DATA SYTEMS NETWORK CORPORATION
34705 W. 12 MILE, STE. 300
FARMINGTON HILLS, MI 48331
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
Commission File Number 1-13424
Data Systems Network Corporation
Michigan 38-92649874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)
Identification No.)
34705 W. 12 Mile Rd., Suite 300 48331
Farmington Hills, Michigan
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(248) 489-8700
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
a 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 - 4,596,206 shares as of
April 30, 1997
PART I. - FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS.
For Three Months Ended March 31,
1997 1996
------------ -----------
REVENUES:
Net sales $13,949,728 $4,246,349
Service revenue 3,913,825 767,515
------------ -----------
Total revenues 17,863,553 5,013,864
COST OF REVENUES:
Cost of sales 10,379,266 3,728,824
Cost of service revenue 2,869,387 233,800
----------- ---------
Total cost of revenues 13,248,653 3,962,624
GROSS PROFIT 4,614,900 1,051,240
OPERATING EXPENSES:
Selling expenses 2,440,624 473,148
General and administrative expenses 1,210,226 404,357
---------- ---------
Total operating expenses 3,650,850 877,505
INCOME FROM OPERATIONS 964,050 173,735
INTEREST INCOME (EXPENSE):
Interest expense (281,574) (92,378)
Interest income 32,282 85,200
--------- --------
Total interest expense, net (249,292) (7,178)
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 714,758 166,557
MINORITY INTEREST IN SUBSIDIARY 0 (53,027)
--------- --------
INCOME BEFORE INCOME TAXES 714,758 113,530
INCOME TAXES (285,900) 0
--------- --------
NET INCOME $ 428,858 $ 113,530
========= ==========
For the Three Months Ended March 31,
1997 1997 1996 1996
----------------------------------------
Fully Fully
Primary Diluted Primary Diluted
----------------------------------------
EARNINGS PER COMMON SHARE $ 0.12 $ 0.11 $ 0.04 $ 0.04
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 3,466,118 3,823,010 2,589,903 2,889,903
===========================================
See Accompanying Notes to the Condensed
Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
---------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,032,711 $ 1,522,434
Accounts receivable (net of
allowance of $101,143 and
$67,609 at March 31, 1997 and
December 31, 1996, respectively) 19,241,981 12,102,794
Notes receivable 556,987 564,059
Inventories 5,379,211 2,563,201
Other current assets 855,408 646,112
----------- -----------
Total current assets 33,066,298 17,398,600
SERVICE PARTS, net 1,492,059 1,471,284
PROPERTY AND EQUIPMENT, net 1,699,592 1,811,923
GOODWILL, net (Note 3) 4,229,311 4,291,312
OTHER ASSETS 370,436 549,056
---------- ----------
TOTAL ASSETS $40,857,696 $25,522,175
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 2) $15,728,302 $ 9,225,211
Accounts payable 7,713,506 7,594,346
Accrued liabilities 1,556,790 813,831
Deferred maintenance revenues 1,473,386 1,256,566
----------- ------------
Total current liabilities 26,471,984 18,889,954
LONG-TERM DEBT 75,000 75,000
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000
shares, none outstanding, Common
stock ($.01 par value; authorized
10,000,000 shares; issued and
outstanding 4,596,206 and 3,255,000
shares at March 31, 1997 and
December 31, 1997, respecively) 45,962 32,550
Additional paid-in capital 16,450,374 9,139,153
Accumulated deficit (2,185,624) (2,614,482)
------------- -------------
Total stockholders' equity 14,310,712 6,557,221
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $40,857,696 $25,522,175
============= =============
See Accompanying Notes to the Condensed
Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31,
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 428,858 $ 113,530
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amoritization 149,189 90,351
Provision for doubtful receivables 33,534 21,121
Provision for inventory obsolescence 73,463 8,331
Changes in assets and liabilities that
provided (used) cash, net of effects
of acquisition:
Accounts receivable (7,172,721) 440,067
Notes receivable 7,072 279,978
Inventories (2,889,473) 67,585
Other current assets (209,296) 90,423
Service parts (70,775) (5,019)
Other assets 178,620 (2,710)
Accounts payable 119,160 (302,895)
Accrued liabilities 742,959 (1,004)
Deferred maintenance revenues 216,820 18,369
----------- -----------
Net cash provided by (used in)
operating activities (8,392,590) 818,127
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment,net 75,143
Purchase of UNS common stock (7,000)
Exercise of warrants and conversion into
common stock, net 7,324,633
------------ ----------
Net cash provided by (used in)
financing activities 7,399,776 (7,000)
------------ ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
bank line of credit 6,503,091 (45,088)
Payment of principal on long-term debt (82,717)
Notes payable (605,078)
------------ ----------
Net cash provided by (used in)
investing activities 6,503,091 (732,883)
------------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,510,277 78,244
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,522,434 3,171,544
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,032,711 $3,249,788
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the period for:
Interest
Income taxes
============ ===========
NONE NONE
============ ===========
See Accompanying Notes to the Condensed Consolidated
Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated
financial statements of Data Systems Network Corporation ("
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 consolidated financial statements and
notes contained in the Company's Form 10-K for the year
ended December 31, 1996. 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 accompanying consolidated financial
statements include the financial statements of Data Systems
Network Corporation and its 70%-owned subsidiary, Unified
Network Services, Inc. ("UNS"). All significant
intercompany balances and transactions have been eliminated
in consolidation.
Note 2. Bank Line
The Company has a bank line of credit bearing interest at
.25% over the bank's prime rate (effective rate of 9.0% at
March 31, 1997). Borrowing limits are determined based on a
collateral formula which includes 85% of qualified trade
receivables and 25% of eligible inventory and spare parts up
to $2,250,000. The term of the current agreement extends to
November 30 1997, is renewable annually and can be
terminated at any time by the borrower or lender. As of
March 31, 1997, no additional credit was available under
this line, however, subsequent to March 31, 1997, the bank
has increased the credit facility to a maximum of $18
million and decreased the interest rate to the bank's prime
rate.
The bank 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 to be kept at designated locations and free from
all other encumbrances.
Note 3. Goodwill
During the first quarter of 1996, the Company purchased 70%
(7,000 shares) of UNS for $7,000 and during the third quarter of
1996, the Company purchased the assets and operations of The
Network Services Group of SofTech, Inc. ("SofTech") and assumed
certain liabilities from SofTech. Each acquisition has been
accounted for as a purchase and each 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 is being accounted for
as goodwill and is being amortized over 20 years using a straight-
line method.
Note 4. Credit Line
The Company is party to a secured finance agreement with IBM
Credit Corporation. As of March 31, 1997, the agreement extended
a maximum of $1,200,000 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 debt incurred under this agreement, IBM
Credit Corporation was granted a first security interest in the
Company's inventory equal to the amount of the outstanding debt.
This agreement allows for thirty (30) day interest free financing
of eligible inventory and a variable discount from the invoice
price for eligible product purchases paid for within fifteen days
from the date of invoice. 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. The amount outstanding at March 31, 1997
is approximately $269,000 and has been included in accounts
payable.
Note 5. Redemption of Warrants
In February 1997, the Company called all of its then outstanding
Redeemable Common Stock Purchase Warrants ("Warrants") for
redemption as of March 10, 1997 pursuant to the Warrant
Agreement, dated October 28, 1994, setting forth the terms of the
Warrants. Approximately 99% of the Warrants were exercised on or
prior to the date of redemption at a price of $6.25 per Warrant,
resulting in net proceeds of approximately $7,300,000. In
connection with the receipt of consent to the redemption, the
Company agreed to file a registration statement with the
Securities and Exchange Commission with respect to 60,000 units,
consisting of two common shares and two warrants to purchase an
additional two common shares ("Units") which may be purchased
upon exercise of a warrant issued to the underwriters'
representatives in the Company's initial public offering. The
registration of the units and the 240,000 common shares
underlying the Units is in progress.
During the first quarter of 1997, the Company's bank also
exercised 85,000 warrants for nominal consideration held in
connection with the Company's prior reorganization. Such shares
had been included in paid in capital and in the calculation of
earnings per share and therefore, the par value of $850 has been
reclassified to common stock.
Item 2-MANAGEMENT'S DISCUSSIONAND 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 financial statements and notes thereto
included under Item 1. Financial Statements.
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months
Ended March 31, 1996.
Revenues. Total revenues increased 258% to $17.9 million
for the three months ended March 31, 1997 from $5.0 million
for the same period in 1996. This increase was attributable
primarily to the acquisition of the Network Systems Group of
SofTech, Inc. ("NSG") in September 1996 and the expansion
into the eastern region of the United States and, to a
lesser extent, to the acquisition of 70% of the outstanding
common stock of Unified Network Services ("UNS") in February
1996. A significant portion of the increase was attributable
to the contract with the State of Michigan received as part
of the NSG acquistion. The State of Michigan contract
expires in August of 1997 and the Company sales management
team has met with Representatives of the State on a
continued basis to both improve the current contract and to
work towards securing an extension on the current contract
or the award of the new bid. As with all contracts, there
can be no assurance that this contract will be extended or
that, if rebid, the Company will be awarded the contract on
the same terms and conditions. The Company believes that
the expected revenue growth from the eastern region will
significantly offset the affect of any potential revenue
losses from the non-renewal of current contracts.
Net sales increased to $13,949,728 from $4,246,349 for the
three months ended March 31, 1997 compared with the same
period in 1996 attributable to both the 1996 acquistion of
NSG and the eastern region expansion. Gross profit margins
on net sales increased to 25.6% in 1997 compared with 12.2%
for the same period in 1997. This increase primarily
resulted from the higher margin product mix marketed by the
eastern region.
Returns and allowances increased in dollars but decreased as
a percentage of sales for the three months period in 1997
compared with the same period in 1996. Product returns
increased to $263,935 or 1.9% of total revenues in the three
month period in 1997 from $186,899 or 3.7% of total revenues
for the same period in 1996.
Service revenues increased $3,150,000 to 21.9% of total
revenues in the three month period ended March 31, 1997 from
15.3% in the corresponding period of 1996. A significant
percentage of the service revenue increase resulted from the
revenue generated from the marketing of highly-skilled
technical resources added through the eastern region
expansion. The Company also allocated corporate resources
to further develop its capabilities in marketing advance
service and remote and on site network management services.
Cost of Revenues. The cost of revenues decreased to 74.2%
of total revenues for the three month period ended March 31,
1997 from 79.0% for the same period in 1996. The cost of
service revenue increased to 73.3% of service revenues for
the three month period ended March 31, 1997 from 30.5% for
the same period in 1996, due primarily to the Company's
investment in additional technical personnel resulting in
excess of a 1:1 ratio of technical support personnel to
sales personnel. This growth in the technical support staff
increased both pre- and post- sale field support headcount
to prepare for the anticipated growth in the more profitable
service revenue offerings which include, design, consulting
and project planning and installation. Secondarily, the
increase in the cost of service sales can also be attributed
to the Company's facilities investment made to expand its
Raleigh, NC based network management center which includes
an increase in fixed facilities and ongoing operational
expenses, as well as certain one- time design, relocation
and engineering expenses. The cost of sales decreased to
74.4% of net sales for the three month period ended March
31, 1997 compared to 87.8% for the same period in 1996. The
Company attributes this decrease primarily to the shift
towards the sale of higher margin advanced technology
products. The Company believes this shift is at least in
part a result of the implementation of the 1996 sales
compensation plan that encourages increased product and
service gross margins. As a result of the improvements in
cost of revenues, the integration of UNS' focus on network
management systems, and DSNC's network engineering and
installation expertise, the Company is establishing a strong
position in the rapidly growing area of remote network
monitoring systems.
Operating Expenses. Selling, general and administrative
expense increased $2.77 million to 20.4% of total revenue
for the three month period ended March 31, 1997 compared to
17.6% of total revenue for the same period in 1996. The
increase was primarily attributable to the increased volume
of business that has been generated through the acquisitions
which has required a corresponding increase in non-revenue
producing expenses, such as the addition of customer
service, accounting and distribution personnel as well as
the expansion of internal network and communication systems.
Certain of these expenses are anticipated to be non-
recurring.
Other (Expense) Income. Interest expense for the three
months ended March 31, 1997 increased $189,196 compared to
the same period in 1996 which is reflective of the need to
borrow to support the increased business activity and to
support the increased levels of receivables and inventory
during the quarter. These increased levels are expected to
decline in the upcoming quarters as the Company is able to
better manage the business processes related to the
significant increase in business activity. Interest income
decreased by $52,918 for the three months ended March 31,
1997 as a result of the reduced level of short-term
investments throughout most of the period of the Company
utilized its cash reserves to support its business
activities, to complete the acquisition NSG, and to invest
in the infrastructure for the eastern region expansion.
Financial Condition
The Company finances its business primarily through funds
generated internally through operations, trade credit, and
advances under its 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 .25% over the
Bank's prime rate (effective rate of 9.0% at March 31, 1997)
and is due on demand of the Bank. Borrowing under the line
of credit is limited by a formula determined from time to
time by the Bank and currently is calculated as the sum of
85% of qualified receivables less than 90 days old and 25%
of eligible inventory and spare parts up to $2,250,000. The
formula permitted total borrowings of up to $15,000,000 as
of March 31, 1997, all of which was outstanding at that
time. The borrowing limit was increased to $18 million
subsequent to March 31, 1997 and the interest rate was
lowered to the bank's prime rate. The Company believes that
the 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 term of the current agreement extends to
November 30, 1997, is renewable annually and can be
terminated at any time by the borrower or lender.
The secured financing agreement with IBM Credit Corporation
continues to offer thirty day interest free financing up to
$1.2 million on certain products purchased by the Company
for resale. As of March 31, 1997, IBM Credit Corporation
purchase transactions accounted for $269,000 of the total
accounts payable balance.
In February 1997, the Company called all of its then outstanding
Warrants for redemption as of March 10, 1997 pursuant to the
Warrant Agreement, dated October 28, 1994. Approximately
1,256,000 shares were issued due to the resulting exercise of
Warrants, generating in net proceeds of approximately $7,300,000
(see Note 5).
For the three months ended March 31, 1997, the Company increased
cash and cash equivalents by approximately $5.5 million primarily
due to the results of the call for redemption of the outstanding
Warrants. Cash flow from operations decreased by $8.4 million
primarily as a result of an increase in accounts receivable due
to the longer payment cycles associated with government and
institutional customers, and secondarily to inventory held for
project sales. Working capital as of March 31, 1997 was $6.6
million.
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 foregoing discussion and analysis contain a number of
"forward looking statements" within the meaning of the
Securities Exchange Act of 1934 and are subject to a number
of risks and uncertainties. These include general business
conditions, continuing favorable economic conditions, the
failure of the company's customers to fulfill contractual
commitments, the ability of the company to recruit and
retain qualified personnel, the ability of the Company to
develop and sustain new customers in geographic areas in
which the Company has recently begun to operate, the ability
of the Company to successfully complete the integration of
its new offices and divisions into its operations, the
relative uncertainties in the market direction of emerging
technologies, the Company's ability to develop and sustain
new customers in new geographic areas, the potential loss of
key personnel within the new regions, the Company's ability
to retain the State of Michigan contract and a lack of
market acceptance of the Company's products and services in
the new regions.
PART II - OTHER INFORMATION
Item #3. Quantitateve and Qualitative Disclosures about
Market Risk.
Not applicable.
Item #6 Exhibits and Reports on Form 8-K
(a.) Exhibits
10.4(c) Amendment to NBD credit facility agreement dated
April 23, 1997
10.18 Warrant Redemption Agreement dated January 21,
1997 between the Company and H.J. Meyers & Co., Inc. filed as
an exhibit to the Company's Annual Report on Form 10K for the year
ended December 31, 1996 and incorporated herein by reference.
11. Computation of Earnings Per Share
27. Financial Data Schedule
(b.) Reports on Form 8-K
None
DATA SYSTEMS NETWORK CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act
of 1934, the registrant has duly cause this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Data Systems Network Corporation
Registrant
May 15, 1997 /S/ Philip M. Goy
Date Philip M.Goy
Vice President and
Chief Financial Officer
May 15, 1997 /S/ Michael W. Grieves
Date Michael W.Grieves
President and
Chief Executive Officer
Exhibit 10.4(c)
April 23, 1997
Data Systems Network Corporation
34705 W. Twelve Mile Road, Suite 300
Farmington Hills, MI 48331
Gentlemen:
This letter will constitute an amendment to our Restated
Business Financing Agreement-Secured Credit Agreement
(Accounts Receivable and Inventory) dated June 30, 1992, as
amended.
Paragraph 2 reads, in part, as follows:".. The maximum
principal amount to be advanced to Borrower under this line
of credit will not exceed $15,000,000 at any one time
outstanding.".
Effective April 1, 1997, Paragraph 2 is amended, in part, to
read as follows: "...The maximum principal amount to be
advanced to Borrower under this line of credit will not
exceed $18,000,000 at any one time outstanding...".
Paragraph 3 reads, in part, as follows: "...The rate of
interest to be charged on al advances, whether under this
Agreement, any supplement, or otherwise ("Interest Rate")
will be 1/4 of one percentage point per annum higher than
the prime per annum rate of interest adjusted on a daily
basis.".
Effective May 1, 1997, Paragraph 3 is amended, in part, to
read as follows: "..The rate of interest to be charged on
all advances, whether under this Agreement, any supplement,
or otherwise will be at the prime per annum rate of interest
adjusted on a daily basis.".
Effective March 31, 1997, Paragraph 15 (j) is amended in its
entirety to read as follows: "..if Borrower does not
maintain its Tangible Net Worth, defined as all assets
which, under GAAP would appear on its balance sheet, but
excluding intangible items such as goodwill, treasury
shares, reserves, patents, trademarks, research and
development expenses and the like, and excluding any write-
up or increase in the book value of assets resulting form a
reevaluation thereof (except with respect to inventory on
account of the standard costing systems), a change in
accounting methods, standards, practices or rules, or for
any other reason, less total liabilities, at not less than
$8,700,000.".
All other provisions and covenants contained in the Restated
Business Financing Agreement-Secured Credit Agreement
(Accounts Receivable and Inventory) and all related loan
documents remain in full force and effect and unchanged.
Kindly acknowledge your acceptance of the foregoing by
signing in the space provided below and return two copies of
this letter to the undersigned.
Very truly yours,
Mary Lu Cramer Mark W. Widawski
Vice President First Vice President
The foregoing is hereby acknowledged and
agreed to:
DATA SYSTEMS NETWORK CORPORATION
By: Philip M. Goy
Chief Financial Officer
EXHIBIT 11
DATA SYSTEMS NETWORK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------
PRIMARY FULLY DILUTED
-------------- -------------
NUMBER OF SHARES
Weighted average shares issued 3,766,118 3,823,010
Less shares held in escrow (300,000)
-------------- -------------
Weighted average shares outstanding 3,466,118 3,823,010
============== =============
EARNINGS
Net Income $ 428,858 $ 428,858
============== =============
EARNINGS PER SHARE
Net Income $ 0.12 $ 0.11
=============== ============
EXHIBIT 27