UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
Commission file Number 1-13424
Data Systems Network Corporation
Michigan 38-2649874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34705 W. 12 Mile Rd., Suite 300 48331
Farmington Hills, Michigan
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(810)489-7117
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12,13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.01 Par Value - 3,255,000 shares as of September 30, 1996
Part I Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net product sales $5,015,491 $7,792,443 $14,815,940 $20,798,782
Service revenue 1,360,273 461,580 2,872,262 1,580,084
----------- ------------ ------------ ---------
Total revenues 6,289,612 8,254,023 17,688,202 22,378,866
Cost of product
sales 4,509,696 7,421,474 13,184,103 18,897,272
Cost of services 806,088 289,807 1,367,774 936,900
---------- --------- ---------- ---------
Total cost of
revenues 5,315,784 7,711,281 14,551,877 19,834,172
------------ ----------- ----------- -----------
Gross profit 1,059,980 542,742 3,136,325 2,544,694
Selling expenses 897,423 487,062 1,932,164 1,479,498
General and
administrative
expenses 608,696 325,219 1,462,501 815,926
---------- --------- --------- ---------
Total operating
expenses 1,506,119 812,281 3,394,665 2,295,424
----------- ---------- ------------ -----------
Income (loss) from
operations (446,139) (269,539) (258,340) 249,270
Other income(expenses):
Interest expense (142,704) (88,380) (337,448) (279,008)
Interest income 82,248 47,254 218,164 136,846
Other income 208,194 304,122
---------- --------- --------- ---------
Income(loss)
before minority
interest and extraordinary
items (297,121) (310,665) (73,563) 107,108
Minority interest in
subsidiary 44,147 3,000
Income (loss) before
extraordinary items (252,976) (310,665) (70,563) 107,108
Extraordinary items (Note 5):
Loss on settlement
of Bankruptcy (164,666) (164,666)
Gain recognized upon
extinguishment of debt 75,494 75,494
-------- --------- --------- ----------
Net income(loss) $(342,146) $ (310,665) $(159,735) $107,108
======== ========= ========= ========
<CAPTION>
Three Months Ended September 30,
1996 1995
--------------------------
Primary Primary
<S> <C> <C>
Loss per common
share before extraordinary items: ($0.10) ($0.12)
Extraordinary items ($0.03)
Net loss ($0.13) ($0.12)
Weighted number of ====== ======
shares outstanding: 2,665,993 2,670,000
<CAPTION>
Nine Months Ended September 30,
1996 1995
----------------------
Primary Primary Fully
Diluted
<S> <C> <C> <C>
Earnings (loss) per common
share before extraordinary items: ($0.03) $0.04 $0.04
Extraordinary items ($.03)
-------- -------- -------
Net earnings (loss) ($0.06) $0.04 $0.04
======= ======= =======
Weighted number of
shares outstanding: 2,595,885 2,670,000 2,970,000
<CAPTION>
See Notes to Interim Consolidated Financial Statements
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF
September 30, 1996 December 31, 1995
______________ ______________
(unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,572,672 $3,171,544
Accounts receivable (net of
allowance of $51,815 and
$67,086 at September 30, 1996 and
December 31, 1995, respectively) 5,751,677 5,249,771
Notes receivable 648,548 692,387
Inventories,net 2,326,115 992,922
Other current assets 742,616 294,296
-------------- --------------
Total current assets 11,041,624 10,400,860
Service parts, net 1,609,708 1,169,781
Property and equipment, net 1,736,861 297,029
Other assets 76,247 70,743
Goodwill, net (note 3) 4,510,847
---------------- --------------
TOTAL ASSETS $18,975,287 $11,938,413
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit(Note 2) $5,358,506 $3,956,000
Current portion of long-term debt -0- 213,039
Accounts payable(Note 4) 5,337,200 3,449,520
Accrued liabilities 1,001,805 514,693
Deferred maintenance revenues 1,100,843 228,060
---------- ----------
Total current liabilities $12,798,355 $8,361,312
Long term debt, less current portion 100,000 100,000
Stockholders' Equity
Preferred stock -0- -0-
Common stock par value $0.01 per share
Authorized 10,000,000 shares
Issued and outstanding - 3,255,000
shares at September 30, 1996; 2,715,000
shares at December 31, 1995 32,550 27,150
Additional paid-in capital 9,139,153 6,385,047
Accumulated deficit (3,094,771) (2,935,096)
----------- -----------
Total Stockholders' Equity $6,076,932 $3,477,101
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $18,975,287 $11,938,413
=========== ===========
See Notes to Interim Consolidated Financial Statements
<CAPTION>
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
1996 1995
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $159,735 $107,108
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in subsidiary (3,000)
Depreciation and amortization 299,077 251,348
Extraordinary gain (75,494)
Provision for doubtful receivables 17,191 31,093
Provision for inventory obsolescence 45,817 54,743
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (203,300) (2,453,617)
Notes receivable (561,235)
Inventories (1,379,010) (554,833)
Other current assets (359,978) (244,519)
Service parts (31,112) 136,719
Other assets (5,504) (195,265)
Accounts payable 1,471,967 2,837,890
Accrued liabilities (439,443) 46,021
Deferred maintenance revenues 13,071 34,382
Net cash provided by (used in)
operating activities $ (1,370,688) $50,070
Cash Flows From Investing Activities:
Acquisition of property,
plant, and equipment $(520,651) $(292,710)
Purchase of capital stock of subsidiary (7,000)
Cash paid for net assets acquired (890,000)
Net cash used in investing activities $(1,417,651) $(292,710)
Cash Flows From Financing Activities:
Net borrowings under bank line
of credit $1,402,506 $995,878
Payment of principal on long-term debt (394,644) (630,241)
Increase in long-term debt 181,605
Net cash provided by financing
activities $1,189,467 $365,637
Net decrease in cash and
cash equivalents (1,598,872) 122,977
Cash and cash equivalents
at beginning of period $3,171,544 $3,196,038
------------- --------------
Cash and cash equivalents
at end of period $1,572,672 $3,319,035
=========== ===========
Supplemental disclosure
cash paid during the
period for interest $337,448 $192,156
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
The Company purchased common stock of UNS for $7,000. In conjunction with
the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $204,745
Goodwill acquired $999,078
Cash Paid for Capital Stock $(7,000)
Liabilities Assumed $1,196,823
The Company purchased the net assets of The Network Systems Group (NSG) of
Information Decisions, Inc., a wholly owned subsidiary of SofTech, Inc. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $1,857,742
Goodwill acquired $3,539,000
Common stock issued to seller $(2,835,000)
Cash paid for net assets $(890,000)
Transactional costs-capitalized $(160,850)
Liabilities Assumed $1,510,892
See Notes to Interim Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and should be read in
conjunction with the Company's audited financial statements and notes
contained in the Company's Form 10-K for the year ended December 31,
1995. The condensed consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of results of operations for the periods presented. The results
of such interim periods are not necessarily indicative of the results of
operations for the full year.
The consolidated financial statements include the financial statements of Data
Systems Network Corporation and its majority-owned subsidiary, Unified
Network Services ("UNS"). The statements also reflect the activity of the
Network Services Group ("NSG") of Information Decisions Incorporated ("IDI"),
a wholly owned subsidiary of SofTech, Inc.("SofTech") from the acquisition
date of September 3, 1996. All significant intercompany balances and
transactions have been eliminated in consolidation.
Note 2. Bank line of Credit
As of September 30, 1996, the Company has a bank line of credit of $7.5 million
bearing interest at .75% over the bank's prime rate (effective rate of 9% at
September 30, 1996). The current agreement has been amended effective
November 1, 1996 to, among other things, increase the maximum borrowing
amount under the line of credit to $15 million and to reduce the interest
rate to .25% over the bank's prime rate. The line of credit expires on
February 1, 1997 and can be terminated at any time by the Company or the
bank. Borrowings under the line of credit are due on demand. Borrowing
limits are determined based on a collateral formula which includes 85% of
qualified trade receivables less than 90 days old and 25% of eligible
inventory and service parts. The line is collateralized by substantially all
of the Company's assets. The line of credit agreement contains certain
covenants requiring the Company's receivables to be genuine and free of all
other encumbrances and requiring the Company's inventory financed under the
term agreement to be kept at designated locations and free from all other
encumbrances. The inventory covenants are restricted to apply solely to the
inventory financed through this agreement, exclusive of any and all
inventories financed under the IBM Credit Corporation Agreement (see Note 4).
Note 3. Acquisitions
On February 22, 1996, the Company purchased 70% (7,000 shares) of UNS for
$7,000. The purchase price was allocated to the net assets acquired based
upon their estimated fair market value. The excess of the purchase price
over the estimated fair market value of the net assets acquired amounted to
$999,078, which is being accounted for as goodwill and is being amortized
over 20 years using a straight-line method. Operating results of these
acquired operations are included in the financial statements from the date
of purchase.
Effective September 3, 1996, the Company purchased the operations of NSG,
including certain assets and assumed certain liabilities from SofTech. The
acquisition has been accounted for as a purchase. In exchange for certain
assets and liabilities, SofTech received $890,000 in cash and 540,000 shares
of the Company's common stock valued at approximately $2,835,000. The
purchase price was allocated to the net assets acquired based upon their
estimated fair market value. The excess of the purchase price over the
estimated fair market value of the net assets acquired amounted to
$3,539,000, which is being accounted for as goodwill and is being amortized
over 20 years using a straight-line method.
The allocations of the purchase prices have been made on a preliminary basis
and are subject to change upon final determination regarding the fair market
values of assets acquired and liabilities assumed.
The following unaudited pro forma income statements were prepared to
illustrate the effects of the acquisition as if it had occurred on
January 1, 1995. The pro forma adjustments are based on the available
information and upon certain assumptions the Company believes are reasonable.
The pro forma income statements do not purport to represent what the
Company's income statements would actually have been if such transaction in
fact had occurred on January 1, 1995, or to project the Company's income
statements for any future period. The information below reflects an
adjustment for the amortization of goodwill based upon the new cost basis of
the Company, as well as an adjustment to the income tax provision to reflect
the tax effect of the aforementioned adjustment. The 1996 amounts exclude the
extraordinary items for purposes of comparability.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
(in thousands)
<S> <C> <C>
Revenues $ 37,888 $ 49,679
Cost of Revenues 30,589 40,538
----------- ---------
Gross profit 7,299 9,141
Selling expenses 3,905 3,580
General and administrative expenses 3,338 3,173
Amortizatin of goodwill 133 133
---------- ---------
Income(loss) from operations (77) 2,255
Other income 185 (143)
---------- ---------
Income before income taxes 108 2,112
Income taxes 37 510
---------- ----------
Net income $ 71 $ 1,602
====== ======
</TABLE>
Note 4. Credit Line
On July 28, 1995, the Company entered into a secured financing agreement with
IBM Credit Corporation. For the period ending September 30, 1996, the
current agreement extends a maximum of $1,250,000 in secured funds to be used
exclusively for the acquisition of inventory for resale limited to those
products manufactured by Apple, Compaq, Hewlett Packard, IBM and Lexmark. Use
of this credit line is at the Company's option. To secure payment of all
current debt under this agreement, IBM Credit Corporation was granted a first
security interest in the Company's inventory financed under this agreement
equal to the amount of the outstanding debt. This agreement allows for
interest-free financing if paid within thirty days of invoicing. The
agreement also provides for a variable discount option, ranging from .5% to
1.0% off each invoice ,if paid within fifteen days. This agreement can be
terminated at any time by the Company or the lender. The terms and conditions
of this financing agreement can be changed at the discretion of IBM Credit
Corporation.
Note 5. Extraordinary Items
During the course of 1995 and 1996, the Company has negotiated with certain
creditors to accelerate the payment of unsecured debt providing the creditors
agree to certain terms, such as forgiveness of a portion of unsecured debt and
contingent liabilities and of sale the fully paid warrants. Under the terms
of the 1992 Plan of Reorganization, the unsecured creditors were granted
fully paid warrants of 170,000 shares of the Company's authorized common
stock and contingent payments of up to a total of $650,000. This contingent
liabiity was not previously recorded as the amount could not be reasonably
estimated. As a result of these extensive negotiations, the Company has
purchased approximately 110,000 warrants in 1995 and 10,400 in 1996. In
addition, the Company requested the authority to settle claims and obtained
final approval of the bankruptcy court to enter into a settlement agreement
whereby aggregate payments of approximately $114,000 will be made subsequent
to September 1996 to conclude the reorganization plan.
The extraordinary gain of approximately $75,000 represents the purchase of
the 10,400 warrants and the extinguishment of the related debt. The
extraordinary loss of approximately $165,000 represents the bankruptcy
contingent liability payments to be made and the related professional fees
incurred to conclude the bankruptcy reorganization plan.
Item 2-Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following analysis of financial condition and results of operations of the
Company should be read in conjunction with the Company's consolidated
financial statements and notes thereto included under Item 1. Financial
Statements.
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995. Revenues. Total revenues decreased 23% to $6.3 million for the
three months ended September 30, 1996 from $8.3 million for the same period
in 1995. This decrease is primarily attributable the Company's sales and
sales management personnel decision to shift their attention away from the
current quarter's activity to address the needs of both the NSG acquisition
due diligence process and the resulting personnel training and orientation
programs. The Company believes that its decision to allocate considerable
resources to the process of integrating the NSG employees into the Company's
operations is an important key to the Company's long term success and
retention of these employees. To a lesser degree, this decrease was a result
of a net product sales decrease of 40% resulting primarily from the
shifting of Company sales and support resources to UNS in an effort to
support initial third quarter sales expectations. The initial forecast for
UNS included the delivery and installation of certain large projects that
were either rescheduled for implementation in the fourth quarter, or canceled
due to customer budgetary constraints.
Product returns and allowances decreased to $199,000 or 3% of total revenues in
the three month period in 1996 from $223,000 or 3% of total revenues for the
same period in 1995. Gross profits for the period increased to $1,060,000, or
17% of total revenue, from $983,000, or 12% of total revenue, for the same
period in 1995. This increase is attributable to a 190% increase in service
revenue in 1996 over the same period in 1995.
Service revenue increased $898,000 to 14% of total revenues in the three
month period ended September 30, 1996 from 6% in the corresponding period of
1995. A majority of the service revenue increase resulted from the
recognition of network installations, training and hardware maintenance
income generated from the service base acquired with NSG.
Cost of Revenues. The total cost of revenues decreased to 83% of total
revenues for the three month period ended September 30, 1996 from 93% for the
same period in 1995. The cost of service revenue decreased to 59% of service
revenues for the three month period ended September 30, 1996 from 63% for the
same period in 1995, due to the significant increase in lower cost
maintenance revenues which typically represent a more profitable revenue
stream than time and materials revenues. The cost of product sales decreased
significantly to 90% of net sales for the three month period ended September
30, 1996 compared to 95% for the same period in 1995. This decrease is
primarily attributable to the increased sales mix of advanced technology
products which typically result in higher gross margins than the sale of
widely distributed commodity products. This shift in mix is consistent with
the Company's overall marketing plan to concentrate its efforts on leading
edge technology, such as network management, remote network monitoring and
imaging.
Operating Expenses. Selling, general and administrative expense increased by
$694,000 to 24% of total revenue for the three month period ended
September 30, 1996 compared to 10% of total revenues for the same period in
1995. This increase was primarily attributable to costs associated with the
Company's decision to expand its geographic presence into New York,
Massachusetts, New Jersey, Rhode Island and Connecticut. The Company's
expansion plan targets geographic areas where significant government and
institutional contract opportunities exist. An aggressive expansion posture
and its related effect on operating expenses are expected to continue through
the fourth quarter. The foregoing statement is a "forward looking statement"
within the meaning of the Securities Exchange Act of 1934 and is subject to a
number of risks and uncertainties. These include the continuance of
favorable economic and business conditions, the availability of adequate
financing from the Company's cash resources and bank line of credit, and the
ability of the Company to continue to identify and recruit sales and service
professionals within its future geographic target areas.
Other Income(Expense). Other income for the quarter increased by $210,000
resulting primarily from non-recurring services rendered by UNS not related
to the Company's continuing operations and to a lesser degree to the Company's
recognition of an accrual established in 1991 to satisfy the unsecured
creditors' debt liability. Both interest income and interest expense
remained relatively stable for the three month period ended September 30,
1996 compared to the same period in 1995.
Extraordinary Gain and Loss. The extraordinary gain of approximately $75,000
represents the purchase of the 10,400 warrants and the extinguishment of the
related debt. The extraordinary loss of about $160,000 represents the
bankruptcy contingent payments to be made and the related professional fees
to conclude the bankruptcy reorganization plan.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995.
Revenues. Total revenues decreased 21% to $17.7 million for the nine months
ended September 30, 1996 from $22 million for the same period in 1995. This
decrease was attributable to a 29% decrease in product sales, offset by an
82% increase in service revenue. These results illustrate the continued
success of the Company's ongoing effort to increase service revenues in both
dollars and as a percentage of total sales. Returns and allowances remained
stable at 3% percentage of total revenue for the nine months period in ended
September 30, 1996 and 1995. Product returns decreased in dollars to
$383,000 for the nine months ended September 30,1996 from $649,000 for the
same period in 1995. Gross profit increased to 18% of total revenue from 11%
for the same period in 1995, primarily attributable to the increase in
service revenues as a percentage of total sales.
Service revenue increased by 82% to 16% of total revenue in the nine month
period ended September 30, 1996 from 7% in the corresponding period of 1995.
The majority of the service revenue percentage increase resulted from the
second quarter sale of project design and installation service generated from
both DSNC and UNS activities, and to a lessor degree to the third quarter
maintenance, implementation and training revenues contributed by the newly
acquired NSG operation. The Company will continue to focus on increasing
service revenue in dollars and percentage of sales as part of its 1996
product mix strategy. The Company expects the NSG division to materially
contribute to that strategy through increased state contract service revenue.
Cost of Revenue. The cost of revenue decreased to 82% of total revenues for
the nine month period ended September 30, 1996 from 89% for the same period
in 1995. The cost of service revenue decreased to 48% of service revenues
for the nine month period ended September 30, 1996 from 59% for the same
period in 1995. This significant decrease is primarily attributable to the
successful marketing of maintenance contract revenue which provides the
Company with more profitable recurring service revenue than time and material
services. The cost of product sales decreased to 89% of net sales for the
nine month period ended September 30, 1996 compared to 91% for the same
period in 1995 primarily due to the Company's shift to an increased mix of
higher margin advanced technology products.
Operating Expenses. Selling, general and administrative expense increased by
$1,098,000 to 19% of total revenue for the nine month period ended
September 30, 1996 compared to 10% of total revenue for the same period in
1995. This increase is attributable to a variety of factors in order of
materiality, including the addition of the NSG staff, the increased costs
associated with the UNS staff recruitment and development, the increased
travel expenses required to service a geographically expanding customer base,
and to a lesser degree, to the third quarter sales office expansion activities.
Other Income(Expense). Interest expense increased for the nine months ended
September 30, 1996 compared to the same period in 1995 resulting primarily
from notes payable interest paid and an in the Company's business financing
line of credit. Interest income increased by $82,000 as a result of
increased earnings from the investment of the remaining proceeds of the 1994
public offering and interest earned on notes receivable accounts. Other
income for the nine month period ended September 30, 1996 increased by
$304,000 resulting primarily from non-recurring services rendered by UNS
not related to the Company's continuing operations, and to a lesser degree to
the Company's recognition of accruals for income taxes and unsecured
creditors' debt liability established in prior years.
Financial Condition
The Company finances its business primarily through funds generated internally
through operations, trade credit, and advances under its $7.5 million line of
credit with NBD Bank N.A. (the "Bank"). The line of credit is secured by
substantially all of the Company's assets, bears interest at .75% over the
Bank's prime rate (effective rate of 9% at September 30, 1996) and is due on
demand of the Bank. The current agreement has been amended effective November
1, 1996 to, among other things, increase the maximum borrowing amount under
the line of credit to $15 million and to reduce the interest rate to .25%
over the bank's prime rate. The line of credit expires on February 1, 1997
and can be terminated at any time by the Company or the bank. Borrowing
under the line of credit is limited by a formula determined from time to time
by the Bank and currently is calculated as the sum of 85% of qualified
receivables less than 90 days old and 25% of eligible inventory and service
parts as designated by the bank. The formula permitted total borrowings of
up to $5,540,000 as of September 30, 1996 with $5,360,000 outstanding. The
Company believes that the current permitted borrowing formula which increases
borrowing availability as the Company's sales growth generates new accounts
receivable, will support the continued growth of the Company. The foregoing
statement is a "forward looking statement" within the meaning of the
Securities Exchange Act of 1934 and is subject to a number of risks and
uncertainties. These include the continuance of favorable economic and
business conditions and the Company's future rate of sales growth.
In addition to the bank line of credit, the Company is utilizing a secured
financing agreement with IBM Credit Corporation which offers thirty day
interest free financing on certain products (Note 4) purchased by the Company
for resale. As of September 30, 1996, IBM Credit Corporation purchase
transactions accounted for $270,000 of the total accounts payable balance.
As of September 30, 1996, net cash flows decreased by $700,000 resulting from
an increase in both the bank line of credit and accounts payable, materially
offset by an increase in inventories and accounts receivable. To a lesser
degree, the decrease in working capital can be attributed to a $704,000
increase in deferred maintenance revenue. Working capital as of September 30,
1996 was ($1,601,000).
The Company has recorded the creditor committee settlement of approximately
$114,000 as a payable at September 30, 1996. This amount represents the
negotiation of the potential contingent payment due in 1997 of $650,000. The
amounts will be paid to the creditors and the related warrants will be issued
subsequent to September 30, 1996.
On September 3, 1996 the Company acquired the operations of the Network
Systems Group (NSG) of Information Decisions Incorporated, a wholly owned
subsidiary of SofTech. In exchange for certain assets and liabilities,
SofTech, Incorporated received $890,000 and 540,000 shares of Company common
stock valued at approximately $2,835,000. The purchase price was allocated
to the net assets acquired based upon their estimated fair market value.
The excess of the purchase price over the estimated fair market value of the
net assets acquired amounted to $3,539,000, which is being accounted for as
goodwill and is being amortized over 20 years using a straight-line method.
At the time of the acquisition, NSG had approximately 100 employees with
operations in Michigan, North Carolina, and New York.
On February 22, 1996, the Company purchased 70% (or 7,000 shares) of common
stock of Unified Network Services, Inc. for $7,000 in cash and assumed
approximately $1,200,000 in liabilities. The acquisition of UNS was
accounted for as a purchase. Accordingly, the purchase price was allocated
to the net assets acquired based upon their estimated fair market value. The
excess of the purchase price over the estimated fair market value of the net
assets acquired amounted to approximately $999,078, which is being accounted
for as goodwill and is being amortized over 20 years using a straight-line
method. This allocation was based on preliminary estimates and may be
revised at a later date.
The Company believes that the combination of present cash balances, future
operating cash flows, and credit facilities will be adequate to fund the
Company's internal growth and current short and long term cash flow
requirements. The payment of the unsecured creditors' claims, pursuant to
the recent settlement agreement, is expected to have minimal effect on the
Company's cash flows. Future trends for revenue and profitability continue
to be difficult to predict. The foregoing statement is a "forward looking
statement" within the meaning of the Securities Exchange Act of 1934 and is
subject to a number of risks and uncertainties. These include the continuance
of favorable economic and business conditions, the financial requirements of
the newly acquired operations and offices, and the success of the Company's
strategy to shift its revenue mix away from product sales towards service
revenue and thereby improve operating margin.
PART II - OTHER INFORMATION
Item #1 Legal Proceedings
None
Item #2 Change in Securities
On September 12, 1996, the Company issued 540,000 shares of its Common Stock
and paid $890,000 in cash to SofTech, Inc. in connection with the Company's
acquisition of certain of the assets and liabilities of SofTech's Network
Systems Group. The shares were issued in a transaction not involving a
public offering which was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The exemption is
available because: (1) the shares were issued to one accredited offeree and
purchaser, (2) no general solicitation or advertising was utilized in making
the offering, (3) the purchaser represented in writing that it was not
acquiring the shares with a view to or for the transfer, assignment, resale
or unregistered distribution except in compliance with the Securities Act or
an exemption from registration thereform, (4) the purchaser received written
disclosure that the securities have not been registered under the Securities
Act and cannot be resold unless they are registered thereunder or unless an
exemption from registration is available, and (5) the certificate evidencing
the shares includes a legend stating that the shares have not been registered
and referring to the restriction on transferability of the shares.
Item #4
None
Item #6 Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 2.1 Asset Purchase Agreement, dated September 12, 1996, by and
among the Company, Information Decisions, Incorporated,
System Constructs, Inc. and SofTech, Inc. (filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K
filed September 27, 1996 and incorporated herein by
reference)
Exhibit 10.3(b) The Data Systems Network Corporation 1994 Stock Option
Agreement (as amended and restated October 1996)
Exhibit 10.4(b) Restated Business Financing Agreement-NBD Secured Credit
Agreement
Exhibit 10.17 Registration Rights Agreement, dated as of September 12,
1996 to the Compnay and SofTech, Inc. (filed as Exhibit
10.17 to the Company's Current Report on Form 8-K filed
September 27, 1996 and incorporated herein by reference)
Exhibit 11 Computation of Earnings per share
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
Item 2. The Company filed a Report on Form 8-K on September 27, 1996
disclosing information under Item 2. The appropriate financial
statements will be filed by amendment to such Form 8-K.
DATA SYSTEMS NETWORK CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Data Systems Network Corporation
Registrant
November 14, 1996 /S/ Philip M. Goy
Date Philip M. Goy
Chief Financial Officer
November 14, 1996 /S/ Michael W. Grieves
Date Michael W. Grieves
President and Chief Executive Officer
<TABLE>
<CAPTION>
DATA SYSTEMS NETWORK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Nine Month Nine Month
Period ended September 30, 1996 Period ended September 30, 1995
------------------------------------ ----------------------------------
Primary Primary Fully Diluted
------------ --------- -------------
<S> <C> <C> <C>
Number of
Shares Weighted
average of
shares issued 2,895,885 2,970,000 2,970,000
Less shares
held in escrow (300,000) (300,000)
---------- ------------ -----------
Weighted average
shares
outstanding 2,595,885 2,670,000 2,970,000
Earnings(loss):
Earnings(loss) before
extraordinary item from gain
on extinguishment of debt $(70,563) $107,108 $107,108
Extraordinary loss $(164,666)
Extraordinary gain $ 75,494
------------ ---------- --------
Net earnings(loss) $(159,735) $107,108 $107,108
Earnings(loss) per share $(.06) $0.04 $0.04
======== ======= ========
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 1,573
<SECURITIES> 0
<RECEIVABLES> 6,401
<ALLOWANCES> 52
<INVENTORY> 2,326
<CURRENT-ASSETS> 11,041
<PP&E> 3,346
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,975
<CURRENT-LIABILITIES> 12,798
<BONDS> 0
0
<COMMON> 33
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,975
<SALES> 17,688
<TOTAL-REVENUES> 17,688
<CGS> 14,552
<TOTAL-COSTS> 3,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> (160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (160)
<DISCONTINUED> 0
<EXTRAORDINARY> 89
<CHANGES> 0
<NET-INCOME> (160)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
DATA SYSTEMS NETWORK CORPORATION
1994 STOCK OPTION PLAN
(as amended and restated October 1996)
1. Purpose. The purpose of the Plan is to promote the best interests of the
Company and its shareholders by giving Participants a greater personal
interest in the success of the Company in order to create additional
incentive for Participants to make greater efforts on behalf of the Company.
2. Administration. (a) The Plan shall be administered by the Committee. The
selection of Participants in the Plan and decisions concerning the timing,
pricing and amount of any grant of options under the Plan shall be made by
the Committee. Except as provided in Sections 10 and 13 of the Plan, the
Committee shall interpret the Plan, prescribe, amend, and rescind rules and
regulations relating to the Plan, and make all other determinations necessary
or advisable for its administration. The decision of the Committee on any
question concerning the interpretation of the Plan or any option granted
under the Plan shall be final and binding upon all Participants.
Notwithstanding any other provisions of the Plan, the Committee may impose
such conditions on an option as may be required to satisfy the requirements
of Rule 16b-3.
(b) The Committee may delegate to one or more officers or managers of the
Company or a committee of such officers or managers, the authority, subject
to such terms and limitations as the Committee shall determine, to grant
options to, or to cancel, modify, waive rights with respect to, alter,
discontinue or terminate options held by, and otherwise act in lieu of the
Committee with respect to, Participants who are not officers or directors of
the Company for purposes of Section 16 of the Exchange Act.
3. Participants. Participants in the Plan shall be such key Employees as the
Committee may select from time to time and with respect to Director Options,
the Nonemployee Directors. The Committee may grant options to an individual
upon the condition that the individual become an Employee, provided that the
option shall be deemed to be granted only on the date the individual becomes
an Employee.
4. Stock. The stock subject to options under the Plan shall be the Common
Stock and may be either authorized and unissued shares or treasury shares
held by the Company. The total amount of Common Stock on which options may
be granted under the Plan shall not exceed 200,000 shares, subject to
adjustment in accordance with Section 11. Shares subject to any unexercised
portion of a terminated, cancelled or expired option granted under the Plan,
and shares of Common Stock tendered or withheld pursuant to Sections 6 and 7
(to the extent permitted under Rule 16b-3), shall be available for subsequent
grants under the Plan.
5. Award of Options. (a) Subject to the limitations set forth in the Plan,
the Committee from time to time may grant options to such Participants and
for such number of shares of Common Stock and upon such other terms
(including, without limitation, the exercise price and the times at which the
option may be exercised) as it shall designate; provided that during any
two-year period, no salaried Employee shall receive options to purchase more
than 100,000 shares of Common Stock (as adjusted from time to time upon the
occurrence of a corporate transaction or event described in the first
sentence of Section 11). The Committee may designate any option granted as
either an Incentive Stock Option or a Nonqualified Stock Option, or the
Committee may designate a portion of an option as an Incentive Stock
Option or a Nonqualified Stock Option. A Participant may hold more than one
option under the Plan and any other stock option plan of the Company.
(b) Any option intended to constitute an Incentive Stock Option shall comply
with the following requirements in addition to the other requirements of the
Plan: (i) the exercise price per share for each Incentive Stock Option
granted under the Plan shall be equal to the Fair Market Value per share of
Common Stock on the Grant Date; provided that no Incentive Stock Option shall
be granted to any Participant who owns (within the meaning of Section 424(d)
of the Code) stock of the Company, or any Parent or Subsidiary, possessing
more than 10% of the total combined voting power of all classes of stock of
such Company, Parent or Subsidiary unless, at the Grant Date of an option to
such Participant, the exercise price per share for the option is at least
110% of the Fair Market Value on the Grant Date and the option, by its terms,
is not exercisable more than five years after the Grant Date; (ii) the
aggregate Fair Market Value of the underlying Common Stock on the Grant Date
as to which Incentive Stock Options under the Plan (or a plan of a
Subsidiary) may first be exercised by a Participant in any calendar year
shall not exceed $100,000 (to the extent that an option intended to
constitute an Incentive Stock Option shall exceed the $100,000 limitation,
the portion of the option that exceeds such limitation shall be deemed to
constitute a Nonqualified Stock Option); and (iii) an Incentive Stock Option
shall not be exercisable after the tenth anniversary of the Grant Date or
such lesser period as the Committee may specify from time to time.
(c) A Nonqualified Stock Option shall not be exercisable after the tenth
anniversary of the Grant Date, or such lesser period as the Committee shall
determine. The exercise price per share of a Nonqualified Stock Option shall
not be less than 85% of the Fair Market Value of the Common Stock on the
Grant Date.
(d) No person shall have any rights under any grant made pursuant to the Plan
unless and until the Company and the recipient of the grant have executed and
delivered an agreement expressly granting benefits to such person pursuant to
the Plan and containing the provisions required under the Plan to be set forth
in the Agreement. The terms of the Plan shall govern in the event any
provision of any Agreement conflicts with any term in this Plan as
constituted on the Grant Date.
6. Payment for Shares. The purchase price for shares of Common Stock to be
acquired upon exercise of an option granted hereunder shall be paid in full,
at the time of exercise, in any of the following ways: (a) in cash, (b) by
certified check, bank draft or money order, (c) by tendering to the Company
shares of Common Stock then owned by the Participant, duly endorsed for
transfer or with duly executed stock power attached, which shares shall be
valued at their Fair Market Value as of the date of such exercise and payment
or (d) by delivery to the Company of a properly executed exercise notice,
acceptable to the Company, together with irrevocable instructions to the
Participant's broker to deliver to the Company a sufficient amount of cash to
pay the exercise price and any applicable income and employment withholding
taxes, in accordance with a written agreement between the Company and the
brokerage firm ("Cashless Exercise") if, at the time of exercise, the
Company has entered into such an agreement.
7. Withholding Taxes. The Company shall have the right to withhold from a
Participant's compensation or require a participant to remit sufficient funds
to satisfy applicable withholding for income and employment taxes upon the
exercise of an option. A Participant may make a written election to tender
previously-acquired shares of Common Stock or have shares of Common Stock
withheld from the exercise, provided that the tendered or withheld shares
have an aggregate Fair Market Value on the date of exercise of the option
equal to the applicable withholding taxes or the Cashless Exercise procedure
described in Section 6 may be utilized to satisfy the withholding
requirements related to the exercise of an option.
8. Non-Assignability. No option shall be transferable by a Participant except
by will or the laws of descent and distribution or, in the case of a
Nonqualified Stock Option, pursuant to a qualified domestic relations order
as defined by the Code or Title I of the Employee Retirement Income Security
Act, or the rules thereunder. During the lifetime of a Participant, an
option shall be exercised only by the optionee. No transfer of an option
shall be effective to bind the Company unless the Company shall have been
furnished with written notice thereof and such evidence as the Company may
deem necessary to establish the validity of the transfer and the acceptance
by the transferee of the terms and conditions of the option.
9. Termination of Employment. The time or times at which an option shall
terminate prior to its Expiration Date shall be determined by the Committee
in its discretion and set forth in the Agreement relating to such Option.
Unless the Agreement otherwise specifies, the following shall apply:
(a) If a Participant's Employment is terminated for any reason prior to the
date that an option or a portion thereof first becomes exercisable, such
option or portion thereof shall terminate and all rights thereunder shall
cease.
(b) To the extent an option is exercisable and unexercised on the date a
Participant's Employment is terminated:
(i) for any reason other than death, Disability or Retirement, the option
shall terminate on the earlier of (A) the Expiration Date, and (B) the first
anniversary of such Participant's termination of Employment;
(ii) because the Participant has died or become subject to a Disability,
the option shall terminate on the first anniversary of the date of such
Participant's termination of Employment;
(iii) due to Retirement, the option shall terminate on the earlier of (A)
the Expiration Date and (B) the second anniversary of such Participant's
termination of Employment;
(c) During the period after the Participant's termination of Employment
until the termination of the option, the Participant, or the person or
persons to whom the option shall have been transferred by will or by the laws
of descent and distribution, may exercise the option only to the extent that
such option was exercisable on the date of the Participant's termination of
Employment.
(d) The Committee may, at any time, accelerate the right of a Participant to
exercise an option or extend the exercise period of such an option; provided,
that no option exercise period may be extended beyond the option's
Expiration Date.
(e) The transfer of a Participant from one corporation to another among the
Company, any Parent and any Subsidiary, or a leave of absence with the
written consent of the Company, shall not constitute a termination of
Employment for purposes of the Plan.
10. Director Options.
Each Nonemployee Director shall be granted a "Director Option" on the date of
the annual meeting of shareholders in each year during the term of the
Plan beginning in 1995. A "Director Option" shall be a Nonqualified Stock
Option to purchase 1,000 shares (subject to adjustment as provided in
Section 11) of Common Stock at an exercise price equal to the Fair Market
Value per share on the Grant Date. A Director Option shall become
exercisable on the first anniversary of the Grant Date and shall be
exercisable for a term ending on the tenth anniversary of Grant Date;
provided, however, (i) if the term of office of the holder ceases for any
reason before such Director Option becomes exercisable, such Director Option
shall terminate and all rights thereunder shall cease; and (ii) to the extent
a Director Option is exercisable and unexercised on the date the holder's
term of office ceases for any reason, such Director Option shall terminate on
the earlier of the Expiration Date of such Director Option or the first
anniversary of the date the holder's term of office ceased. Each Director
Option shall be evidenced by an Agreement that shall specify the exercise
price, the Grant Date, the term, the number of shares to which the Director
Option relates and such other terms as the Committee shall determine.
Notwithstanding any provision in the Plan to the contrary, Sections 5 and 9
of the Plan shall not apply to Director Options.
11. Adjustments. In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, Common Stock,
other securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Common Stock or other securities of
the Company, issuance of warrants or other rights to purchase Common Stock or
other securities of the Company, or other similar corporate transaction or
event affects the Common Stock such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
Plan, then the Committee shall, in such manner as it may deem equitable,
adjust any or all of (a) the number and type of shares of Common Stock which
thereafter may be made the subject of options, (b) the number and type of
shares of Common Stock subject to outstanding options, and (c) the exercise
price with respect to any option, or, if deemed appropriate, make provision
for a cash payment to the holder of an outstanding option; provided, however,
in each case, that with respect to Incentive Stock Options no such adjustment
shall be authorized to the extent that such authority would cause the Plan
to violate Section 422 of the Code or any successor provision thereto; and
provided further, that any such adjustment shall provide for the elimination
of any fractional share which might otherwise become subject to an option.
In the event of a Change of Control, all outstanding options under the Plan
immediately shall become exercisable in full.
12. Rights Prior to Issuance of Shares. No Participant shall have any rights
as a shareholder with respect to any shares covered by an option until the
issuance of a stock certificate to the Participant for such shares. No
adjustment shall be made for dividends or other rights with respect to such
shares for which the record date is prior to the date such certificate is
issued.
13. Termination and Amendment. (a) The Board may terminate the Plan, or the
granting of options under the Plan, at any time. No Incentive Stock Option
shall be granted under the Plan after April 29, 2004. Termination of the
Plan shall not affect the rights of the holders of any options previously
granted.
(b) The Board may amend or modify the Plan at any time and from time to time.
(c)No amendment, modification, or termination of the Plan shall in any manner
affect any option granted under the Plan without the consent of the
Participant holding the option.
14. Approval of Plan. The Plan shall be subject to the approval of the
holders of at least a majority of the shares of Common Stock of the Company
present and entitled to vote at a meeting of shareholders of the Company held
within 12 months after adoption of the Plan by the Board. No option granted
under the Plan may be exercised in whole or in part until the Plan has been
approved by the shareholders as provided herein. If not approved by
shareholders within such 12-month period, the Plan and any options granted
hereunder shall become void and of no effect.
15. Effect on Employment. Neither the adoption of the Plan nor the granting
of any option pursuant to it shall be deemed to create any right in any
individual to be retained as an Employee.
16. Securities Laws. (a) Anything to the contrary herein notwithstanding, the
Company's obligation to sell and deliver Common Stock pursuant to the
exercise of an option is subject to such compliance with federal and state
laws, rules and regulations applying to the authorization, issuance or sale
of securities as the Company deems necessary or advisable. The Company shall
not be required to sell and deliver Common Stock unless and until it
receives satisfactory assurance (i) that the issuance or transfer of such
shares will not violate any of the provisions of the Securities Act of 1933
or the Exchange Act, or the rules and regulations promulgated thereunder or
those of the National Association of Securities Dealers, Inc. or any stock
exchange on which the Common Stock may be listed, or the provisions of any
state laws governing the sale of securities, or (ii) that there has been
compliance with the provisions of such acts, rules, regulations and laws.
(b) The Committee may impose such restrictions on any shares of Common Stock
acquired pursuant to the exercise of an option under the Plan as it may deem
advisable, including, without limitation, restrictions (i) under applicable
federal securities laws, (ii) under the requirements of the Nasdaq National
Market or Small Cap Market or any stock exchange or other recognized trading
market upon which such shares of Common Stock are then listed or traded, and
(iii) under any blue sky or state securities laws applicable to such shares.
No shares shall be issued until counsel for the Company has determined that
the Company has complied with all requirements under appropriate securities
laws.
17. Certain Definitions.
"Agreement" means the written agreement setting forth the terms of the
Participant's option, including, without limitation, its exercise price, the
time or times it may be exercised, its Expiration Date and the number or
shares of Common Stock subject to the option.
"Board" means the Board of Directors of the Company.
"Change in Control" shall mean (i) consummation of any merger or
consolidation with respect to which the Company or any Parent is a
constituent corporation (other than a transaction for the purpose of
changing the Company's corporate domicile), any liquidation or dissolution of
the Company or any sale of all or substantially all of the Company's assets
or (ii) a change in the identity of a majority of the members of the
Company's Board of Directors within any twelve-month period, which change or
changes are not recommended by the incumbent directors immediately prior to
any such change or changes.
The "Code" is the Internal Revenue Code of 1986, as amended from time to time.
The "Committee" is a committee of two or more directors of the Company, each
of whom shall be a "non-employee director" as such term is defined in Rule
16b-3.
The "Common Stock" is the common stock of the Company.
The "Company" is Data Systems Network Corporation, a Michigan corporation.
"Director Option" shall have the same meaning as defined in Section 10.
"Disabled" or "Disability" means total and permanent disability as defined
in Section 22(e) of the Code.
"Employee" means an individual with a full-time salaried "employment
relationship" with the Company, or any Parent or Subsidiary, as defined in
Regulation 1.421-7(h) promulgated under the Code, and shall include, without
limitation, employees who are directors of the Company, or any Parent or
Subsidiary.
"Employment" means the state of being an Employee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"Expiration Date" means the date set forth in the Agreement relating to an
Option on which the right to exercise shall expire absent a termination of
the Participant's employment, consulting arrangement or term on the Board.
Unless otherwise provided in the Agreement, the Expiration Date for an
Option shall be the tenth anniversary of its Grant Date.
"Fair Market Value" means, for purposes of determining the value of Common
Stock on the Grant Date, (i) the last sale price on the Nasdaq National
Market or the Nasdaq SmallCap Market as reported in The Wall Street Journal
for the Grant Date, or (ii) if the Common Stock is not traded on the Nasdaq
National Market or the Nasdaq SmallCap Market on the Grant Date but is traded
on a national securities exchange on the Grant Date, the closing price on the
Grant Date (if traded on more than one such exchange, the closing price for
this purpose shall be the average of the closing prices on each such exchange
on the Grant Date or (iii) if the Common Stock is not traded on the Nasdaq
National Market, the Nasdaq SmallCap Market or a national securities
exchange on the Grant Date but is traded "over the counter", the average of
the bid and asked prices for the Grant Date; provided, however, that Fair
Market Value with respect to the initial option grants approved prior to the
closing of the Company's initial public offering shall be deemed to be $4.75
per share. In the event that there were no Common Stock transactions on
such date and no published bid and asked prices, the Fair Market Value shall
be determined as of the immediately preceding date on which there were Common
Stock transactions or published bid and asked prices, as the case may be.
"Fair Market Value" for purposes of determining the value of Common Stock on
the date of exercise or the date Common Stock is tendered or withheld for
purposes of Sections 6 or 7 shall be determined in accordance with the
procedure set forth in the preceding sentence as of the last date preceding
the exercise, tender or withholding rather than the Grant Date.
"Grant Date" means the date on which the Committee authorizes a particular
option, or such later date as shall be designated by the Committee.
An "Incentive Stock Option" is an option intended to meet
the requirements of Section 422 of the Code.
"Nonemployee Director" means a Director who is not an
Employee.
A "Nonqualified Stock Option" is an option granted under
the Plan other than an Incentive Stock Option.
"Option" means either an Incentive Stock Option or a
Nonqualified Stock Option to purchase Common Stock.
"Parent" means any "parent corporation" of the Company
as defined in Section 424(e) of the Code.
"Participant" shall have the meaning ascribed in Section 3
of the Plan.
The "Plan" is the 1994 Stock Option Plan.
"Retirement" means normal retirement from Employment
at age 65 or older.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act,
as in effect from time to time.
"Subsidiary" means any "subsidiary corporation" of the
Company as defined in Section 424(f) of the Code.
NBD Bank
701 First National Building
Detroit, Michigan 48226
Phone 3 13-225-4378
FAX 313-962-2326
Mary Lu D. Cramer
Vice President
NBD Business Finance
November 1, 1996
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 as of June 30, 1992 and amended by that certain
letter agreement dated February 1, 1995. Paragraph 2 reads, in part,
as follows: "...Lender, in its sole discretion, will lend to Borrower, on the
terms described in this Agreement, up to the principal sum of- (a) up to
85% of the net amount of "eligible" receivables (as determined in
accordance with Paragraph 9 below); and (b) up to 25% of the lesser
of the cost or market value, or whatever other reasonable valuation is
set by Lender, of "eligible" Inventory (as determined in accordance with
Paragraph 9 below). The maximum principal amount to be advanced
to Borrower under this line of credit will not exceed $7,500,000 at any
one time outstanding, of which the maximum principal amount to be
advanced against the security of eligible Inventory will not exceed
$2,250,000, and of which the maximum principal amount to be
advanced against the security of "eligible" Inventory constituting
software will not exceed $300,000 at any one time outstanding.".
Effective this date, Paragraph 2 is amended, in part, to read as follows:
"...Lender, in its sole discretion, will led to Borrower, on the terms
described in this Agreement, up to the principal sum of.- (a) up to 85%
or the net amount of "eligible" receivables (as determined in
accordance with Paragraph 9 below)-, and (b) up to the sum of (i) 75%
of the lesser of the cost or market value, or whatever other reasonable
valuation is set by Lender, of "eligible" Inventory that is subject to
repurchase by the seller thereof under written repurchase agreements
satisfactory to Lender (as determined in accordance with Paragraph 9
below ("Repurchase Inventory); (ii) up to 35% of the lesser of the cost
or market value, or whatever Subsidiary of First Chicago NBD
Corporation
Data Systems Network Corporation November 1, 1996 other
reasonable valuation is set by Lender, of "eligible" software Inventory
(as determined in accordance with Paragraph 9 below) ("Software
Inventory") and (iii) up to 35% of the lesser of the cost or market value
of all other "eligible" Inventory (as determined in accordance with
Paragraph 9 below and after deducting from inventory an amount
equal to the amount Borrower owes to IBM Credit and its affiliates and
Borrower's Inventory reserve ("Other Inventory"). 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, of which the
maximum principal amount to be advanced against the security of'
eligible Inventory will not exceed $3,750,000, and of this $3,750,000
amount, the maximum principal amount to be advanced against the
security of all types of "eligible" Inventory consisting of Repurchase
Inventory will not exceed $2,500,000 at any one time outstanding, and
the maximum principal amount to be advanced against the security of
"eligible" Inventory consisting of Software Inventory will not exceed
$300,000 at any one time outstanding, and the maximum principal
amount to be advanced against the security of "eligible" Inventory
consisting or Other Inventory will not exceed $2,500,000 at any one
time outstanding.".
Effective this date, the following Paragraph 2A is added immediately
after Paragraph 2 and before Paragraph 3: "...2A Letter of Credit
Facility. Lender agrees, in its sole discretion, to issue,, from time to
time, Standby Letters of Credit ("S/L/C's") for Borrower's account. The
total face amount of the S/I./C's may not exceed $ 1 00,000 in the
aggregate at ally one time outstanding. ]'he amount of all outstanding
S/L/C plus the amount of outstanding advances under Paragraph 2,
plus the amount of all draws under S/L/C's that have not been
reimbursed to Lender, may not exceed the lesser of (i) $15,000,000
and (ii) the borrowing base provided in Paragraph 2 above, less the
face amount of all outstanding SLC's and the amount of all draws
under SLC's that have not been reimbursed to Lender. Borrower must
execute I-ender standard documentation relating to S/L/C's ("SLC
documents"). Each S/L/C must have an expiry date of not later than
November 1, 1997. Each S/L/C will accrue a commission at the per
annum rate of 1.25% of the face amount of each S/L/C, payable in
advance at the time of each issuance or extension. In addition,
Borrower must also pay all other usual and Customary fees charged by
Lender in connection with the issuance of, amendments to, and draws
under the S/L/C's. All of Borrower's present and future obligations to
Lender in connection with SLC's are secured by all collateral security
heretofore, simultaneously herewith, or hereafter granted to Lender by
Borrower for the purpose of securing any of Borrower's present or
future obligations to Lender. This collateral includes but is not limited
to Receivables and Inventory. If Borrower fails to make any payment
due Lender under this
Agreement or the SLC documents, Lender may charge Borrower's loan
account under the line of credit set forth in Paragraph 2 above or may
debit such amounts from any of Borrower's accounts at Lender.".
Effective this date, Paragraph 3 reads, in part, as follows: "...The rate
of interest to be charged on all advances, whether under this
Agreement, any supplement, or otherwise ("Interest Rate") will be 3/4
of one percentage point per annum higher than the prime per annum
rate of interest adjusted on a daily basis.".
Effective this date, 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 ("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.".
Paragraph 6 reads, in part, as follows: "...Furthermore, all reasonable
cost and expenses incurred by Lender or its agents in connection with
this Agreement, including the preparation and review of this
Agreement and all related agreements and documents and all other
obligations to Lender, shall be part of Borrower's obligations......
Effective this date, Paragraph 6 is amended, in part, to read as follows:
"...Furthermore, all reasonable costs and expenses incurred by Lender
or its agents in connection with this Agreement, including the
preparation and review of this Agreement and all related agreements
and documents, annual collateral monitoring fee of $3,000 payable
semiannually, and all other obligations to Lender, shall be part of
Borrower's obligations..."
Effective this date, Paragraph 9 (b) (ii) is amended in its entirety to
read as follows: "...if 50% or more of the total Receivables from a
Customer are more than 90 days old (based on the billing date) or if
50% or more of the total Receivables from the State of Michigan are
more than 120 days old (based on the billing date); ".
Effective this date, Paragraph 15 is amended by the inclusion of 0)
which will 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 from a reevaluation
thereof (except with respect to inventory on account of the standard
costing system), a change in accounting methods, standards, practices
or rules, or for any other reason, less total liabilities, at not less than
$1,900,000 and increasing by $500,000 at each fiscal year thereafter.".
Paragraph 18 reads, in part, as follows: "...The Borrower shall be
obligated to pay a prepayment premium if Borrower makes a
prepayment of all or substantially all (more than 50%) of the principal
then outstanding, accrued interest and other obligations due Lender by
Borrower at any time other than the anniversary of this Agreement
Effective this date, Paragraph 18 is amended, in part, to read as
follows: " The Borrower shall be obligated to pay a prepayment
premium if Borrower makes a prepayment of all of the principal then
outstanding, accrued interest and other obligations due Lender by
Borrower at any time other than the anniversary of this Agreement.".
Simultaneously with the execution of this letter, Borrower must pay
NBD Bank a $ 1 0,000 facility fee.
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
Vice President Finance
Chief Financial Officer
