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