance with the Securities Act or
an exemption from registration thereform, (4) the purchaser received written
disclosure that the securities have not been registered under the Securities
Act and cannot be resold unless they are registered thereunder or unless an
exemption from registration is available, and (5) the certificate evidencing
the shares includes a legend stating that the shares have not been registered
and referring to the restriction on transferability of the shares.
Item #4
None
Item #6 Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 2.1 Asset Purchase Agreement, dated September 12, 1996, by and
among the Company, Information Decisions, Incorporated,
System Constructs, Inc. and SofTech, Inc. (filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K
filed September 27, 1996 and incorporated herein by
reference)
Exhibit 10.3(b) The Data Systems Network Corporation 1994 Stock Option
Agreement (as amended and restated October 1996)
Exhibit 10.4(b) Restated Business Financing Agreement-NBD Secured Credit
Agreement
Exhibit 10.17 Registration Rights Agreement, dated as of September 12,
1996 to the Compnay and SofTech, Inc. (filed as Exhibit
10.17 to the Company's Current Report on Form 8-K filed
September 27, 1996 and incorporated herein by reference)
Exhibit 11 Computation of Earnings per share
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
Item 2. The Company filed a Report on Form 8-K on September 27, 1996
disclosing information under Item 2. The appropriate financial
statements will be filed by amendment to such Form 8-K.
DATA SYSTEMS NETWORK CORPORATION
SIGNATURES
Pursuant to the requirement 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.
Data Systems Network Corporation
Registrant
November 14, 1996 /S/ Philip M. Goy
Date Philip M. Goy
Chief Financial Officer
November 14, 1996 /S/ Michael W. Grieves
Date Michael W. Grieves
President and Chief Executive Officer