<PAGE> 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 JUNE 30, 2000
Commission File Number 1-13424
DATA SYSTEMS NETWORK CORPORATION
<TABLE>
<S> <C>
Michigan 38-2649874
(State or other jurisdiction of Incorporation or organization) (IRS Identification Number)
</TABLE>
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 - 5,575,906 shares as of August 1, 2000
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets as of June 30, 2000 and December 31,1999 3
Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements for the Six Months
Ended June 30, 2000 and 1999 6
</TABLE>
<PAGE> 3
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
UNAUDITED
JUNE 30, DECEMBER 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,370,335 $ 1,516,709
Accounts receivable (net of allowance of $170,000 and $290,000
at June 30, 2000 and December 31, 1999 respectively). 7,133,298 9,132,585
Inventories 551,943 907,207
Notes receivable 50,000 50,000
Other current assets 1,099,473 1,132,070
----------------- -----------------
Total current assets 10,205,049 12,738,571
PROPERTY AND EQUIPMENT, net 1,199,846 1,385,498
GOODWILL, (net of amortization of $642,688 and $557,938 at 2,747,320 2,832,070
June 30, 2000 and December 31, 1999 respectively.)
OTHER ASSETS 258,929 351,956
----------------- -----------------
TOTAL ASSETS $ 14,411,144 $ 17,308,095
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit 3,666,845 $ 5,217,794
Accounts payable 6,549,069 6,356,961
Accrued liabilities 1,883,351 1,742,977
Deferred maintenance revenues 1,367,976 1,598,024
----------------- -----------------
Total current liabilities 13,467,241 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 5,558,878 and 5,509,224
at June 30, 2000 and December 31,1999 respectively.) 55,589 55,092
Additional paid-in capital 18,620,722 18,575,219
Accumulated deficit (17,732,408) (16,237,972)
----------------- -----------------
Total stockholders' equity 943,903 2,392,339
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,411,144 $ 17,308,095
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 4
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Product revenue $ 7,265,881 $ 8,141,758 $ 15,798,331 $ 17,219,863
Service revenue 5,680,248 5,073,368 10,402,650 10,343,779
------------ ------------ ------------ ------------
Total revenues 12,946,129 13,215,126 26,200,981 27,563,642
COST OF REVENUES:
Cost of products 6,012,419 6,782,037 13,152,187 13,552,844
Cost of services 4,494,988 3,657,699 8,602,456 7,989,115
------------ ------------ ------------ ------------
Total cost of revenues 10,507,407 10,439,736 21,754,643 21,541,959
GROSS PROFIT 2,438,722 2,775,390 4,446,338 6,021,683
OPERATING EXPENSES:
Selling expenses 1,649,674 1,416,456 3,232,283 3,185,933
General and administrative expenses 1,483,921 1,466,482 2,449,261 2,652,777
------------ ------------ ------------ ------------
Total operating expenses 3,133,595 2,882,938 5,681,544 5,838,710
EARNINGS/(LOSS) FROM OPERATIONS (694,873) (107,548) (1,235,206) 182,973
OTHER INCOME (EXPENSE):
Shareholder Settlement -- 1,137,500 -- 1,137,500
Loss on Sale of Equipment (19,992) (385,419) (19,992) (385,419)
Interest expense (144,480) (127,078) (296,053) (249,311)
Interest income 25,451 16,532 50,111 60,375
Other income/(expense) 250 79 6,704 18,253
------------ ------------ ------------ ------------
(138,771) 641,614 (259,230) 581,398
NET EARNINGS /(LOSS) $ (833,644) $ 534,066 $ (1,494,436) $ 764,371
============ ============ ============ ============
Earnings/(Loss) per common share - basic
Net earnings / (loss) per common share $ (0.15) $ 0.11 $ (0.27) $ 0.16
============ ============ ============ ============
Weighted average shares outstanding - basic 5,526,139 4,930,653 5,537,945 4,895,156
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 5
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings (loss) $(1,494,436) $ 764,371
Adjustments to reconcile net earnings (loss)
to net cash provided by/(used in) operating activities:
Depreciation and amortization 420,700 576,251
Loss on disposition of assets 19,992 385,419
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 1,999,287 895,233
Notes receivable -- --
Inventories 355,264 860,890
Other current assets 32,597 (187,218)
Other assets 93,027 218,913
Accounts payable 192,108 (2,346,615)
Accrued liabilities 140,374 269,114
Shareholder settlement -- (1,768,000)
Deferred maintenance revenues (230,048) (1,669,078)
----------- -----------
Net cash provided by (used in) operations 1,528,865 (2,000,720)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net (170,290) (4,290)
Issuance of common stock and exercise of stock options, net 46,000 630,500
----------- -----------
Net cash provided by (used in) investing activities (124,290) 626,210
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net current (repayments) borrowings under bank line of credit (1,550,949) 547,880
----------- -----------
Net cash (used in) provided by financing activities (1,550,949) 547,880
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (146,374) (826,630)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,516,709 2,695,863
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,370,335 $ 1,869,233
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid during the period for:
Interest $ 296,000 $ 249,000
=========== ===========
Income taxes -- 32,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 6
DATA SYSTEMS NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR QUARTER ENDED JUNE 30, 2000
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 June 30, 2000,
and the results of its operations the three and six months ended June 30, 2000
and 1999, and its cash flows for the six months ended June 30, 2000 and for
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 June 30, 2000, cash of $1,266,610 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.
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.
<PAGE> 7
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, and 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.
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 which consist
primarily of cash and cash equivalents, bank lines of credit, accounts
receivables, accounts payable and short-term debt, approximate their fair
values.
<PAGE> 8
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 June 30, 2000 was $288,695. 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 (10.5% at June 30, 2000) and have a term
extending to September 30, 2001.
Data Systems is required to maintain certain financial ratios. At June 30, 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 includes
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 2% to $12.9 million for the three months
ended June 30, 2000 from $13.2 million for the same period in 1999. For the six
months ended June 30, 2000 total revenues decreased 5% to $26.2 million from $
27.6 million for the same period in 1999. The decrease was attributable to
non-recurring product sales and the completion of a systems application project.
Product sales decreased $.9 million or 10.8% for the three months ended June 30,
2000 from the same period in 1999. Product revenue for the six months ended June
30, 2000 decreased 8.3% to $ 15.8 million from $ 17.2 million for the same
period in 1999. The decrease is a reflection of the Company's efforts in
focusing on service sales. Service revenues increased 12.0% to $5.7 million for
the three months ended June 30, 2000 compared to the same period in 1999. For
the six months ended June 30, 2000, service revenues remained flat at $10.4
million compared to the same period in 1999.
Service revenues accounted for 43.9% and 38.4% of total revenues in the three
months ended June 30, 2000 and 1999, respectively. For the six months ended June
30, 2000 and 1999, service revenue accounted for 39.7% and 37.5% of total
revenues respectively.
COST OF REVENUES. The cost of revenues increased to 81.1% of total revenues for
the three months ended June 30, 2000, from 79.0% during the corresponding period
of 1999. For the six months ended June 30, 2000, the cost of revenues increased
to 83.0% from 78.2% during the corresponding period of 1999. The cost of product
sales decreased to 82.7% of product sale revenue for the three months ended June
30, 2000 compared to 83.3% for the same period in 1999. The Company attributes
the decrease to its ability in 2000 to negotiate better pricing with certain key
vendors. The cost of product sales increased to 83.2% of product sale revenue
for the six months ended June 30, 2000 compared to 78.7% for the same period in
1999. The Company attributes this increase to the Company's ability in 1999 to
pass through equipment sales with certain key vendors. 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 79.1% of service
revenues for the three months ended June 30, 2000, from 72.1% for
<PAGE> 9
the same period in 1999. For the six months ended June 30, 2000, the cost of
service revenue increased to 82.7% from 77.2% for the same period in 1999. The
Company attributes the increase for both the three and six-month periods 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.
OPERATING EXPENSES. Selling, general and administrative expense increased to
24.2% of total revenue for the three months ended June 30, 2000 compared to
21.8% of total revenue for the same period in 1999. The increase was related to
the Company's increase in legal costs resulting from an unfavorable judgment
relating to an employee breach of contract claim in North Carolina. Selling,
general and administrative expense increased to 21.7% of total revenue for the
six months ended June 30, 2000 compared to 21.2% of total revenue for the same
period in 1999. The increase is due primarily to the increase in legal costs as
referenced above.
OTHER (EXPENSE) INCOME. Other income decreased by $.8 million for the three
months ended June 30, 2000 compared to the same period in 1999. This change was
attributable to the final settlement of the Company's shareholder lawsuit, the
second quarter of 1999. The Company had established and accrual in 1998 of
approximately $ 1.8 million for the estimated fair market value of the shares of
Data System's common stock that were to be contributed into the gross settlement
fund for the suit. At the time of settlement (June 22, 1999), the Company
recognized as income approximately $1.1 million of the accrual because the
actual fair market value of the common stock issued was $ 630,500. This was
partially offset by a loss on sale of non-revenue producing assets. The disposal
of the assets was related to the closure of two sales offices.
Interest expense increased 13.7% and 18.8% respectively for the three and six
months ended June 30, 2000. 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 June 30, 2000, cash totaled $1.4 million, a decrease of $0.2 million
from December 31, 1999. Cash provided by operating activities during the first
six months of 2000 was $1.5 million, primarily due to an increase in accounts
receivable of $2.0 million, increase in inventories of $.4 million and
depreciation of $.4 million. These increases were offset by a loss of $1.5
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 $1.6
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 June 30, 2000, the line of credit under the Foothill
Agreement bore interest at 10.5%. As of June 30, 2000, the line of credit
collateral formula permitted borrowings of up to $4.1 million, of which $3.7
million was outstanding.
The agreement in effect at June 30, 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 June 30, 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
<PAGE> 10
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 June 30, 2000 was $3.3
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.
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 signed the First
Amendment to the Agreement and Plan of Merger which provided that Data Systems
will merge into TekInsight Services, another wholly owned subsidiary of
TekInsight. On June 28,2000 the parties signed the Second Amendment to the
Agreement and Plan of Merger. The Second Amendment extended the right to
terminate date to September 30, 2000 from June 30, 2000 and extended the
automatic termination date from September 30, 2000 to October 31,2000. In
addition, conversion ratio for computing the number of Series A Preferred Shares
to be exchanged for Data Systems Common Stock was modified. An additional
divisor was added into the calculation which would reduce the number of Series A
Preferred Stock to be issued. The additional step was needed to meet the Nasdaq
listing requirement for the Series A Preferred Stock. On August 11, 2000, the
Company completed this merger.
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 analyses on significant purchases to
anticipate the effect of market interest rate changes.
<PAGE> 11
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 June 30, 2000 would increase by approximately $20,000
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 June 16, 1998, Data Systems filed suit in Oakland County Circuit Court (Case
No. 98-006905-CZ), Michigan, against Softech, Inc. alleging that Softech
wrongfully retained monies due Data Systems in accordance with an asset purchase
agreement dated September 12, 1996. In addition, Data Systems stated that
Softech owed Data Systems rent under a sublease agreement, and had not paid
invoices for work completed by Data Systems. It also stated that software
acquired by Data Systems in the acquisition of the Network Systems Group did not
perform properly. The complaint alleged fraud, breach of contract, conversion
and unjust enrichment.
On November 3, 1998, Softech, Inc. filed a demand for arbitration against Data
Systems. Data Systems' claim was dismissed in February 1999 without prejudice
due to the arbitration provision in the asset purchase agreement. Softech
alleged that Data Systems had breached the September 12, 1996 asset purchase
agreement by failure to register shares of stock on a timely basis, failure to
pay monies owed for inventory purchases and receivables, equipment and
commissions paid by Softech on behalf of Data Systems, funds owed to employees,
advances to former employees of Softech who became employees of Data Systems and
rents. Data Systems filed a counterclaim with respect to the allegations in
connection with the arbitration. The arbitration hearing has been rescheduled
for November 2000 and Data Systems intends to pursue its counterclaim and
vigorously defend itself against Softech's claims.
On August 27, 1998, J. Alan Moore filed suit in Mecklenburg County Superior
Court Division (Case No. 98-CvS-12286), North Carolina, against Data Systems
Network Corporation. The complaint alleges the Company did not act in good faith
and failed to pay commissions and expenses of which the plantiff claims
entitlement. On July 28, 2000 a judgement was entered in favor of the plantiff.
Data Systems intends to adamantly appeal the judgement.
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. In July 2000, the SEC staff advised the Company that it is
considering a recommendation that the SEC bring a civil injunctive action
against the Company and certain officers on the basis of violations of the
federal securities laws with respect to the Company's accounting records and
reports and events which occurred in 1996 and 1997. However, the staff has
provided the Company with the opportunity to submit its position on the matter
before the staff recommendation is finalized. The Company strongly disagrees
with the views of the staff and intends to furnish a full statement of its
position to the SEC.
<PAGE> 12
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.
<PAGE> 13
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: August 14, 2000
------------------
Michael W. Grieves
Chairman of the Board, President and Chief
Executive Officer (Duly Authorized Officer)
By:/s/ Michael Jansen Date: August 14, 2000
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Michael Jansen
Vice President, Treasurer and Chief Financial Officer
(Principle Financial Officer)
<PAGE> 14
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
2.1 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,
incorporated herein by reference to Data System's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
2000, SEC File No. 1-13424.
2.2 Second Amendment to Agreement and Plan of Merger, dated as of
June 28, 2000, Between TekInsight.Com, Inc., TekInsight Services,
Inc. and Data Systems Network Corporation, incorporated herein by
reference from Amendment No. 1 to Form S-4 filed by
TekInsight.Com, Inc. on July 13, 2000, SEC File No. 333-36044.
27.1 Financial Data Schedule
