1
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, 2000
Commission File Number 1-13424
DATA SYSTEMS NETWORK CORPORATION
Michigan 38-2649874
(State or other jurisdiction of Incorporation (IRS Identification
or organization) Number)
34705 W. 12 Mile Rd., Suite 300
Farmington Hills, Michigan 48331
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(248) 489-8700
Indicate by check mark whether the registrant (l) 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 them 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 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 - 5,542,448 shares as of May 9, 2000
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements for the Three Months
Ended March 31, 2000 and 1999 6
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DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
UNAUDITED
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,339,963 $ 1,516,709
Accounts receivable (net of allowance of $240,000 and $290,000
at March 31, 2000 and December 31, 1999 respectively). 8,908,977 9,132,585
Inventories 532,035 907,207
Notes receivable 50,000 50,000
Other current assets 1,207,588 1,132,070
----------- ------------
Total current assets 12,038,563 12,738,571
PROPERTY AND EQUIPMENT, net 1,345,444 1,385,498
GOODWILL, (net of amortization of $600,313 and $557,938 at 2,789,695 2,832,070
March 31, 2000 and December 31, 1999 respectively.)
OTHER ASSETS 303,985 351,956
----------- ------------
TOTAL ASSETS $16,477,687 $ 17,308,095
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit 4,147,957 $ 5,217,794
Accounts payable 7,403,715 6,356,961
Accrued liabilities 1,484,205 1,742,977
Deferred maintenance revenues 1,710,263 1,598,024
----------- ------------
Total current liabilities 14,746,140 14,915,756
COMMITMENTS and CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares, none outstanding
Common stock ($.01 par value; authorized 10,000,000
shares; issued and outstanding 5,509,224
at March 31, 2000 and December 31,1999) 55,092 55,092
Additional paid-in capital 18,575,219 18,575,219
Accumulated deficit (16,898,764) (16,237,972)
----------- ------------
Total stockholders' equity 1,731,547 2,392,339
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,477,687 $ 17,308,095
=========== ============
The accompanying notes are an integral part of these financial statements
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DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
UNAUDITED UNAUDITED
2000 1999
----------- -----------
REVENUES:
Product revenue $ 8,532,450 $ 9,078,105
Service revenue 4,722,402 5,270,411
----------- -----------
Total revenues 13,254,852 14,348,516
COST OF REVENUES:
Cost of products 7,139,768 6,770,807
Cost of services 4,107,468 4,331,416
----------- -----------
Total cost of revenues 11,247,236 11,102,223
GROSS PROFIT 2,007,616 3,246,293
OPERATING EXPENSES:
Selling expenses 1,582,609 1,769,477
General and administrative expenses 965,340 1,186,295
----------- -----------
Total operating expenses 2,547,949 2,955,772
(LOSS)/INCOME FROM OPERATIONS (540,333) 290,521
OTHER (EXPENSE) INCOME:
Interest expense (151,573) (122,233)
Interest income 24,660 43,843
Other income 6,454 18,174
----------- -----------
(120,459) (60,216)
NET (LOSS)/INCOME $ (660,792) $ 230,305
=========== ===========
(Loss)/Income per common share - basic and diluted
Net (loss)/earnings per common share $ (0.12) $ 0.05
=========== ===========
Weighted average shares outstanding 5,509,224 4,859,224
=========== ===========
The accompanying notes are an integral part of these financial statements
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DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
UNAUDITED UNAUDITED
2000 1999
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/earnings (660,792) 230,305
Adjustments to reconcile net (loss)/earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization 206,028 289,125
Changes in assets and liabilities that provided (used) cash,
Accounts receivable 223,608 1,129,276
Notes receivable - 60,000
Inventories 375,172 796,403
Other current assets (75,518) 115,389
Other assets 47,971 (42,293)
Accounts payable 1,046,754 (2,022,373)
Accrued liabilities (258,772) (326,817)
Deferred maintenance revenues 112,239 (1,166,810)
----------- ----------
Net cash provided by (used in) operating activities 1,016,690 (937,795)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisition of property and equipment, net (123,599) (4,290)
----------- ----------
Net cash used in investing activities (123,599) (4,290)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net current (repayments) borrowings under bank line of credit (1,069,837) 69,610
----------- ----------
Net cash (used in) provided by financing activities (1,069,837) 69,610
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (176,746) (872,475)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,516,709 2,695,863
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,339,963 1,823,388
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the period for:
Interest $ 151,573 $ 122,233
=========== ==========
The accompanying notes are an integral part of these financial statements
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DATA SYSTEMS NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR QUARTER ENDED MARCH 31, 1999
UNAUDITED
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by Data
Systems Network Corporation (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations.
The information provided in this report reflects all adjustments consisting of
normal recurring accruals which are, in the opinion of management, necessary for
the fair presentation of the Company's financial position as of March 31, 2000,
and the results of its operations and its cash flows for the three months ended
March 31, 2000 and 1999. These consolidated financial statements should be read
in conjunction with the Company's financial statements for the year ended
December 31, 1999 as filed with the Securities and Exchange Commission.
Results for the interim period are not necessarily indicative of results that
may be expected for the entire year.
NOTE B - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Data Systems Network Corporation ("Data Systems"), incorporated in Michigan in
1986, provides computer network services and products that allow companies to
control their complex distributed computing environments, allowing companies to
capitalize on their investments in technology and people. Data Systems' wide
range of services includes Applications Development, Network Services,
Enterprise Management, Help Desk and Security Services. Data Systems also
provides a wide range of network integration services including installation,
consultation, technical support and training to governmental and corporate
accounts.
CASH EQUIVALENTS
For purposes of the statement of cash flows, Data Systems considers all highly
liquid debt instruments purchased with maturity of three months or less to be
cash equivalents.
RESTRICTED CASH
At March 31, 2000, cash of $1,319,000 was restricted in connection with
maintenance agreements. It will become unrestricted as revenue is recognized
according to the terms of the agreements.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
weighted average method. Inventories consist of goods for resale and service
parts, which represent equipment spares utilized for service contracts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed principally using the straight-line method based upon estimated useful
lives ranging from 5 to 7 years. Amortization of leasehold improvements is
provided over the terms of the various leases.
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GOODWILL AND LONG-LIVED ASSETS
The cost in excess of net assets acquired (goodwill) is amortized using the
straight-line method over twenty years, which is the estimate of future periods
to be benefited. Data Systems performs a review for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Undiscounted estimated future cash flows of an asset are
compared with its carrying value, if the cash flows are less than the carrying
value, an impairment loss is recognized.
INCOME TAXES
Income taxes are accounted for by using an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial basis and tax basis
of assets and liabilities. Assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
REVENUE RECOGNITION
Revenue recognition for consulting, network installation services, time and
materials services, and training is recognized when the services are rendered.
Revenue from the sale of merchandise is recognized when the customer receives
the product. Revenue from the sales of after-installation service maintenance
contracts is recognized on a straight-line basis over the lives of the
respective contracts.
PRODUCT RETURNS AND SERVICE ADJUSTMENTS
Product returns and service adjustments are estimated based upon historical
data. Data Systems' customers have no contractual rights to return products.
Data Systems determines whether to accept product returns on a case-by-case
basis and will generally accept product returns only upon payment of a
restocking fee and/or if the products may be returned to the manufacturer. Data
Systems offers no warranty separate from the product manufacturers' warranties.
EARNINGS OR LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 specifies the computation and
presentation and disclosure requirements for earnings per share ("EPS") of
entities with publicly held common stock or potential common stock. SFAS 128
defines two EPS calculations, basic and diluted. The objective of basic EPS is
to measure the performance of an entity over the reporting period by dividing
income available to common stock by the weighted average of shares outstanding.
The objective of diluted EPS is consistent with that of basic EPS while giving
effect to all dilutive potential common shares that were outstanding. For year
ended March 31, 2000, there were no potentially dilutive common shares.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Data Systems' financial instruments consist primarily of
cash and cash equivalents, bank lines of credit, accounts receivables, accounts
payable and short-term and long-term debt, approximate their fair values.
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NOTE C - LINES OF CREDIT
On September 30, 1998 Data Systems and Foothill Capital Corporation ("Foothill")
entered into a credit facility ("Foothill Agreement"). The Foothill Agreement
provides for a revolving line of credit not to exceed $15 million. The available
line of credit at March 31, 2000 was $336,396. Data Systems may, at its option
and subject to certain collateral requirements, increase the line to $20 million
during the term of the Foothill Agreement. Borrowing limits under the Foothill
Agreement are determined based on a collateral formula, which includes 85% of
qualified trade receivables. Borrowings under the Foothill Agreement bear
interest at 1% over Norwest Bank prime (10.0% at March 31, 2000) and have a term
extending to September 30, 2001.
Data Systems is required to maintain certain financial ratios. At March 31,
2000, due primarily to the Company's loss from operations, the Company was not
in compliance with the EBITDA and net worth covenants. The Company has received
waivers of such noncompliance from Foothill. The Foothill Agreement include
restrictions with respect to dividend distributions by Data Systems.
In connection with the Foothill Agreement, Data Systems issued a warrant for
50,000 shares of common stock with an exercise price not greater than $2.20 per
share. This warrant will expire September 30, 2003.
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 financial
statements and notes thereto included under "Item 1. Financial Statements."
RESULTS OF OPERATIONS
REVENUES. Total revenues decreased 7.6% to $13.3 million for the three months
ended March 31, 2000 from $14.3 million for the same period in 1999. The
decrease was attributable to non-recurring product sales, completion of a
systems application project and the August 1999 termination of the Company's
unprofitable imaging services group.
Product sales decreased $.5 million or 6.0% for the three months ended March 31,
2000 from the same period in 1999. The decrease was directly related to
non-recurring product sales and the termination of the Company's unprofitable
imaging services group. Service revenues decreased 10.4% to $4.7 million for the
three months ended March 31, 2000. The decrease was due to the completion of a
systems application project.
Service revenues accounted for 35.6% of total revenues in the three months
ended March 31, 2000 compared to 36.7% of total revenues in the corresponding
period of 1999. The decrease is related to the reduction in service sales.
COST OF REVENUES. The cost of revenues increased to 84.9% of total revenues for
the three months ended March 31, 2000, from 77.4% during the corresponding
period of 1999. The cost of product sales increased to 83.7% of product sale
revenue for the three months ended March 31, 2000 compared to 74.6% for the same
period in 1999. The Company attributes the increase to the Company's ability in
1999 to pass through equipment sales with certain key vendors. The Company did
not have this ability in the three months ended March 31, 2000. In 1999, this
allowed the Company to recognize commission revenue on those product sales
without the associated cost of the product. The cost of service revenue
increased to 87.0% of service revenues for the three months ended March 31,
2000, from 82.2% for the same period in 1999. The Company attributes the
increase to expenses that were carried in anticipation of new system application
projects in Florida and expenses incurred in Michigan due to the Company's focus
on developing strategic service offerings.
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OPERATING EXPENSES. Selling, general and administrative expense decreased to
19.2% of total revenue for the three months ended March 31, 2000 compared to
20.6% of total revenue for the same period in 1999. The decrease was related to
the Company's continued effort to control overhead costs. Sales expense declined
by $0.2 million or 10.6% when compared to the first quarter 1999 due primarily
to a reduction in the commission plan. General and administrative expenses
declined by $0.2 million or 18.6% when compared to the first quarter 1999 due
primarily to reduction in headcount as a result of attrition.
OTHER (EXPENSE) INCOME. Interest expense for the three months ending March
31,2000 increased 24.0% when compared to the same period in 1999. The increase
reflects an increase in the interest rate on the Company's borrowings as a
result of the increase in the prime rate.
FINANCIAL CONDITION
As of March 31, 2000, cash totaled $1.3 million, a decrease of $0.2 million
from December 31, 1999. Cash provided by operating activities during the first
quarter 2000 was $1.0 million, primarily due to an increase in accounts payable
of $1.0 million, partially offset by a loss of $.6 million during the period.
Net cash used in financing activities was attributable to a net repayment of the
Company's bank line of credit of $1.1 million. The Company, in accordance with
its bank financing agreement, applies all available cash to its outstanding line
of credit balance. Daily working capital requirements are managed through daily
borrowings.
The Company finances its working capital needs primarily through a line of
credit agreement with Foothill. The Foothill Agreement provides for an initial
revolving line of credit not to exceed $15 million. The Company may, at its
option and subject to certain collateral requirements, increase the line to $20
million during the term of the Foothill Agreement. Borrowing limits under the
Foothill Agreement are determined based on a collateral formula, which includes
85% of qualified trade receivables. Borrowings under the Foothill Agreement bear
interest at 1% over Norwest Bank's prime rate and have a term extending to
September 30, 2001. As of March 31, 2000, the line of credit under the Foothill
Agreement bore interest at 10%. As of March 31, 2000, the line of credit
collateral formula permitted borrowings of up to $4.6 million, of which $4.2
million was outstanding.
The agreement in effect at March 31, 2000 contains certain financial
covenants related to earnings before interest, taxes, depreciation and
amortization ("EBITDA"), net worth and capital expenditures. There are other
covenants that require the Company's receivables to be genuine and free of all
other encumbrances and require the Company's inventory to be kept only at
certain locations and to be free of all other encumbrances. At March 31, 2000,
due primarily to the Company's loss from operations, the Company was not in
compliance with the EBITDA and net worth covenants. The Company has received
waivers of such non compliance from Foothill and the Company's access and use of
the line of credit was not affected. In the event that the Company would be
unable to borrow amounts necessary to fund its operations, or if repayment of
its obligations under the current credit agreement were demanded by Foothill,
the Company's financial condition would be materially and adversely affected. In
such event, there can be no assurance that the Company would be able to obtain
alternative working capital financing to continue its operations.
The Company's working capital deficiency as of March 31, 2000 was $2.7
million. The Company believes that the combination of present cash balances,
future operating cash flows, and working capital provided by the Foothill
Agreement or alternate working capital financing secured by the Company will be
adequate to fund the Company's internal growth and current short and long term
cash flow requirements.
Upon completion of its planned merger into TekInsight Services, as
described below, the Company believes that additional financing resources will
be available and certain synergies relating to business opportunities will
arise. However, the Agreement and Plan of Merger requires the Company to conduct
business in the usual and ordinary course but under certain restrictions and
limitations until closing. These restrictions and limitations, in the aggregate,
could have a material effect on the Company's ability to quickly respond to
changes in its business.
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On February 18, 2000, Data Systems and TekInsight.Com, Inc. ("TekInsight")
entered into an Agreement and Plan of Merger pursuant to which Data Systems
would be merged (the "Merger") into Astratek, Inc., a wholly owned and operating
subsidiary of TekInsight. On April 4, 2000 the parties amended the merger
agreement to provide that Data Systems will merge into TekInsight Services,
another wholly owned subsidiary of TekInsight. Completion of the Merger is
subject to a number of conditions, including receipt of TekInsight and Data
Systems shareholder approval, acceptance by Nasdaq for the listing of the
convertible preferred stock to be issued Data Systems shareholders in the merger
and other customary closing conditions. There can be no assurance that the
Nasdaq listing will be obtained for the newly issued convertible preferred
stock, or that any of the closing conditions will be satisfied. Although no
assurances can be given, the parties intend to close the merger no later than
June 30, 2000.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains 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 risks may include
the continuation of current favorable economic conditions, the ability of Data
Systems' customers to fulfill contractual commitments, the ability of Data
Systems to recruit and retain qualified personnel, the ability of Data Systems
to develop and sustain new customers, the willingness of Data Systems' bank
lender to continue to lend under its current credit facility or Data Systems'
ability to secure alternative working capital financing, the relative
uncertainties in the market direction of emerging technologies, the potential
loss of key personnel, Data Systems' ability to retain its commercial and
governmental contracts, the potential lack of market acceptance of Data Systems'
products and services, and certain risks associated with the closing of the
merger between Data Systems and TekInsight.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks. In addition to the market risk
associated with interest on outstanding debt, other examples of risk include
collectibility of accounts receivable and recoverability of residual values of
assets placed in service.
The Company's debt contains an element of market risk due to possible
changes in interest rates. The Company regularly assesses these risks and has
established collection policies and business practices to minimize the adverse
effects of these and other potential exposures. The Company does not currently
anticipate any material losses in these areas, due primarily to the lack of
significant fluctuation in the prime-lending rate on which the Company's
interest expenses are determined. The financial instruments included in the debt
of the Company consist of all of the Company's cash and cash equivalents, bank
financing, bank credit facilities and lines of credit, vendor credit lines,
leases, and, if applicable, marketable securities, and any short and long-term
investments.
The Company assesses the risk of loss due to the impact of changes in
interest rates on market sensitive instruments. Interest rates affecting the
Company's debt are market based and will fluctuate as a result. The Company
prepares forecasts and cost of funds analysis on significant purchases to
anticipate the effect of market interest rate changes.
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The Company's earnings are affected by changes in short-term interest rates
as a result of its use of bank (line of credit) financing for working capital.
If market interest rates based on the prime lending rate average 2% more in 2000
than they did during 1999, the Company's interest expense, after considering the
effects of interest income, would increase, and the loss before taxes for the
three months ending March 31, 2000 would increase by approximately $25,000
assuming comparable average borrowings. These amounts are determined by
considering the impact of the hypothetical change in the interest rates on the
Company's borrowing cost and short-term investment balances, if any. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
PART II. OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
On or about October 29, 1998, the Securities and Exchange Commission
("SEC") informed the Company that it is conducting a formal private
investigation of the accounting irregularities experienced by the Company in the
fiscal years 1996 and 1997. This inquiry is ongoing, and the Company is
cooperating with the investigation.
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ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
A list of the exhibits required to be filed, as part of this Form 10-Q is
included under the heading "Exhibit Index" in this Form 10-Q and incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
The following filings occurred in the first quarter of 2000:
- -----------------------------------------------------------
Date Information Reported
---- ---------------------
January 28, 2000 Items 5 and 7
March 1, 2000 Items 5 and 7
No financial statements were filed with these Reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
DATA SYSTEMS NETWORK CORPORATION
By:/s/ Michael W. Grieves Date: May 12, 2000
------------------
Michael W. Grieves
Chairman of the Board, President and Chief
Executive Officer (Duly Authorized Officer)
By:/s/ Michael Jansen Date: May 12, 2000
--------------
Michael Jansen
Vice President, Treasurer and Chief Financial Officer
(Principle Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
2.1 Agreement and Plan of Merger, dated February 18, 2000, by and
among Tekinsight.com, Inc., Astratek, Inc. and Data Systems
Network Corporation, including Form of DSNC Voting Agreement and
irrevocable Proxy as Exhibit A thereto, incorporated herein by
reference from Data Systems' current report on Form 8-K filed
March 1, 2000. Schedules to the Agreement, listed on page iv,
were not filed but will be provided to the commission
supplementally upon request.
2.2 First Amendment to the Agreement and Plan of Merger, dated as of
April 4, 2000, by and among TekInsight.Com, Inc., Astratek, Inc.,
Tadeo E-Commerce Corp. and Data Systems Network Corporation.
27.1 Financial Data Schedule