SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K/A-3 CURRENT REPORT Pursuant to Section 13 of the Securities and Exchange Act of 1934 Date of Report: September 12, 1996 (Date of earliest event reported) DATA SYSTEMS NETWORK CORPORATION (Exact Name of Registrant as Specified in Charter) MICHIGAN 1-13424 38-2649874 (State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identification No.) 34705 W. 12 Mile Rd., Suite 300 Farmington Hills, Michigan 48331 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, incl. area code: (810) 489-7117 Item 7 is amended in its entirety as follows: ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. Financial Statements of Business Acquired. REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of SofTech, Inc. We have audited the accompanying consolidated balance sheets of Network Systems Group, a division of SofTech, Inc. as of May 31, 1996 and May 31, 1995 and the statements of operations and investment of parent and cash flows for the three years in the period ended May 31, 1996. These financial statements are the responsibility of Network Systems Group and SofTech, Inc.'s management. Our responsibility is to express an opinion on these financial statements 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. As discussed in Notes A and E, certain corporate expenses presented in the financial statements represent allocations of the cost of services provided to Network Systems Group by SofTech, Inc. As a result, the financial statements presented may not be indicative of the financial position or results of operations that would have been achieved had the Network Systems Group operated as a nonaffiliated entity. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Network Systems Group, a division of SofTech, Inc., as of May 31, 1996 and May 31, 1995, and the results of operations and cash flows for the three years in the period ended May 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note F, on September 12, 1996, certain assets and liabilities of the Network Systems Group were sold to Data Systems Network Corporation. /s/Coopers & Lybrand L.L.P. Boston, Massachusetts November 21, 1996 Network Services Group (a division of SofTech, Inc.) Consolidated Balance Sheets As of May 31, 1996 1995 Assets: Current assets: Accounts receivable (less allowance of $241,868 in 1996, and $42,254 in 1995) $6,529,825 $8,912,185 Unbilled costs and fees 685,973 1,146,738 Inventory 1,602,737 1,518,672 Prepaid expenses and other assets 469,757 897,782 --------- ---------- Total current assets 9,288,292 12,475,377 Property and equipment, at cost: Data processing equipment 1,328,359 2,149,943 Office furniture 845,136 898,772 Leasehold improvements 69,290 179,906 Land and building 513,540 500,000 --------- -------- Total property and equipment 2,756,325 3,728,621 Less accumulated depreciation & amortization 1,397,210 2,218,309 --------- --------- 1,359,115 1,510,312 Goodwill, net 1,030,408 2,419,076 --------- --------- $11,677,815 $16,404,765 ========== ========== Liabilities and Investment of Parent: Current liabilities: Accounts payable $1,799,283 $2,695,166 Accrued expenses 1,010,718 1,512,614 Deferred maintenance revenue 1,311,463 1,066,201 --------- --------- Total current liabilities 4,121,464 5,273,981 --------- --------- Commitments and contingencies (Note D) Investment of parent 7,556,351 11,130,784 --------- ---------- $11,677,815 $16,404,765 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. Network Services Group (a division of SofTech, Inc.) Consolidated Statements Of Operations And Investment Of Parent For The Years Ended May 31, 1996 1995 1994 Revenue: Products $20,730,048 $29,960,153 $11,442,062 Services 9,600,106 9,360,739 5,880,855 ---------- ---------- ---------- 30,330,154 39,320,892 17,322,917 Cost of products sold 17,753,866 25,315,236 9,023,845 Cost of services provided 7,483,452 5,706,001 4,357,165 ---------- ---------- --------- 5,092,836 8,299,655 3,941,907 Selling, general and administrative 8,950,518 9,035,628 3,125,823 Loss on carrying value of goodwill 700,000 0 0 --------- --------- --------- Income (loss) before income taxes (4,557,682) (735,973) 816,084 Provision (benefit) for income taxes 24,869 (113,928) 205,652 ---------- ---------- -------- Net income (loss) (4,582,551) (622,045) 610,432 Investment of parent company 1,008,118 7,299,526 1,193,930 Parent company investment, beginning of year 11,130,784 4,453,303 2,648,941 ---------- --------- --------- Parent company investment, end of year $7,556,351 $11,130,784 $4,453,303 ========== =========== ========== The accompanying notes are an integral part of the consolidated financial statements. Network Systems Group (a division of SofTech, Inc.) Consolidated Statements of Cash Flows For the Years ended May 31, 1996 1995 1994 Cash flows from operating activities: Net income (loss) $(4,582,551)$ (622,045) $ 610,432 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 1,398,557 1,195,347 607,168 (Gain) loss on disposal of equipment 8,212 (24,773) 1,594 Loss on carrying value of goodwill 700,000 0 0 Change in current assets and liabilities: Accounts receivable and unbilled costs and fees 2,843,125 (5,664,144) (2,078,970) Inventory (313,841) (566,715) (715,805) Prepaid expenses and other assets 506,237 (660,286) (117,056) Accounts payable (895,883) 1,319,515 133,737 Accrued expenses (580,108) 603,913 349,230 Deferred maintenance revenue 245,262 329,221 328,007 --------- ---------- --------- Total adjustments 3,911,561 (3,467,922) (1,492,095) --------- ---------- --------- Net cash used by operating activities (670,990) (4,089,967) (881,663) --------- ---------- --------- Cash flows from investing activities: Capital expenditures (342,448) (711,246) (386,084) Proceeds from sale of capital equipment 5,320 21,569 73,817 Payments for the purchase of CCS and SCI 0 (2,519,882) 0 --------- ----------- --------- Net cash used by investing activities (337,128) (3,209,559) (312,267) --------- ----------- --------- Cash flows from financing activities: Cash provided by parent company 1,008,118 7,299,526 1,193,930 --------- ---------- --------- Net cash provided from financing activities 1,008,118 7,299,526 1,193,930 --------- --------- --------- Net change in cash and cash equivalents $ -0- $ -0- $ -0- ========= ========== ========== The accompanying notes are an integral part of the consolidated financial statements. NETWORK SYSTEMS GROUP, a division of SofTech, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 	PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: 	The Network Systems Group (the "Division") is a division of SofTech, Inc. ("SofTech"). The consolidated financial statements of the Division include the accounts of Information Decisions, Inc. (IDI) and System Constructs, Inc. (SCI). These financial statements present the Division's results of operations and its financial condition as it operated as a Division of SofTech. The financial statements for the fiscal years ended May 31, 1996, 1995 and 1994 exclude certain corporate expenses associated with SofTech for its financing and working capital needs and certain personnel. As a result, the financial statements presented may not be indicative of the results that would have been achieved had the Division operated as a non-affiliated entity. 	 	Operating losses from inception through the effective date of the sale of assets on September 12, 1996, have been recorded as a reduction in the net balance advanced to the Company in accordance with the terms described in Note E. Refer to Note F for a description of the sale of the Division to Data Systems Network Corporation. 	INDUSTRY SEGMENT AND SIGNIFICANT CUSTOMER: 	The Division operates in one industry segment and is engaged in the development and sale of custom software for computer applications, the sale and integration of computer systems, and the marketing of software products under licensing agreements. Revenue from a single customer accounted for approximately $15,600,000 in 1996, $12,300,000 in 1995, and $7,100,000 in 1994. 	CASH: 	SofTech has funded all of the Division's operations to date through its corporate cash balances. Accordingly, no current cash balances are presented in the accompanying financial statements. 	INVENTORIES: 	Inventories consist of equipment purchased for resale and service parts and are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT: 	 	Property and equipment are stated at cost. The Company provides for depreciation and amortization on a straight-line basis over the following estimated useful lives: 								Estimated 	 	Useful Life - ------------------------------------------------------------------------- Data processing equipment					 3-5 years Office furniture	 						 5-10 years Leasehold improvements		 Lesser of useful life or life of lease	 Building 								20 years 	Depreciation expense was approximately $480,000, $390,000, and $140,000 for fiscal 1996, 1995 and 1994, respectively. 	Maintenance and repairs are charged to expense as incurred; betterments are capitalized. At the time fixed assets are retired, sold, or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts. Any resulting gain or loss on disposal is credited or charged to income. 	INCOME TAXES: 	All of the Company's operations are included in the SofTech federal consolidated income tax returns. The income taxes for the Division have been determined on a stand alone basis following Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) for financial reporting purposes. Under SFAS No. 109 deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expectd to reverse. 	REVENUE RECOGNITION: 	Revenue from computer system sales is recognized upon shipment, or installation and acceptance, if significant performance obligations remain. On certain long-term contracts, the percentage of completion method is used for recording revenue. When the current estimate indicates a loss, provision is made for the total anticipated loss. Revenue from software maintenance agreements and service contracts are deferred and amortized into income over the maintenance support period. Other service revenue is recognized when the services are performed and the revenue is earned. 	GOODWILL: 	Goodwill represents the excess of cost over the fair value of tangible assets acquired and is amortized using the straight-line method over periods not to exceed eight years, subject to periodic review of impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The unamortized excess of cost over fair value of tangible assets acquired through business combination was $1,030,000, $2,419,000 and $1,299,000 at May 31, 1996, 1995 and 1994, respectively. Accumulated amortization of these intangible assets was $3,408,000, $2,020,000 and $1,355,000 at May 31, 1996, 1995 and 1994, respectively. The Division has recorded a reduction in the carrying value of the goodwill, at May 31, 1996, amounting to $700,000 due to impairment. The reduction was based on the loss incurred on the sale of the Network Systems Group (see Note F). 	 	RISKS AND UNCERTAINTIES: 	The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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. 	NET LOSS PER COMMON SHARE: 	Net loss per share has not been presented since the Network Systems Group operated as a Division of SofTech during the periods presented in the accompanying financial statements. B.	INCOME TAXES: 	The provision (benefit) for income taxes includes the following: For the Years ended May 31, (in thousands)		1996		1995		1994 - ------------------------------------------------------------------------------ Current: Federal	 					$ ---		$(512)		$ 63 State and local					 25		 286		 78 ------ ------ ------ 							 25 		 (226)		 141 Deferred						 ---		 112		 65 ------ ------ ------ 							 $ 25		$(114)		$206 ===== ===== ===== 	 	The Company's effective tax rates were 1% in 1996, (15)% in 1995 and 25% in 1994. Reconciliations of the federal statutory rates to the effective rates were as follows: For the Years ended May 31,				1996		1995		1994 - ------------------------------------------------------------------------------- Statutory rate 						(34)%		(34)%		 34% State and local taxes					 1	 	 39	 	 10 Other							 2	 	 -- 		 1 Use of NOL's						 -- 		 (29)		 (20) Valuation reserve					 32		 --		 -- ------ ----- -----	 Effective tax rates					 1%	 	(15)%		 25% ------ ------ ------ 	Deferred tax assets (liabilities) were comprised of the following at May 31: (in thousands)						1996		1995		1994 - ------------------------------------------------------------------------------ Deferred tax assets (liabilities): 	Depreciation				 	 $ 14	 	$ 5	 	$ -- 	Inventory and receivables			 105	 	11	 -- 	Vacation					 70		 50 	24 	Difference in book and tax bases of 	 assets of acquired businesses			 (30) (209)		 -- 	Valuation allowance				 (159) --	 -- ----- ----- ----- 	Net deferred tax liability				 $--- $(153)		$ 24 	Due to the uncertainty surrounding the realization of certain favorable tax attributes in future tax returns, the Division has established a valuation reserve against a portion of the otherwise recognizable deferred tax assets. D.	COMMITMENTS: 	 	The Company conducts its operations in facilities leased through 1999. Rental expense for fiscal years 1996, 1995 and 1994 was approximately $514,000, $558,000 and $286,000, respectively. 	 At May 31, 1996, minimum annual rental commitments under noncancellable leases were as follows: 	Fiscal Year ---------------	 	 1997		$404,182 	 1998		$336,694 	 1999		$103,520 E.	ALLOCATIONS FROM SOFTECH, INC.: 	Since the Division's inception, administrative support services have been provided by SofTech. For these services, the Division was charged $3.1 million, $2.8 million and $1.6 million for the years ended May 31, 1996, 1995 and 1994, respectively. These charges represent an allocation of the Division's proportionate share of SofTech's consolidated corporate overhead costs using formulas which management believes are reasonable based upon the Division's use of such services. All other costs during fiscal 1996, 1995 and 1994, including payroll costs, are directly attributable to the Division and have been paid by SofTech for the Division. F.	SUBSEQUENT EVENT: 	On September 12, 1996, SofTech completed the sale of the Division to Data Systems Network Corporation (DSN). Data Systems purchased certain assets and assumed certain liabilities of the Division with a net book value of approximately $200,000 in exchange for $890,000 in cash and 540,000 shares of DSN common stock. The tangible assets acquired totaled approximately $1.7 million and were primarily composed of fixed assets and service inventory for maintaining the NSG installed base of hardware and software. Liabilities assumed included deferred revenue associated with maintenance contracts and other accrued expenses with a total book value of about $1.5 million. In addition, Data Systems assumed all NSG lease obligations. SofTech retained NSG assets that had a tangible book value of approximately $5.0 million, composed primarily of accounts receivable and inventory. For the fiscal year ended May 31, 1996, SofTech recorded an estimated loss of $700,000 on the sale of the Division. (b) Pro Forma Financial Information. The following unaudited pro forma financial 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 financial statements do not purport to represent what the Company's financial statements would actually have been if such transaction in fact had occurred on January 1, 1995, or to project the Company's financial statements for any future period. The information below reflects the elimination of goodwill recorded in connection with the transaction. 		 Proforma Balance Sheet Data as of September 30, 1996 (in thousands) 	DSNC	 	 Network 	 Adjustments	 Total 					 Systems Group Assets: Current assets $11,042 $10,161				 $21,203 Other assets 7,933 2,939 (3,500) 7,372 ------- ------- ------- ------- Total assets 18,975	 13,100		 (3,500)	 28,575 ======	 =======	 =======	 ======= Liabilities: Current liabilities	 12,798	 4,150 16,948 Other liabilities 100 100 ------ 	------- 	------- ------ Total liabilities 12,898	 4,150		 	 17,048 Equity 6,077	 8,950		 (3,500)	 11,527 -------- -------- -------- -------- Total liabilities & equity $18,975	 $13,100		 (3,500) $28,575 			 =======	 =======	 =======	 ======= Proforma Statement of Operations (in thousands) For the nine months ended September 30, 1996 		DSNC		 Network	 Adjustments	 Total 						 Systems Group Revenue $17,688	 	$22,643 $40,331 Cost of revenue 14,552 		 19,885 34,437 --------		 --------------	-------- --------- Gross profit 3,136		 2,758 5,894 Selling expense 1,932		 3,914	 5,846 General & administrative expense 1,463	 	 1,686		 3,149 Amortization of goodwill 0		 0 89 89 -------	 -------------	 --------	 -------- (Loss) from operations (259) (2,842) ( 89 ) (3,190) Other income(expense) 188 		 0	 0 188 --------		 -------------- --------- -------- (Loss) before income taxes and extraordinary item 		 (71) (2,842) ( 89 ) (3,002) Income taxes			 0	 	 0 			0	 0 				 ----------		-------------- ---------	 -------- Loss before extraordinary items (71) (2,842) ( 89 ) (3,002) Extraordinary items (89) (89) --------- --------------- -------- -------- Net Loss $ (160)	 $(2,842) $ ( 89 ) $(3,091) ======== =============== ======== ====== Loss per share 						 $ (1.19) 										 ====== Pro Forma Statement of Operations for the Year Ended December 31, 1995 				DSNC		 Network		 Adjustments	 Total 						 Systems Group Revenues 	$30,507		 $37,912	 			$68,419 Cost of revenues			 27,933 		 30,986		 		 58,919 				 ----------		 -------------		---------- --------- 				 2,574 6,926		 		 9,500 Selling expenses	 		 1,923 		 5,904	 			 7,827 General and administrative expenses			 1,306	 	 1,950	 3,256 Amortization of goodwill		 133	 133 				 -----------	 -------------	------------	--------- (Loss) from operations	 (655) (928) (133) (1,716) Other income (expense) 		 (280) (280) 				 -----------	 -------------	 ------------	-------- (Loss) before income taxes and extraordinary item		 (935)		 (928) (133) (1,996) Extraordinary item		 322		 322 			 	----------- 	------------- 	------------	-------- Net Loss		 $(613) 	 $ (928)		 $ (133)$(1,674) =========== 	=============	 ============	======= Loss per share			 					 $ (0.65) 										 ======= (c) Exhibits. 2.2 Asset Purchase Agreement, dated September 12, 1996, by and among DSNC, IDI, SCI and SofTech, previously provided with original current report on Form 8-K, filed September 27, 1996. Schedules to the Agreement, listed on pp iii-iv of the Table of Contents of the Agreement, were not filed, but will be provided to the Commission supplementally upon request. 10.17 Registration Rights Agreement, dated as of September 12, 1996, made and entered into by DSNC and SofTech, previously provided with original current report on Form 8-K filed September 27, 1996. 23.1 Consent of Coopers & Lybrand L.L.P. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DATA SYSTEMS NETWORK CORPORATION Date: January 31, 1997 /s/ Philip M. Goy By: Philip M. Goy Its: Chief Financial Officer EXHIBIT INDEX Exhibit Number Description 23.1 Consent of Coopers & Lybrand L.L.P. EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (File Nos. 33-81350 and 333-5505) of Data Systems Network Corporation of our report, which includes an emphasis of a matter concerning certain costs and expenses presented in the financial statements which represent allocations and management's estimates of the costs of services provided by SofTech, Inc., dated November 21, 1996, on our audits of the financial statements of the Network Systems Group Division of SofTech, Inc. as of May 31, 1996 and 1995 and the statements of operations and cash flows for each of the three years in the period ended May 31, 1996, appearing in this Form 8-K (as amended) of Data Systems Network Corporation. 								COOPERS & LYBRAND L.L.P. Boston, Massachusetts January 23, 1997