<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the year ended December 31, 1999
Commission-File Number: 1-13424
DATA SYSTEMS NETWORK CORPORATION
(Exact name of Registrant as specified in its charter)
Michigan 38-2649874
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
34705 West Twelve Mile Road, Suite 300
Farmington Hills, Michigan 48331
(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code: (248) 489-8700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
The aggregate market value of the voting stock of the registrant held by
non-affiliates (4,824,224 shares) on March 8, 2000 was $6,937,234. For purposes
of this computation only, all executive officers, directors and beneficial
owners of more than 5% of the outstanding shares of common stock are assumed to
be affiliates.
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date: 5,542,448 shares of Common Stock
outstanding as of March 8, 2000
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
GENERAL
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.
In February 1996, Data Systems acquired 70% of the common stock of
Unified Network Services, Inc. ("UNS"), a start-up network management operation
based in Raleigh, North Carolina. Data Systems also acquired the Network Systems
Group ("NSG") of SofTech, Inc. in September 1996 for 540,000 shares of Data
Systems' Common Stock and $890,000 in cash. During 1998, Data Systems sold its
interest in UNS, effective June 1, 1998.
RECENT DEVELOPMENTS
On February 1, 1999, Data Systems announced that a definitive
merger agreement was signed with Alydaar Software Corporation now known as
Information Architects Corp. of Charlotte, North Carolina. Under the terms of
the agreement, approved by the Board of Directors of both companies, Information
Architects was to exchange 1.6 million shares of its common stock for all
outstanding shares of Data Systems' stock.
On September 15, 1999, Data Systems and Information Architects
mutually agreed to terminate their Agreement and Plan of Merger dated January
31, 1999. As a result of the termination, Information Architects signed a
promissory note payable to Data Systems in the amount of $250,000 as
reimbursement for expenses incurred as a result of the terminated merger. The
note will be repaid in 10 equal installments of $25,000. Payments began October
1, 1999 and will end July 1, 2000. Payments for the period October 1999 through
March 2000 have been received.
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On February 17, 1999, Data Systems announced that it had agreed
to a stipulation of settlement of the consolidated complaint in the shareholder
class action lawsuit captioned, In Re: Data Systems Network Corporation
Securities Litigation, Case No. 98-70854. The stipulation of settlement was
filed in federal court in Detroit, Michigan and the court determined the
settlement to be fair on May 24, 1999. Under the terms of the settlement, and
subject to various conditions, Data Systems created a gross settlement fund. The
fund benefits a settlement class of purchasers who bought Data Systems' stock
during the period from May 16, 1996 through February 24, 1998. The fund was
comprised of $900,000 provided by Data Systems' insurer, and 650,000 shares of
Data Systems' common stock which were issued June 22, 1999. In agreeing to the
settlement, Data Systems and individual defendants made no admission of any
wrongdoing.
On February 18, 2000, Data Systems and TekInsight.Com, Inc.
("TekInsight") entered into an Agreement and Plan of Merger pursuant to which
Data Systems will be merged (the "Merger") into Astratek, Inc., a wholly owned
and operating subsidiary of TekInsight. In consideration for the Merger, Data
Systems' shareholders will receive a number of shares of a new class of
TekInsight convertible preferred stock with a value (the "Merger Price") which
will equal $12,500,000 if the market price of Tekinsight's common stock at the
time of closing (the "Market Price") is less than $5.00 per share, $16,000,000
if the Market Price is between $5.00 and $7.00 per share, and $18,000,000 if the
Market Price is over $7.00 per share. The new class of TekInsight convertible
preferred stock is proposed to be listed on the Nasdaq Small Cap market, with
the aggregate number of such shares to be issued determined by dividing the
applicable Merger Price by the Market Price. Completion of the Merger is subject
to a number of conditions, including receipt of TekInsight and Data Systems
shareholder approval, acceptance by Nasdaq for the listing of the convertible
preferred stock and other customary closing conditions. There can be no
assurance the Nasdaq listing will be obtained for the newly issued convertible
preferred stock, or that any of the closing conditions will be satisfied.
Although no assurances can be given, the parties intend to close the merger no
later than June 30, 2000.
PRODUCTS AND SERVICES
Data Systems' principal business is to provide computer network
services and products that allow companies to control their complex distributed
computing environments. Such services include the design, sale and service of
local area networks ("LANs") and wide area networks ("WANs"). Data Systems
generates revenues by providing consulting and network installation services,
selling add-on hardware components to existing clients and providing
after-installation service and support, training services and network management
services. Data Systems is an authorized dealer, reseller or integrator for the
products of many major vendors, including, but not limited to: Compaq, Sun
Microsystems, Dell, Nortel Networks, Hewlett-Packard, Novell, Microsoft, Cisco,
Meridian Data, 3COM, Intel, and Oracle. Data Systems has developed applications
for remote network management and can sell private label computer systems,
primarily to state governments. In addition, the Company provides application
development services in database management.
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Resellers who meet specified qualifications receive customer
referrals and recommendations and advanced technical assistance and support from
certain manufacturers, giving the qualifying resellers a competitive advantage
over other resellers in the market. These qualifications vary from manufacturer
to manufacturer and typically include some or all of the following components:
specific training for technical personnel, specific training for sales
personnel, possession of certain advanced equipment, ongoing training
requirements, and minimum purchase targets. The process of obtaining and
maintaining these manufacturer authorizations is time consuming and has costs
associated with obtaining and maintaining a single authorization. These costs
include, but are not limited to, acquisition of hardware, software, facilities
and spare parts, training fees, personnel and travel expenses and fees paid to
the manufacturer for certification.
Data Systems generally sells equipment in conjunction with its
higher margin network engineering services. These services include design,
consulting, installation, and network administration for both LANs and WANs.
Data Systems provides turnkey implementation and support services and, for some
customers, on-site support personnel who work in conjunction with the customer's
personnel on a continuous basis.
Data Systems also provides on-going technical and maintenance
support through a variety of service programs tailored to fit each specific
customer's service needs and budget. These programs include a two-hour response
service for critical network components, help desk, Computer Associates
Unicenter and dispatch services. Data Systems generally passes through
warranties provided by manufacturers to the purchaser. Data Systems offers no
warranty separate from manufacturers' warranties.
MARKETING AND CUSTOMERS
Data Systems markets its products and services through its internal
sales force. Data Systems has sales and service personnel in the following
states: Florida, Louisiana, Massachusetts, Michigan and New York. Data Systems
has no retail sales outlets and has no intention of entering the retail market.
Data Systems directs its marketing efforts at state and local
governments, Fortune 1000 and middle market corporations and institutional users
such as hospitals and universities. Current marketing efforts are generally
focused on customers located in the states in which the Company has offices.
The State of Michigan accounted for 4% of Data Systems' revenue in
1999 and 29% of Data Systems' revenue in each of 1998 and 1997. Purchases by
agencies of the State of Michigan were made pursuant to a blanket agreement,
which expired in September 1998. Data Systems continues to provide network
services and maintenance services to the State of Michigan through a third-party
master contractor blanket purchase order. As with all of Data Systems' service
contracts and purchase orders, there are no assurances that any contract can be
extended further or that, if re-bid, Data Systems will be awarded a new
agreement under the same terms and conditions.
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The State of New York accounted for 25% of Data Systems' revenue in
1999 and 12% of Data Systems' revenue in 1998. Data Systems was awarded a
three-year contract, renewable in one-year increments, to provide system
peripheral equipment. The first year expired May 1999. The contract was renewed
and the second year expires May 2000. Data Systems is also an authorized
reseller of Novell, Nortel Systems and Cisco products and software to the State
of New York.
VENDORS
Data Systems purchases the microcomputers and related products it
sells directly from manufactures and indirectly through distributors such as
Merisel, Tech Data and Ingram Micro Corporation. In general, Data Systems must
be authorized by a manufacturer in order to sell its products, whether the
products are purchased from distributors or directly from manufacturers. Data
Systems is an authorized reseller for microcomputers, workstations, and related
products of over 50 manufacturers. Sales by Data Systems of products
manufactured by Compaq, Hewlett-Packard, Cisco, Novell, Sun Microsystems, Nortel
Networks, Dell, and IBM accounted for between 35% an 40% of revenues during each
of the last three fiscal years. However, sales of commodity products, such as
IBM and Dell, have substantially declined over this period. Typically, vendor
agreements provide that Data Systems has been appointed, on a non-exclusive
basis, as an authorized reseller of specified products at specified locations.
The agreements generally are terminable on 30 to 90 days' notice or immediately
upon the occurrence of certain events, and are subject to periodic renewal. The
loss of a major manufacturer or the deterioration of Data Systems' relationship
with a major manufacturer could have a material adverse effect on Data Systems'
business as certain product offerings that are requested by customers would not
be available to Data Systems.
Data Systems determines whether to purchase products from
distributors or directly from manufacturers by surveying prices and product
availability among the manufacturers and the distributors with whom it has
contractual relationships. Distributors, which purchase products in large
quantities, often are able to offer a better price on products due to volume
discounts granted by manufacturers. Data Systems' agreement with Ingram Micro,
through which it made 17.6% of its product purchases in 1999, provides
competitive pricing, inventory and asset management terms and conditions. The
loss of Data Systems' relationships with distributors could result in higher
product prices to Data Systems and potentially reduce Data Systems' profit
margins. Data Systems believes, however, that the loss of its relationship with
any particular distributor would not have a material adverse effect on Data
Systems' results of operations or financial condition due to the availability of
other sources of supply.
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COMPETITION
The network integration market is highly competitive. Data Systems
competes with different classes of competitors, depending on the type of
business opportunity. For project-oriented sales, Data Systems competes with
system integrators and with computer hardware manufacturers. Data Systems also
competes with a wide variety of local, regional and national hardware resellers
for add-on equipment sales. Because Data Systems is not as price-aggressive as
some of these competitors, Data Systems relies on its sales force to provide
superior servicing and post-sale technical support to maintain its customer
relationships. Depending on the customer, Data Systems competes on the basis of
technological capability, price, breadth of product offerings and quality of
service. Competitors also vary project-to-project depending upon the geographic
location of the work to be performed.
Many competitors are larger than Data Systems and have
significantly greater financial, marketing and human resources, and geographic
coverage. Data Systems believes that it can compete against these competitors on
the basis of its extensive experience in the network integration and management
market, authorization to sell a broad range of products and experienced
technical staff.
EMPLOYEES
As of December 31, 1999, Data Systems employed 180 persons, 44 were
sales personnel, 118 were service personnel and the remainder were
administrative or management personnel. The Data Systems' employees have no
union affiliations and Data Systems believes its relationship with its employees
is good.
ITEM 2. PROPERTIES.
Data Systems' corporate headquarters are located in Farmington
Hills, Michigan, in a leased facility consisting of approximately 12,555 square
feet of office space rented under a lease expiring in November 2002. Data
Systems also leases a technical facility located in Farmington Hills, Michigan
with approximately 7,000 square feet rented under a lease expiring in March
2003. Data Systems also has a telephone "help desk" center located in Baton
Rouge, Louisiana, which is part of its State of Louisiana maintenance contract,
and is located in a facility with 8,200 square feet rented under a lease that
expired in November 1999, and is currently leased on a month-to-month basis.
Data Systems also leases direct sales offices totaling approximately
25,000 square feet under leases with terms of one to five years, in 10 locations
in the United States. Data Systems believes that its existing facilities and
offices and additional space available to it are adequate to meet its
requirements for its present and reasonably foreseeable needs.
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ITEM 3. LEGAL PROCEEDINGS.
On or about October 29, 1998, the Securities and Exchange
Commission ("SEC") informed Data Systems that it was conducting a formal private
investigation of the accounting irregularities experienced by Data Systems in
the fiscal years 1996 and 1997. This inquiry is ongoing, and Data Systems is
cooperating with the investigation.
On December 9, 1999, Data Systems filed suit against Unified
Network Services, Inc ("UNS") in the State of Michigan, Oakland County Circuit
Court. Effective June 1, 1998, Data Systems sold its interest in the UNS
subsidiary for $7,000 in cash and a note for $3,000,000, secured by the stock of
UNS. The note called for interest only payments to commence July 1, 1998 for a
period of twelve months followed by monthly payments of $50,000 plus interest on
the unpaid balance until the note is fully repaid at June 1, 2004. Interest was
to accrue on the unpaid balance at a per annum rate equal to the Bank One,
Michigan prime rate. The suit alleges that UNS breached its agreement with Data
Systems by failing and refusing to make payments due on the note. See Item 7
"Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 -
Discontinued Operations".
On June 16 1998, Data Systems filed suit in Oakland County Circuit
Court, Michigan, against Softech, Inc. alleging that Softech wrongfully retained
monies due Data Systems in accordance with the Asset Purchase Agreement dated
September 12, 1996. In addition, the suit alleged that Softech owed Data Systems
rent under a sublease agreement, had not paid invoices for work completed by
Data Systems and also alleged that software acquired by Data Systems in the
acquisition of the Network Systems Group did not perform properly. The Complaint
alleges fraud, breach of contract, conversion and unjust enrichment (the "Data
Allegations").
Data Systems' claim was dismissed due to the arbitration provision
in the Asset Purchase Agreement. On November 3, 1998, Softech, Inc. filed a
Demand for Arbitration against Data Systems. Softech alleges that Data Systems
breached the September 12, 1996 Asset Purchase Agreement by failure to register
shares of stock on a timely basis, monies owed for inventory purchases and
receivables, failure to pay for equipment and commissions paid by Softech on
behalf of Data Systems, commissions owed to employees of Softech, advances to
former employees who became employees of Data Systems and rents. Data Systems
filed a counter claim with respect to the Data Allegations in connection with
the arbitration. The arbitration hearing is scheduled for June 2000 and Data
Systems intends to pursue its counter claim and vigorously defend itself against
Softech's claims.
Other than the above, Data Systems is not party to any other legal
proceedings other than routine legal matters arising in the normal course of
business, which management believes will not be material to Data Systems'
financial condition or operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter ending December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1999 Data Systems' Common Stock was traded on the
Over-the-Counter Bulletin Board ("OTCBB") under the symbol "DSYS." During 1998,
Data Systems was also listed on the Nasdaq SmallCap Market (symbol "DSYS") and
on the Pacific Stock Exchange ("PSE") under the symbol "DSY." Due to late SEC
filings and other related issues experienced during the first two quarters of
1998, Data Systems was de-listed from Nasdaq and the PSE. The high and low sales
prices for the Common Stock on the Nasdaq SmallCap Market and the OTC Bulletin
Board during the period from January 1, 1998 through December 31, 1999 are set
forth in the following table.
<TABLE>
<CAPTION>
1998 High Low
---- ---- ---
<S> <C> <C>
1st Quarter $14.75 $5.50
2nd Quarter $7.25 $0.25
3rd Quarter $3.88 $0.75
4th Quarter $2.41 $0.75
<CAPTION>
1999 High Low
---- ---- ---
<S> <C> <C>
1st Quarter $3.13 $1.03
2nd Quarter $1.31 $0.81
3rd Quarter $1.19 $0.38
4th Quarter $1.19 $0.53
</TABLE>
As of March 8, 2000 the approximate number of record holders
and beneficial owners of Data Systems' Common Stock was 2,285 based upon
securities position listings information available to Data Systems and the
records of Data Systems' transfer agent.
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Data Systems has never declared or paid any dividends on its
capital stock. Data Systems does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be at the discretion of
the Data Systems' Board of Directors and will depend upon, among other things,
Data Systems' future earnings, operations, capital requirements and surplus,
general financial condition, contractual restrictions, and such other factors as
the Board of Directors may deem relevant. Data Systems' primary lender, Foothill
Capital Corporation, must also approve any dividend distribution.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of Data
Systems as of, and for each of the five years ended December 31, 1999. The
historical financial data has been derived from Data Systems' audited
consolidated financial statements for all years presented except for 1995, which
remains unaudited. The selected financial data as of and for the years ended
December 31, 1996 and 1995 is derived from audited consolidated financial
statements of Data Systems, which are not included in this report. The data
presented below should be read in conjunction with the financial statements and
notes thereto. It should also be read in conjunction with "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(in thousands except per share data)
(Restated) (Restated) (Unaudited)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues 52,825 $ 85,323 $ 85,997 $ 32,577 $ 30,506
Cost of revenues (1) 42,825 71,238 73,516 27,616 27,933
------ -------- -------- -------- --------
Gross Profit 10,000 14,085 12,481 4,961 2,573
Operating expenses 10,787 15,365 16,149 8,211 3,228
Other income (expenses) 978 (2,419) (749) (185) (280)
------ -------- -------- -------- --------
Income / (Loss) before extraordinary item
and discontinued operations 191 (3,699) (4,417) (3,435) (935)
Extraordinary item - - - 75 322
------ -------- -------- -------- --------
Income / (Loss) before discontinued operations 191 (3,699) (4,417) (3,360) (613)
Discontinued Operations (2)
Loss from Operations of UNS - (1,686) (557) (481) -
Gain on Disposal of UNS - 706 - - -
------- -------- -------- -------- --------
Net Income / (Loss) $ 191 $ (4,679) $ (4,974) $ (3,841) $ (613)
======== ========= ========= ========= =========
Net Income /(loss) basic and diluted per common share $ 0.04 $ (0.96) $ (1.15) $ (1.41) $ (0.24)
======== ========= ========= ========= =========
Weighted average common shares
Shares outstanding (3) 5,205 4,859 4,324 2,719 2,560
======== ========= ========= ========= =========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
(in thousands except per share data)
(Restated) (Restated) (Unaudited)
1999 1998 1997 1996 1995
---- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets 17,308 $ 22,666 $ 45,082 $ 20,565 $ 11,938
Working capital (deficiency) (2,177) (5,356) (2,371) (6,073) 2,040
Current liabilities 14,916 21,096 36,659 18,504 8,361
Liabilities from Discontinued Operations - - 2,021 1,945 -
Long term debt - - - 75 100
Stockholder's equity 2,392 1,571 6,244 2,396 3,477
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the effect of accounting changes
in policies and estimates which are related to and consistent with the
restatement of prior financial statements.
(2) See "Note C of Notes to Consolidated Financial Statements" for a discussion
of discontinued operations.
(3) Amounts in 1995, and 1996 do not include 300,000 issued and outstanding
shares of Data Systems' common stock, which were placed in escrow at the
closing of Data Systems' initial public offering and released from escrow
in 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the financial results for the
three-year period ending December 31, 1999 and should be read in conjunction
with Data Systems' financial statements and notes thereto.
The following discussion and analysis contain a number of
"forward looking statements" within the meaning of the Securities Exchange Act
of 1934 and are subject to a number of risks and uncertainties. These 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.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth selected items
from the Company's Consolidated Statements of Operations included in this
Report, expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
Revenues: ---- ---- ----
<S> <C> <C> <C>
Product revenue 61.4% 74.5% 78.9%
Service revenue 38.6% 25.5% 21.1%
---------- ----------- ------------
Total revenues 100.0% 100.0% 100.0%
Cost of Revenues:
Cost of products 50.4% 61.2% 68.9%
Cost of services 30.7% 22.3% 16.6%
---------- ----------- ------------
Total cost of revenues 81.1% 83.5% 85.5%
Gross Profit 18.9% 16.5% 14.5%
Operating expense 20.4% 18.0% 18.8%
Other income(expense) 1.9% (2.9%) (0.9%)
---------- ----------- ------------
Income /(Loss) before discontinued operations 0.4% (4.4%) (5.2%)
Discontinued Operations:
Loss from operation of UNS - (2.0%) (0.6%)
Gain on disposal of UNS - 0.8% -
---------- ----------- ------------
Net Income / (Loss) 0.4% (5.6%) (5.8%)
========== =========== ============
</TABLE>
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YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES.
Data Systems' total revenues declined to $52.8 million in 1999,
compared to $85.3 million in 1998. The decline (38.1%) is the cumulative effect
of the termination of a specific product sales contract, non-recurring product
project work and a change in sales strategy to an emphasis on service sales.
The Data Systems' product sales component of the business declined to
$32.4 million in 1999 from $63.5 million in 1998 due primarily to the completion
and expiration on September 30, 1998, of Data Systems' master contractor
purchase order with the State of Michigan. Product sales to the State of
Michigan were made under that agreement and accounted for $17.1 million in sales
in 1998. The State of Michigan continues to buy network services and service
maintenance contracts from Data Systems. Non-recurring product project work
completed in 1998 for Hooper Homes and the State of Louisiana accounted for $4.7
million and $3.1 million, respectively, of the decline in product revenues from
1998 to 1999.
In prior periods, Data Systems would sell equipment and absorb the
full burden of financing those sales. During 1999, Data Systems worked with key
vendors to pass-through hardware sales directly to the customer. This allows the
vendor to absorb the risk and burden of financing the equipment component of the
sale. As a result, Data Systems recognized a commission on the sale without the
risk and cost associated with carrying a receivable for equipment sales. This
change was implemented as part of Data Systems' strategic move towards service
sales with less emphasis on the hardware component of its business. The change
implemented by Data Systems of equipment sales pass -through to the vendors
accounted for approximately $10.9 million of the product revenue decline from
1998 to 1999. Data Systems' shift in emphasis to service sales from product
sales is due to the expectation of higher margins generally associated with
sales of technical services.
Service revenues declined 6.4% to $20.4 million in 1999 from $21.8
million in 1998. The decline is due to the loss of the service revenue
associated with the State of Michigan master product purchase order, which
expired September 30, 1998, and the termination of unprofitable imaging
services. Service sales accounted for 38.6% of total revenue in 1999 versus
25.5% in 1998. This percentage increase was due to the overall decline in
product revenue as described above.
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COST OF REVENUES.
The decline in cost of revenues in 1999 is consistent with the
reduction in product sales due to the termination of the Sate of Michigan master
contractor purchase order, non-recurring product project work and Data Systems'
success with involving key vendors in the financing of large equipment sales. In
addition, Data Systems continues to manage external labor costs, increase
internal technical workforce utilization and increase high-end network service
work. Primarily as a result of this activity, cost of revenues decreased to
81.1% of total revenues in 1999 from 83.5% of total revenues in 1998.
Cost of product revenue decreased as a percentage of total
revenues to 50.4% in 1999 from 61.2% in 1998. The decline in product revenue and
the ability to pass through product sales accounts for the reduction in the cost
of product revenue. Product revenue gross margins increased to 18.0% in 1999
versus 17.8% in 1998.
Cost of service revenue increased to 30.7% of total revenues in
1999 from 22.3% of total revenues in 1998 due to the decrease in overall sales.
However, service revenue gross margins increased to 20.6% in 1999 versus 12.7%
in 1998 due to Data Systems' management of external labor while increasing the
utilization of the internal technical workforce.
Overall, gross profit in 1999 decreased $4.1 million, or 29.0%,
from 1998. However, gross margin as a percent of revenue increased in 1999 to
18.9%, versus 16.5% in 1998. The increase in margin is attributable to Data
Systems' ability to negotiate vendor discounts for product purchases, vendor
financing of large equipment transactions and increases in service margins as
described above.
OPERATING EXPENSES.
Operating expenses increased to 20.4% of total revenues in 1999
from 18.0% of total revenues in 1998. Sales expenses remained constant at 11.6%
of total revenues in 1999 and 1998 respectively. General and administrative
expense increased to 8.8% of total revenues in 1999 from 6.4% of total revenues
in 1998. The increase in operating expense margin is directly related to the
decrease in total revenue. However, overall operating expenses declined 29.8%
due to cost controls and overhead reductions put in place during 1999.
Specifically, sales offices in Chicago, Ill, Raleigh, NC, and Lexington, KY were
closed and administrative positions were consolidated through attrition, without
jeopardizing controls or procedures. Included in 1999, are non-recurring
expenses for professional fees and unprofitable operations as a result of Data
Systems operating under the terms of the merger agreement with Information
Architects that was terminated on September 15, 1999. The differential between
1998 and 1999 was impacted by the fact that 1998 included some non-recurring
costs required to complete Data Systems' year-end audits for 1997 and 1996
reporting, costs associated to Data Systems' shareholder class action lawsuit,
and bank audit and examination expenses.
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OTHER INCOME (EXPENSES).
Other income for 1999 increased $3,397,373 to $978,252
and was primarily attributable to the settlement of Data Systems' shareholder
class action lawsuit. Data Systems established an accrual in 1998 of
approximately $1.8 million for the estimated fair market value of the shares of
Data Systems' common stock that were to be contributed into the gross settlement
fund for the suit. At the time of settlement (June 22, 1999), Data Systems
recognized as income approximately $1.1 million of the accrual because the
actual fair market value of the common stock issued was $630,500. The remaining
change was due to Data Systems' reversal of certain accrued costs offset by a
loss on sale of non-revenue producing assets. The disposal of the assets was
related to the closure of three sales offices.
Interest expense decreased $.2 million due primarily to Data
Systems' success at negotiating more advantageous payment terms with its key
vendors and overall reductions in Data Systems' bank borrowings.
13
<PAGE> 14
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997
Data Systems' total revenues declined slightly to $85.3 million in
1998, compared to $86.0 million in 1997. The decline (0.8%) was due to the net
effect of the termination of a specific product sales contract offset by Data
Systems' organic growth in service sales and in the eastern region of the United
States.
Data Systems' product sales component of the business declined to $63.5
million in 1998 from $67.8 million in 1997 due primarily to the completion and
expiration on September 30, 1998, of Data Systems' master contractor purchase
order with the State of Michigan. Product sales to the State were made under
that agreement. The State continues to buy network services and service
maintenance contracts from Data Systems. Of the $4.3 million decline in product
sales, approximately $3.8 was attributed to the completion of the State of
Michigan agreement. The remainder of the decline in product sales was due to
management's continued focus on new account penetration through the offering of
advanced services, including network management services. Data Systems' shift in
emphasis to service sales from product sales was due to the expectation of high
margins generally associated with sales of technical services.
Service revenues increased 20.4% to $21.8 million in 1998 from $18.1
million in 1997. Service sales accounted for 25.5% of total revenue in 1998
versus 21.1% in 1997. This increase was primarily due to the allocation of
additional resources to further develop Data Systems' capabilities to deliver
advanced services.
COST OF REVENUES.
The decline in cost of revenues in 1998 was consistent with the
reduction in product sales due to the termination of the Sate of Michigan master
contractor purchase order and the shift to service revenue. Management had
refocused Data Systems' business in conjunction with these changes by shifting
resources away from the lower margin direct product component of revenue, in
favor of the higher returns generated from advanced service and network
management offerings. Primarily as a result of this activity, cost of revenues
decreased to 83.5% of total revenues in 1998 from 85.5% of total revenues in
1997.
Cost of product revenue decreased as a percentage of total
revenues to 61.2% in 1998 from 68.9% in 1997. Certain software purchases in
support of maintenance contracts were reclassified as cost of services versus
cost of products. This change, along with the decline in product revenue,
accounts for the reduction in the cost of product revenue. Product revenue gross
margins increased to 17.8% in 1998 versus 12.7% in 1997. Data Systems had been
more selective in pricing large projects and believes that the increase in
product gross margin is reflective of the strategic shift away from low margin
sales.
14
<PAGE> 15
Cost of service revenue increased to 22.3% of total revenues in
1998 from 16.6% of total revenues in 1997 due to the significant increase in
total service revenues and reclassification of software costs that are more
closely related to service revenue. Additionally, due to Data Systems' decision
to move towards a higher mix of service sales, Data Systems increased its
technical personnel to assist the sales effort with specialized internal
resources. By providing in-house technical resources to support revenue growth,
Data Systems increased expenditures in third party consultants and technicians
to support existing contracts.
Overall, gross profit increased $1.6 million or 12.9% over 1997.
Gross margin in 1998 was 16.5% versus 14.5% in 1997. To maintain its strategic
direction, emphasizing a shift towards higher margin service sales, Data Systems
did invest resources in technical personnel, hardware, software and processes.
OPERATING EXPENSES.
Operating expenses decreased to 18.0% of total revenues in 1998
from 18.8% of total revenues in 1997. Sales expenses decreased to 11.6% of total
revenues in 1998 versus 12.0% of total revenues in 1997. General and
administrative expense decreased to 6.4% of total revenues in 1998 from 6.8% of
total revenues in 1997. Overall, operating expenses declined due to cost
controls and overhead reductions put in place during 1998. Specifically, sales
offices in Atlanta, GA, Charlotte, NC, Greensboro, NC, Pittsburgh, PA and
Dallas, TX were closed or consolidated into other more strategically located
offices. Administrative and other overhead reductions were completely offset by
the additional expenditures necessary to address legal and auditing issues. The
non-recurring legal, auditing, and professional fees exceeded just over $1.0
million during 1998. These expenses related to the extraordinary efforts
required to complete Data Systems' year-end 1997 and 1996 reporting, the class
action lawsuits, and bank audit and examination expenses. All totaled, these
matters account for 1.2% of total revenue.
OTHER INCOME (EXPENSES).
The increase in other expense in 1998 was due primarily to the
recognition of $1.8 million of liability associated with the proposed
stipulation of settlement of Data Systems' shareholder class action lawsuit.
Data Systems established an accrual for the estimated fair market value of the
shares of Data Systems' common stock that will be contributed into the gross
settlement fund. Other expenses, net of the shareholder lawsuit accrual,
declined to $.6 million from $.8 million in 1997. The decrease was due to a $.8
million decrease in interest expense due primarily to Data Systems' success at
negotiating more advantageous payment terms with its key vendors and overall
reductions in Data Systems' bank borrowings.
15
<PAGE> 16
DISCONTINUED OPERATIONS.
Pursuant to the terms of the original 1996 purchase agreement
by which Data Systems acquired UNS, the minority shareholders of UNS elected to
exercise a contract right to initiate re-purchase of the the stock of UNS owned
by Data Systems. Data Systems' Board of Directors accepted the proposal and
adopted a plan to discontinue operations. Effective June 1, 1998, Data Systems
sold its 70% interest in the UNS subsidiary for cash and notes and discontinued
operations in its large account network management business. The terms of the
sale included $7,000 in cash and a note for $3,000,000, secured by the stock of
UNS. The buyers also assumed the existing liabilities of UNS. The gain upon
disposal of the discontinued segment was $705,742 which is net of an allowance
of $3,000,000 due to the uncertainty of the buyers ability to pay the note. Data
Systems deferred the recognition of a gain on sale related to the note until
payments on the note are received. The gain is also net of additional allowances
of $614,000 and $375,000, due to the uncertainty of the buyer's ability to
reimburse Data Systems for working capital and payment of certain assumed
liabilites.
Data Systems has restated its prior financial statements to present the
operating results of the UNS segment as a discontinued operation.
On December 9, 1999, Data Systems filed suit against UNS in the State
of Michigan, Oakland County Circuit Court. The suit alleges UNS breached its
agreement with Data Systems by failing and refusing to make payments due on the
note.
FINANCIAL CONDITION
As of December 31, 1999, cash and investments totaled $1.5 million, a
decrease of $1.1 million from 1998. Cash used in operating activities for 1999
was $3.1 million compared to cash provided by operations of $18.1 million in
1998. The cash used in operating activities was primarily due to a decrease in
accounts payable of $3.3 million, reversal of the Shareholder lawsuit accrual by
$1.1 million and recognition of deferred maintenance revenues of $2.3 million.
These uses were partially offset by income of $191,190 generated in 1999 and
depreciation of $1.1 million and collection of accounts receivable of $2.2
million. Data Systems, in accordance with its bank financing agreement, applies
all available cash to its outstanding line of credit balance. During the year,
Data Systems borrowed $2.0 million against the line of credit. In accordance
with Data Systems' credit agreement with Foothill Capital Corporation, all funds
are applied to the outstanding loan balance. Daily working capital requirements
are managed through daily borrowings.
16
<PAGE> 17
On September 30, 1998 Data Systems and Foothill Capital Corporation
("Foothill") entered into a credit facility ("Foothill Agreement"). The Foothill
Agreement provides for an initial revolving line of credit not to exceed $15
million. 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's
prime rate and have a term extending to September 30, 2001. As of December 31,
1999, the line of credit under the Foothill Agreement bore interest at 9.5%. As
of December 31, 1999, the line of credit collateral formula permitted borrowings
of up to $6.2 million, of which $5.2 million was outstanding.
The Foothill Agreement 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 Data
Systems' receivables to be genuine and free of all other encumbrances and
requires Data Systems' inventory to be kept only at certain locations and to be
free of all other encumbrances. In addition, there are restrictions with respect
to dividend distributions. At December 31, 1999, Data Systems was in compliance
with all of the financial covenants referenced above.
The Data Systems' working capital deficiency as of December 31, 1999
was $2.2 million. Data Systems 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 Data
Systems will be adequate to fund Data Systems' current short and long term cash
flow requirements. Included in Data Systems' cash is $1.5 million, which is
restricted in connection with various maintenance agreements, "Note A of Notes
to Consolidated Financial Statements".
Upon completion of its proposed merger with TekInsight.Com, Data
Systems' believes that additional financing resources will be available and
certain synergies relating to business opportunities will arise. See "Note Q of
Notes to Consolidated Financial Statements." However, the Agreement and Plan of
Merger requires Data Systems to conduct business in the usual and ordinary
course but under certain restrictions and limitations. These restrictions and
limitations, in the aggregate, could have an effect on Data Systems' ability to
quickly respond to changes in its business.
17
<PAGE> 18
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue arose as a result of computer programs
using a two-digit format, as opposed to four digits, to indicate the year. The
concern was that computer systems would be unable to interpret dates beyond the
year 1999, which could cause a system failure or other computer errors, leading
to disruptions in operations. In 1997, Data Systems developed a three-phase
program for Y2K information systems compliance. Phase I was to identify those
systems with which Data Systems has exposure to Y2K issues. Phase I was
completed in 1998. Phase II was the development and implementation of action
plans to be Y2K compliant in all areas by mid 1999. Those plans were developed
and implemented as scheduled. Phase III was the final testing of each major area
of exposure to ensure compliance and was completed during the fourth quarter
1999. In implementing its three-phrase program, the Company had identified three
major areas determined to be critical for successful Y2K compliance: (1)
financial and informational system applications, (2) customer relationships and
equipment applications and (3) third-party consultant and vendor relationships.
Data Systems, in accordance with Phase I of the program, conducted an
internal review and inventory of all systems (including information technology
and non-information technology systems), and contacted all critical suppliers to
determine major areas of exposure to Y2K issues. In the financial and
information system area, a number of applications were identified as Y2K
compliant due to their recent implementation. Data Systems' core financial and
reporting systems were completely replaced as of January 1, 1999, which brought
this critical area into Y2K compliance. In the customer relationships and
equipment applications area, Data Systems completed all remediation and testing
efforts. As a result of its Phase I assessment of its non-information technology
systems, Data Systems did not incur significant costs remediating those systems
for Y2K compliance. In the third-party consultant and vendor relationships area,
Data Systems contacted most of those parties and they stated they were to be Y2K
compliant.
Data Systems spent approximately $154,000 in 1998 to replace its core
financial and reporting systems and had spent 1,100 man-hours through December
31, 1999 to bring the systems network, financial and informational applications
into Y2K compliance at an estimated cost of $55,000. Because of Data Systems'
expertise in this area, internal personnel undertook the majority of this work.
Data Systems believes it did not experience any Y2K disruptions due to
the three-phase program it developed and implemented.
The foregoing disclosure contains information regarding Y2K readiness
that constitutes a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Readiness Disclosure Act.
18
<PAGE> 19
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the financial position of Data
Systems 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.
Data Systems' contains an element of market risk due to possible
changes in interest rates. Data Systems regularly assesses these risks and has
established collection policies and business practices to minimize the adverse
effects of these and other potential exposures. Data Systems 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 Data Systems'
interest expenses are determined. The financial instruments included in the debt
of Data Systems consist of all of Data Systems' 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.
Data Systems assesses the risk of loss due to the impact of changes in
interest rates on market sensitive instruments. Interest rates effecting Data
Systems' debt are market based and will fluctuate as a result. Data Systems
prepares forecasts and cost of funds analysis on significant purchases to
anticipate the effect of market interest rate changes.
Data Systems' 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, Data Systems' interest expense, after
considering the effects of interest income, would increase, and income before
taxes would decrease by approximately $.1 million assuming comparable average
borrowings. Comparatively, if market interest rates based on the prime lending
rate averaged 2% more in 1999 than they did in 1998, Data Systems' interest
expense, after considering the effects of any interest income, would have
increased, and income before taxes would have decreased, by $.2 million assuming
comparable average borrowings. These amounts are determined by considering the
impact of the hypothetical change in the interest rates on Data Systems'
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 Data Systems financial structure.
19
<PAGE> 20
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The financial statement schedule required by this item is
listed in response to Item 14 of this Report on Form 10-K and is filed as part
of this report.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants 21
Independent Auditor's Report 22
Consolidated Balance Sheets as of December 31, 1999 and 1998 23
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 24
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 26
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1999, 1998 and 1997 27
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Data Systems Network Corporation
We have audited the consolidated balance sheets of Data Systems Network
Corporation and Subsidiaries (a Michigan corporation) as of December 31, 1999
and 1998, and the related statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Data Systems Network Corporation and Subsidiaries as of December 31, 1999 and
December 31, 1998, and the results of operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has a deficit in working capital. These matters, among others, as discussed
in Note B to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We have also audited Schedule II of Data Systems Network Corporation and
Subsidiaries as of and for the year ended December 31, 1999. In our opinion this
schedule presents fairly in all material respects, the information required to
be set forth therein.
Grant Thornton LLP
Southfield, Michigan
February 14, 2000
21
<PAGE> 22
INDEPENDENT AUDITORS REPORT
To the Directors and Shareholders
Data Systems Network Corporation
We have audited the accompanying consolidated balance sheet of Data Systems
Network Corporation as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Data Systems Network
Corporation as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced
significant recurring losses from operations, which raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note B. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PLANTE & MORAN, LLP
Southfield, Michigan
August 20, 1998
22
<PAGE> 23
DATA SYSTEMS NETWORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,516,709 $ 2,695,863
Accounts receivable (net of allowance of $290,000 and $561,600
at December 31, 1999 and December 31, 1998 respectively). 9,132,585 11,339,484
Inventories 907,207 1,296,145
Notes receivable 50,000 60,000
Other current assets 1,132,070 347,983
--------------- ----------------
Total current assets 12,738,571 15,739,475
PROPERTY AND EQUIPMENT, net 1,385,498 2,522,978
GOODWILL, (net of amortization of $557,938 and $388,438 at
December 31, 1999 and December 31, 1998 respectively.) 2,832,070 3,001,570
OTHER ASSETS 351,956 1,402,298
--------------- ----------------
TOTAL ASSETS $17,308,095 $22,666,321
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit 5,217,794 3,231,287
Accounts payable 6,356,961 9,640,159
Accrued liabilities 1,742,977 2,590,906
Shareholder Settlement Liability - 1,768,000
Deferred maintenance revenues 1,598,024 3,865,320
--------------- ----------------
Total current liabilities 14,915,756 21,095,672
COMMITMENTS and CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares, none outstanding
Common stock ($.01 par value; authorized 10,000,000
shares; issued and outstanding 5,509,224 and 4,859,224
at December 31, 1999 and December 31,1998 respectively.) 55,092 48,592
Additional paid-in capital 18,575,219 17,951,219
Accumulated deficit (16,237,972) (16,429,162)
--------------- ----------------
Total stockholders' equity 2,392,339 1,570,649
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,308,095 $22,666,321
=============== ================
</TABLE>
The accompanying notes are an integral part of these finanacial statements.
<PAGE> 24
DATA SYSTEMS NETWORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Product revenue $ 32,451,828 $ 63,530,818 $ 67,845,466
Service revenue 20,373,707 21,792,682 18,151,674
---------------- --------------- ---------------
Total revenues 52,825,535 85,323,500 85,997,140
COST OF REVENUES:
Cost of products 26,608,898 52,213,508 59,227,854
Cost of services 16,216,325 19,024,585 14,287,978
---------------- --------------- ---------------
Total cost of revenues 42,825,223 71,238,093 73,515,832
GROSS PROFIT 10,000,312 14,085,407 12,481,308
OPERATING EXPENSES:
Selling expenses 6,105,959 9,896,255 10,334,103
General and administrative expenses 4,681,415 5,468,613 5,814,607
---------------- --------------- ---------------
Total operating expenses 10,787,374 15,364,868 16,148,710
LOSS FROM OPERATIONS (787,062) (1,279,461) (3,667,402)
OTHER INCOME (EXPENSE):
Shareholder settlement 1,137,500 (1,768,000) -
Loss on Sale of Equipment (385,419) - -
Interest income 109,957 109,592 371,716
Interest expense (564,859) (802,328) (1,612,583)
Other income 681,073 41,615 491,638
---------------- --------------- ---------------
978,252 (2,419,121) (749,229)
Earnings (loss) before discontinued operations 191,190 (3,698,582) (4,416,631)
DISCONTINUED OPERATIONS
Loss from operations of Unified Network Services - (1,686,053) (557,469)
Gain on Disposal of Unified Network Services - 705,742 -
---------------- --------------- ---------------
- (980,311) (557,469)
---------------- -------------- ---------------
NET EARNINGS (LOSS) $ 191,190 $ (4,678,893) $ (4,974,100)
================ ============== ===============
Earnings (Loss) per common share - basic and diluted
Continuing operations $ 0.04 $ (0.76) $ (1.02)
Discontinued operations - (0.20) (0.13)
================ ============== ==============
Net loss per common share $ 0.04 $ (0.96) $ (1.15)
================ ============== ==============
Weighted average shares outstanding 5,204,703 4,859,224 4,324,229
================ ============== ==============
</TABLE>
The accompanying notes are an integral part of these finanacial statements.
<PAGE> 25
DATS SYSTEMS NETWORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 32,550 $ 9,139,153 $ (6,776,169) $ 2,395,534
Exercise of stock options and warrant
redemptions 16,030 8,806,453 -- 8,822,483
Net loss -- -- (4,974,100) (4,974,100)
---------- ----------- ------------ ------------
Balance at December 31, 1997 48,580 17,945,606 (11,750,269) 6,243,917
Exercise of stock options 12 5,613 -- 5,625
Net loss -- -- (4,678,893) (4,678,893)
---------- ----------- ------------ ------------
Balance at December 31, 1998 48,592 17,951,219 (16,429,162) 1,570,649
Issuance of shares in connection with Shareholder Settlement 6,500 624,000 -- 630,500
Net Earnings -- -- 191,190 191,190
---------- ----------- ------------ ------------
Balance at December 31, 1999 $ 55,092 $18,575,219 $(16,237,972) $ 2,392,339
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these finanacial statements.
<PAGE> 26
DATA SYSTEMS NETWORK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December,
1999 1998 1997
----------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings (loss) $ 191,190 $(4,678,893) $ (4,974,100)
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation and amortization 1,041,812 1,145,088 883,084
Loss on sale of equipment 385,419 - -
Gain on disposal of UNS - 866,335 -
Changes in assets and liabilities that provided (used) cash net
of effects of discontinued operations:
Investments - 6,203,361 (6,203,361)
Accounts receivable 2,206,899 15,004,496 (16,410,447)
Notes receivable 10,000 137,133 (97,043)
Inventories 388,938 (294,795) 244,812
Other current assets (784,087) 189,797 223,524
Other assets 1,050,342 3,349,668 (667,355)
Accounts payable (3,283,198) (6,514,071) 8,798,041
Accrued liabilities (847,929) (322) 1,346,598
Shareholder Settlement (1,137,500) 1,768,000 -
Deferred maintenance revenues (2,267,296) 2,938,166 (13,473)
Decrease in net liabilities of discontinued operations - (2,021,070) (75,944)
----------- ----------- ------------
Net cash (used in) provided by operations (3,045,410) 18,092,891 (16,945,664)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net (120,251) (1,104,305) (1,627,789)
Issuance of common stock and exercise of stock options - 5,625 -
----------- ----------- ------------
Net cash provided by (used in) investing activities (120,251) (1,098,680) (1,627,789)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net current borrowings (repayment) under bank line of credit 1,986,507 (14,065,272) 8,071,347
Payment of principal on long-term debt - - (75,000)
Proceeds from issuance of common stock (net offering costs) 8,822,483
Net proceeds (repayment) from capital lease obligation financing - (237,539) 237,539
----------- ----------- ------------
Net cash provided by (used in) financing activities 1,986,507 (14,302,811) 17,056,369
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALANTS (1,179,154) 2,691,400 (1,517,084)
CASH AND CASH EQUIVELANTS AT BEGINNING OF PERIOD 2,695,863 4,463 1,521,547
----------- ----------- ------------
CASH AND CASH EQUIVELANTS AT END OF PERIOD $ 1,516,709 $ 2,695,863 $ 4,463
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Cash paid during the period for:
Interest $ 565,000 $ 802,000 $ 1,612,000
=========== =========== ============
Income taxes - - $ 60,000
=========== =========== ============
During the year the Company settled a shareholder lawsuit through the
issuance of 650,000 shares of common stock.
630,500 - -
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these finanacial statements.
<PAGE> 27
NOTE A - 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Data Systems and
its former subsidiary, Unified Network Service, Inc (UNS). The operations of UNS
were sold during 1998 and they are shown as discontinued operations (See Note
C).
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 December 31, 1999, cash of $1,513,000 was restricted in connection with
maintenance agreements. It will become unrestricted as revenue is recognized
according to the terms of the agreements.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
weighted average method. Inventories consist of goods for resale and service
parts, which represent equipment spares utilized for service contracts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed principally using the straight-line method based upon estimated useful
lives ranging from 5 to 7 years. Amortization of leasehold improvements is
provided over the terms of the various leases.
GOODWILL AND LONG-LIVED ASSETS
The cost in excess of net assets acquired (goodwill) is amortized using the
straight-line method over twenty years, which is the estimate of future periods
to be benefited. Data Systems performs a review for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Undiscounted estimated future cash flows of an asset are
compared with its carrying value, if the cash flows are less than the carrying
value, an impairment loss is recognized.
<PAGE> 28
INCOME TAXES
Income taxes are accounted for by using an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial basis and tax basis
of assets and liabilities. Assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
REVENUE RECOGNITION
Revenue recognition for consulting, network installation services, time and
materials services, and training is recognized when the services are rendered.
Revenue from the sale of merchandise is recognized when the customer receives
the product. Revenue from the sales of after-installation service maintenance
contracts is recognized on a straight-line basis over the lives of the
respective contracts.
PRODUCT RETURNS AND SERVICE ADJUSTMENTS
Product returns and service adjustments are estimated based upon historical
data. Data Systems' customers have no contractual rights to return products.
Data Systems determines whether to accept product returns on a case-by-case
basis and will generally accept product returns only upon payment of a
restocking fee and/or if the products may be returned to the manufacturer. Data
Systems offers no warranty separate from the product manufacturers' warranties.
EARNINGS OR LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 specifies the computation and
presentation and disclosure requirements for earnings per share ("EPS") of
entities with publicly held common stock or potential common stock. SFAS 128
defines two EPS calculations, basic and diluted. The objective of basic EPS is
to measure the performance of an entity over the reporting period by dividing
income available to common stock by the weighted average of shares outstanding.
The objective of diluted EPS is consistent with that of basic EPS while giving
effect to all dilutive potential common shares that were outstanding. For year
ended December 31, 1999, there were no potentially dilutive common shares. For
year ended December 31, 1998, all potential common shares were excluded from the
computation of diluted earnings per share because the effect would have been
anti-dilutive.
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.
<PAGE> 29
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Data Systems' financial instruments consist primarily of
cash and cash equivalents, bank lines of credit, accounts receivables, accounts
payable and short-term and long-term debt, approximate their fair values.
FINANCIAL STATEMENT PRESENTATION
Certain amounts in the 1998 and 1997 financial statements have been reclassified
to conform to the 1999 presentation.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the year ended December 31, 1999 reflected net earnings of
approximately $191,000, however, Data Systems had a loss from operations of
approximately $787,000. During the years ended December 31, 1998 and 1997, Data
Systems incurred losses of $4,678,893 and $4,974,100, respectively. These losses
have contributed to Data System's deficit in working capital of $2,177,185 at
December 31, 1999. These factors, among others, raise substantial doubt about
Data Systems' ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Management's plans with respect to this matter include: continued focus on
reducing operational and overhead costs and the implementation of a change in
strategy to emphasize service sales rather than product sales, which is expected
to increase margins. Management believes the consolidation of its business
operations and the stabilization of strategic business relationships will enable
Data Systems to meet its obligations and attain a level of operations that are
profitable.
In addition, upon completion of the merger with TekInsight.Com (See Note P),
Data Systems believes that additional financial resources will be available and
certain synergies relating to business opportunities will be realized to help
return Data Systems to profitability.
<PAGE> 30
NOTE C - DISCONTINUED OPERATIONS - SALE OF UNIFIED NETWORK SERVICES INC.
During 1998, Data Systems decided to sell its 70% interest in its large account
network management services operation, Unified Network Services Inc. Under the
terms of the original purchase agreement, the minority shareholders of UNS
elected to exercise a contract option to purchase the UNS subsidiary. The terms
of the sale included $7,000 in cash and a note for $3,000,000, which is secured
by the stock of UNS. The buyers also assumed the existing liabilities of UNS.
The gain upon disposal of the discontinued operations is net of allowances of
$3,000,000 due to the uncertainty of the buyer's ability to repay the note and
$989,400 in advances made by Data Systems for working capital, and payment of
certain assumed liabilities.
The results of operations of the discontinued operations for the years ended
December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
For years ended December 31, 1998 1997
--------- ----------
<S> <C> <C>
Revenues $ 278,060 $ 2,013,309
Loss from discontinued operations $(1,686,054) $ (557,469)
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Computer equipment and software $ 2,992,909 $ 3,889,597
Furniture and Fixtures 650,824 856,720
Leasehold improvements 257,831 257,831
----------- -----------
3,901,564 5,004,148
Less accumulated depreciation and amortization (2,516,066) (2,481,170)
----------- -----------
$ 1,385,498 $ 2,522,978
=========== ===========
</TABLE>
Depreciation and amortization expense was approximately $874,000, $914,000 and
$574,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE> 31
NOTE E - OTHER ASSETS
Other assets consist of the following at December 31,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Prepaid expenses $351,956 $606,662
Accounts receivable - other 0 795,636
----- - -------
$351,956 $1,402,298
======== ==========
</TABLE>
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Compensation benefits and taxes $889,334 $1,229,821
Customer advances 42,106 140,181
State sales and other taxes 41,163 74,208
Other 770,374 1,146,696
------- ----------
$1,742,977 $2,590,906
========== ==========
</TABLE>
NOTE G - 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 December 31,1999 was $644,003. 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 (9.5 % at December 31, 1999) and have a
term extending to September 30, 2001.
Data Systems is required to maintain certain financial ratios. At December 31,
1999 Data Systems was in compliance with all of the ratios required by Foothill
Capital Corporation. In addition, there are restrictions with respect to
dividend distributions.
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.
<PAGE> 32
NOTE I - LEASE COMMITMENTS
Data Systems has entered into several non-cancelable operating leases for office
space, computer equipment, and certain furniture and fixtures that expire at
various dates through 2004. The approximate future minimum annual rentals under
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C>
2000 $824,987
2001 725,299
2002 499,651
2003 187,045
2004 42,530
---------
Total minimum lease obligations $2,279,512
==========
</TABLE>
Total rent expense for the years ended December 31, 1999, 1998, and 1997 was
approximately $1,028,000, $1,558,000 and $1,130,000, respectively.
NOTE I - INCOME TAXES
Deferred tax assets and liabilities at December 31, consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $4,285,000 $3,336,000
Deferred maintenance revenue 17,000 17,000
Allowance for doubtful accounts 383,000 273,000
Shareholder lawsuit settlement - 601,000
Inventory - -
Depreciation - -
Accrued vacation 92,000 102,000
--------- --------
4,777,000 4,329,000
Deferred tax liabilities
Depreciation (66,000) (138,000)
Amortization (126,000) (114,000)
Other - -
--------- --------
(192,000) (252,000)
Less valuation allowance (4,585,000) (4,077,000)
--------- --------
$ - $ -
=========== ==========
</TABLE>
The net operating loss carry forwards expire in 2007 - 2018.
<PAGE> 33
The income tax provision reconciled to the tax computed at the statutory federal
rate for continuing operations was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Tax (benefit) at statutory rates applied to income before
Federal income tax from continuing operations $65,000 $(1,260,000) $(1,502,000)
Effect of nondeductible items 28,000 41,000 52,000
Other - (144,000)
Changes in treatment on income tax return (601,000) 939,000
Valuation allowance 508,000 280,000 1,594,000
----------- ----------- ------------
$ - $ - $ -
=========== =========== ============
</TABLE>
NOTE J - REDEMPTION OF WARRANTS
During February 1997, Data Systems called all of its outstanding Redeemable
Common Stock Purchase Warrants ("Purchase Warrants") for redemption as of March
10, 1997 pursuant to the Warrant Agreement, dated October 28, 1994, setting
forth the terms of the Purchase Warrants. Approximately 99% of the Warrants were
exercised on or prior to the date of redemption at a price of $6.25 per Warrant,
resulting in net proceeds to Data Systems of approximately $7,400,000. In
connection with the receipt of consent to the redemption Data Systems agreed to
file a registration statement with the Securities and Exchange Commission with
respect to 60,000 units, issued to the underwriters' representatives in Data
Systems' initial public offering, consisting of two common shares and two
warrants to purchase an additional two common shares which may be purchased upon
exercise of a warrant. The exercise price of these warrants was reduced from
$16.50 to $12.50 per unit and the exercise price of the purchase warrants was
reduced from $10.3125 to $6.25 per unit. The registration was completed in July
1997 and during the third quarter of 1997, all related warrants were exercised,
resulting in net proceeds to Data Systems of approximately $1,400,000.
NOTE K - STOCK OPTION PLANS
In April 1994 Data Systems adopted the 1994 Stock Option Plan ("the Plan"). A
total of 200,000 shares were reserved for issuance under the plan. The options
vest over a two-year period at the rate of 50% per year, beginning on the first
anniversary of the grant date. In April 1997, Data Systems amended the Plan to
increase the reserved shares to 600,000. The vesting period in Data Systems'
form option grant agreement was also changed to 50% on the second anniversary of
the grant date and 25% on each of the third and fourth anniversaries of the
grant date. Data Systems' Compensation Committee retains the ability to change
the vesting schedule at any time.
In 1999 Data Systems granted options for 50,000 shares to a Director of Data
Systems exercisable at a price of $.66 per share when the fair market value at
the date of the grant was $1.03. Such options vest 50% on the second anniversary
date, and the 25% vest each of the next two years. In 1998 and 1997, Data
Systems granted options for 40,000 and 3,000, shares, respectively, exercisable
at a price of $.88 and $9.83 per share, respectively, which was the fair market
value at the date of grant, to Directors of Data Systems. Such options vest one
year from the grant date.
<PAGE> 34
The per share weighted-average fair value of stock options granted during 1999,
1998 and 1997 was $1.03, $3.86 and $9.83 per share, respectively.
<TABLE>
<CAPTION>
SHARES AVERAGE PER
UNDER SHARE EXERCISE
OPTIONS PRICE
------- -----------
<S> <C> <C>
Balance at December 31, 1996 191,703 $ 4.55
Issued 215,350 $ 9.82
Forfeited (9,062) $ 6.19
Exercised (21,768) $ 4.57
--------
Balance at December 31, 1997 376,223 $ 7.54
Issued 138,750 $ 3.86
Forfeited (137,900) $ 10.10
Exercised (1,250) $ 3.88
-------
Balance at December 31, 1998 375,823 $ 5.15
Issued 50,000 $ .66
Forfeited (73,212) $ 6.59
Exercised $
-------
Balance at December 31, 1999 352,611 $ 4.21
======= =========
</TABLE>
The range of exercise prices on outstanding options at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AVERAGE REMAINING
PRICE RANGE SHARES EXERCISE PRICE LIFE
- ----------- ------ -------------- ----
<S> <C> <C> <C>
.66 - 2.50 158,125 $0.96 8.9
2.51 - 5.00 90,186 4.25 5.9
5.01 - 7.50 55,400 6.84 7.2
7.51 - 10.00 15,700 8.90 7.3
10.01 - 13.75 33,200 12.98 7.9
------
352,611
</TABLE>
As of December 31, 1999, 1998 and 1997 the number of options exercisable was
169,512, 193,123 and 62,461, respectively and the weighted average exercise
price of those options was $5.89, $5.29 and $4.53, respectively.
The Financial Accounting Standard Board has issued Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). The Statement
established a fair value method of accounting for employee stock options and
similar equity instruments such as warrants, and encourages all companies to
adopt that method of accounting for all of their stock compensation plans.
However, the statement allows companies to continue measuring compensation for
such plans using accounting guidance in place prior to SFAS No. 123. Companies
that elect to remain with the former method of accounting must make pro-forma
disclosures of net earnings and earnings per share as if the fair value method
provided for in SFAS No. 123 had been adopted.
<PAGE> 35
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option - pricing model with the following weighted average
assumptions for grants in 1999: dividend yield of 0%, expected volatility of
136.820%, risk-free interest rate of 6.751% and expected life of ten years.
Data Systems has not adopted the fair value accounting provisions of SFAS No.
123. Accordingly, SFAS No. 123 has no impact on Data Systems' financial position
or results of operations.
Data Systems accounts for the stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." No compensation costs have been
recognized. Had compensation cost for the plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, Data Systems' net earnings (loss) and earnings (loss) per share would have
been as follows (in thousands, except for per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Earnings (Loss) as reported $191 $(4,678) $(4,974)
Proforma 7 (4,985) (5,418)
Earnings (Loss) per share as reported $.03 $(.96) $(1.15)
Proforma - (1.03) (1.25)
</TABLE>
NOTE L - EMPLOYEE BENEFIT PLANS
Data Systems maintains a defined contribution 401(k) plan that covers
substantially all employees. Contributions to the Plan may be made by Data
Systems (which are discretionary) or by plan participants through elective
salary reductions. No contributions were made to the plan by Data Systems during
the years ended December 31, 1999, 1998, and 1997.
NOTE M - MAJOR CUSTOMERS
In 1998 and 1997, the State of Michigan accounted for approximately 29% of
revenue in each year. Additionally, the State of New York represented 25% and
12% of total revenues for 1999 and 1998 respectively.
NOTE N -COMMITMENTS AND CONTINGENCIES
Data Systems is involved in certain routine legal proceedings which are
incidental to its business. All of these proceedings arose in the ordinary
course of Data Systems' business and, in the opinion of Data Systems, any
potential liability of Data Systems with respect to these legal actions will
not, in the aggregate, be material to Data Systems' financial condition or
operations.
<PAGE> 36
NOTE O - SETTLEMENT OF LAWSUIT
On February 17, 1999, Data Systems announced that it had agreed to a stipulation
of settlement of the consolidated complaint in the shareholder class action
lawsuit captioned, In Re: Data Systems Network Corporation Securities
Litigation, Case No. 98-70854. The stipulation of settlement has been filed in
federal court in Detroit, Michigan and the court determined the settlement to be
fair on May 24, 1999.. Under the terms of the settlement, and subject to various
conditions, Data Systems created a gross settlement fund. The fund benefits a
settlement class of purchasers who bought Data Systems' stock during the period
from May 16, 1996 through February 24, 1998. The fund was comprised of $900,000
provided by Data Systems' insurer, and, 650,000 shares of Data Systems' common
stock which were issued June 22, 1999. In agreeing to the settlement, Data
Systems and individual defendants made no admission of any wrongdoing.
As of December 31, 1998, Data Systems recorded a liability for this settlement
in the amount of $ 1,768,000. The amount of the liability was calculated
assuming that a proposed merger with Information Architects had taken place and
that the shares to be issued were those of Information Architects.
When the plan of merger with Information Architects did not take place as
planned the shares issued in the settlement were those of Data Systems rather
than Information Architects. As a result, the amount of the settlement of the
lawsuit was less than anticipated at December 31, 1998 and Data Systems
recognized $ 1,137,500 as income in 1999.
NOTE P - SUBSEQUENT EVENT
On January 18, 2000, Data Systems signed a letter of intent with TekInsight.Com,
Inc. (Teks). Pursuant to the letter of intent, Data Systems agreed to enter into
a proposed acquisition transaction calling for Data Systems to be merged into
Astratek, Inc., a wholly owned and principal operating subsidiary of Teks (the
"Merger"). In consideration for the merger, Data Systems' shareholders will
receive a number of shares of a new class of Teks convertible Preferred Stock
(convertible into Teks common stock on a one to one basis) proposed to be listed
on the NasdaqSmall Cap market that will have a market value of between
$12,500,000 and $18,000,000, with such value to be based upon the market price
of Teks Common stock at the time of closing. Although no assurances can be
given, the parties intend to close the Merger by June 30, 2000.
On February 18, 2000, Data Systems and TekInsight.Com, Inc. ("TekInsight")
entered into an Agreement and Plan of Merger pursuant to which Data Systems will
be merged (the "Merger") into Astratek, Inc., a wholly owned and operating
subsidiary of TekInsight. In consideration for the Merger, Data Systems'
shareholders will receive a varying purchase price (the "Merger Price") which
will equal $12,500,000 if the market price of Tekinsight's common stock at the
time of closing (the "Market Price") is less than $5.00 per share, $16,000,000
if the Market Price is between $5.00 and $7.00 per share, and $18,000,000 if the
Market Price is over $7.00 per share. The Merger Price will be delivered to Data
Systems' shareholders through a distribution of a number of a new class of
TekInsight convertible preferred stock proposed to be listed on the Nasdaq Small
Cap market, with the number of such shares to be found by dividing the
applicable Merger Price by the Market Price. Completion of the Merger is subject
to a number of conditions, including receipt of TekInsight and Data Systems
shareholder approval, acceptance by Nasdaq for the listing of the convertible
preferred stock and other customary closing conditions. There can be no
assurance the Nasdaq listing will be obtained for the newly issued convertible
preferred stock, or that any of the closing conditions will be satisfied.
Although no assurances can be given, the parties intend to close the merger no
later than June 30, 2000.
<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 15, 1998, Plante & Moran, LLP ("Plante") informed the Board
of Directors of Data Systems that it would decline to stand for reappointment,
if asked, as auditors for Data Systems. Plante also notified Data Systems at
that time that, as of the date of such notification, the client-auditor
relationship between the parties was terminated. Data Systems placed no
limitations on Plante responding fully to inquiries of the successor
accountant.
The reports of Plante on Data Systems financial statements for each of
the fiscal years ended December 31, 1997 and 1996 contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle, except that, as issued, Plante's report
dated August 20, 1998 included a modification addressing Data Systems' going
concern uncertainty. The Data Systems' plans concerning these matters are
described in the footnotes attached to the financial statement referenced in
that report.
In connection with its audits for the fiscal years December 31, 1997and
1996, and through October 15, 1998, (i) there were no disagreements between
Data Systems and Plante on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Plante would have caused
them to make reference thereto in their report on the financial statement for
such fiscal years and (ii) there were no reportable events as defined in
Regulation S-K Item 304(a)(1)(v) except that Plante advised the Audit
Committee of Data Systems' Board of Directors, by letter dated May 21, 1998,
of certain items it considered to be material weaknesses in internal controls
in 1997 relating to Data Systems' general accounting practices then in place,
including those relating to billing, accounts payable, and inventory. These
items were discussed with the Audit Committee on September 15, 1998.
Management has addressed and will continue to address the recommendations of
Plante.
21
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the members of the Board of Directors and the
executive officers of Data Systems and includes information regarding the
individual's age, principal occupation, other business experience, directorships
in other publicly held companies and term of service with Data Systems. Each
director holds office until the next annual meeting of shareholders and until
his successor has been elected and qualified.
Name Age Position
---- --- --------
Michael W. Grieves 49 Chairman of the Board,
President, Chief Executive
Officer and Director
Walter J. Aspatore 55 Director
John O. Lychos Jr. 44 Director
Diane L. Grieves 50 Executive Vice President
and Secretary
Michael Jansen 42 Chief Financial Officer, Treasurer
and Asst. Secretary
Garrett L. Denniston 49 Vice President - Sales
Mr. Grieves has served as Data Systems' President, Chief Executive
Officer and Chairman of the Board since its inception in 1986. Prior to 1986,
Mr. Grieves served in executive, managerial and technical capacities with
Computer Alliance Corporation, a turnkey system house, Quanex Management
Sciences, a computer services bureau, and Lear Siegler Corporation, and has more
than 25 years of experience in the computer industry. Mr. Grieves is married to
Diane L. Grieves, Data Systems' Executive Vice President and Secretary.
Mr. Aspatore, a Director of Data Systems since November 1994, has been
Managing Director of Amherst Capital Partners, which provides investment banking
services to medium and small businesses, since its founding in 1994. Prior to
the formation of Amherst Capital Partners, Mr. Aspatore was President of Onset
BIDCO, which supplies financing and management services to companies with strong
growth potential, from 1991 to November 1994. Mr. Aspatore was the President of
Cross & Trecker Corporation, a $500 million worldwide factory automation
company, from 1988 to 1991 and served that company in various capacities for
approximately 22 years. He has a total of more than 27 years of senior level
management experience in operations and finance in the worldwide factory
automation, automotive and aerospace industries.
22
<PAGE> 39
Mr. Lychos, a Director of Data Systems since August 1999, had been the
Chief Financial Officer of Data Systems from May 1998 through July 1999. Mr.
Lychos is currently the Chief Financial Officer of Atlas Oil Company. Prior to
joining Data Systems, he was a Vice President/Area Controller for Waste
Management Inc., and held a variety of other responsible financial management
positions with that company throughout his fifteen-year tenure.
Ms. Grieves, Data Systems' Executive Vice President and Secretary, has
held executive positions in sales, operations, and administration at Data
Systems since its inception. From 1984 to 1985, Ms. Grieves was Vice President
of Sales at Executive Data Solutions, Inc., a computer sales organization. Prior
to that, Ms. Grieves held numerous sales and sales management positions with
American Telephone and Telegraph and the Bell operating companies. Ms. Grieves
is married to Michael W. Grieves, Data Systems' Chairman, President and Chief
Executive Officer.
Mr. Jansen, Data Systems' Chief Financial Officer, Treasurer and
Assistant Secretary has been with Data Systems since November 1998. Before
becoming the Chief Financial Officer, Mr. Jansen had been the Vice President -
Corporate Controller of Data Systems. Mr. Jansen is a CPA with over 15 years of
finance, accounting and business experience. Prior to joining Data Systems, he
spent 13 years in various financial management positions with a Fortune 500
Company.
Mr. Denniston, Data Systems' Vice-President - Sales, has held various
sales management and executive positions with Data Systems since 1996. Prior to
1996, Mr. Denniston was employed in sales and sales management capacities at
Memorex-Telex, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Data
Systems' officers and directors, and persons who own more than 10% of a
registered class of Data Systems' equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish Data Systems with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms received by it
since January 1, 1999, or written representations from certain reporting persons
that no Forms 5 were required for those persons, Data Systems believes that its
officers, directors, and greater than 10% beneficial owners filed all reports
required under Section 16(a).
23
<PAGE> 40
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY
The following table sets forth the compensation paid by Data Systems to
the Chief Executive Officer and other executive officers who earned more than
$100,000 in salary and bonus during 1999 (collectively the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Annual Long Term
Principal Position Compensation Compensation Awards
Securities
Year Salary Bonus Underlying Options
<S> <C> <C> <C> <C>
Michael W. Grieves 1999 $160,000 - -
Chairman, President and 1998 $160,000 - -
Chief Executive Officer 1997 $160,000 30,000 8,000
Diane L. Grieves 1999 $120,000 34,017 -
Executive Vice President 1998 $120,000 30,000 -
And Secretary 1997 $120,000 15,375 7,500
Michael Jansen 1999 $92,000 16,000 -
Chief Financial Officer 1998 $15,000 - 10,000
1997 $- - -
Garret L. Denniston 1999 $150,000 80,000 -
Vice-President - Sales 1998 $150,000 60,000 -
1997 $ 50,000 - -
</TABLE>
Employment Agreements. As of May 12, 1998 Data Systems entered into an
Employment Agreement with Diane L. Grieves, as of November 2, 1998 Data Systems
entered into an Employment Agreement with Michael Jansen and as of December 20,
1999 Data Systems entered into an Employment Agreement with Garrett Denniston.
Ms. Grieves' agreement has a term ending May 11, 2003, or, if earlier on the
executive's 62nd birthday, unless the agreement is terminated earlier in
accordance with its terms. Mr. Jansen's and Mr. Denniston's agreements, each
has a term ending November 1, 2003, or, if earlier, on the executives's 62nd
birthday, unless the agreement is terminated earlier in accordance with its
terms. Each of the Agreements provides that the executive will receive an annual
base salary and incentive compensation as determined by the Data Systems Board
or the Chief Executive Officer. Each of Ms. Grieves, Mr. Jansen and Mr.
Denniston has agreed not to compete with Data Systems during the period of his
employment and for up to one year following the termination of his employment.
Upon termination of his employment without cause or in the event of certain
unilateral changes in his employment resulting in termination by the executive,
each of Ms. Grieves, Mr. Jansen and Mr. Denniston is entitled to continue to
receive benefits for up to six months and severance payments equal to six
month's salary plus his pro rata share of any earned annual incentive
compensation. If a change in control occurs prior to such termination, the
incentive compensation payable under each agreement will be the entire annual
award.
24
<PAGE> 41
OPTION HOLDINGS
The following table provides information with respect to the value of
realized from the exercise of stock options during the last fiscal year and the
value of unexercised options held as of the end of 1999 by the Named Officers.
Aggregated Option/SAR Exercises In
Last Fiscal Year and Fiscal Year-End option/SAR Values
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT FISCAL
FISCAL YEAR END YEAR END ($)(a)
SHARES
ACQUIRED ON VALUE EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE UNEXERCISABLE
--------------- ------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Grieves - - 18,000 - -
Diane L. Grieves - - 26,251 3,794 -
Michael Jansen - - - 10,000 -
Garrett L. Denniston 1,000 13,625 51,000 - -
</TABLE>
(a) Value was determined by multiplying the number of shares subject to the
option by the difference between the last sale price of the Common
Stock reported for December 31, 1999 on the Over-the-Counter Bulletin
Board and the option exercise price.
DIRECTOR COMPENSATION
Customarily, Data Systems has paid non-employee directors an annual
retainer of $1,000 and a fee of $500 for each Board or committee meeting
attended. On the date of each annual shareholders meeting, each non-employee
director elected or reelected as such will also receive an option under the 1994
Stock Option Plan to purchase 1,000 shares of Common Stock, exercisable
beginning one year after the grant date, at an exercise price equal to the fair
market value on the grant date. Data Systems also reimburses out-of-pocket
expenses related to non-employee directors in attendance at such meetings.
Data Systems did not hold an annual shareholder meeting in 1999. During
1999 Data Systems did not pay the Directors for their services. However, in
order to compensate the Board for their services to Data Systems, it was
resolved that the Board members would receive shares of Data Systems' stock in
lieu of cash. The compensation is $2,000 per month in value of common stock
beginning with the fourth quarter of Quarter 1999.
In 1999, Data Systems granted options pursuant to the 1994 Stock Option
Plan for 50,000 shares to a former Director of Data Systems excercisable at a
price of $.66 per share when the fair market value at the date of the grant was
$1.03. See "Note K to Notes to Consolidated Financial Statements." Fifty percent
of such options vest on the second anniversary date of the grant, and the twenty
five percent vest each of the next two years.
25
<PAGE> 42
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 8, 2000, certain information
with respect to the beneficial ownership of Common Stock by each Director of
Data Systems, each of the Named Officers, all current directors and current
executive officers as a group and all other persons known by Data Systems to
beneficially own more than 5% of the outstanding shares of Common Stock. Unless
otherwise noted below, each person has sole voting and investment power over the
shares beneficially owned
<TABLE>
<CAPTION>
Number of Percent of
Name Shares (a) Class (b)
---- ---------- ----------
<S> <C> <C>
Michael W. Grieves (c) 711,306 12.6%
Walter J. Aspatore 9,306 0.1%
Diane L. Grieves 26,251 0.5%
Garret L. Denniston 51,000 0.9%
John O. Lychos 8,306 0.1%
Greg Cocke (c) (d) 361,250 6.5%
Michael Jansen - -
All executive officers and
Directors as a group (6 persons) (c) 1,167,419 20.6%
</TABLE>
(a) The column sets forth shares of common stock which are deemed to be
"beneficially owned" by the persons named in the table. This column
includes the following number of option shares of common stock that may be
acquired upon the exercise of stock options that are presently exercisable
or become exercisable within 60 days: Mr. Grieves 18,000; Mr. Aspatore
1,000; Ms. Grieves 26,251; Mr. Denniston 51,000; Mr. Lychos none; Mr.
Cocke none; Mr. Jansen none.
(b) For purposes of calculating the percentage of Common Stock beneficially
owned, the shares issuable to such person under stock options or warrants
exercisable within 60 days are considered outstanding and are added to the
shares of common stock actually outstanding.
(c) In connection with the proposed TekInsight merger, Mr. Grieves and Mr.
Cocke entered into a Voting Agreement, dated as of February 18, 2000 with
TekInsight, TekInsight's wholly-owned subsidiary Astratek, Inc. and Data
Systems pursuant to which Mr. Grieves and Mr. Cocke each granted
irrevocable proxies in favor of TekInsight, and each of Damon Testaverde
and Brian D. Bookmeier, directors of TekInsight (collectively, the
"Proxyholders"). The irrevocable proxies, dated February 18, 2000, grant
each of the Proxyholders the right to vote the shares of Common Stock held
by Mr. Grieves and Mr. Cocke at any meeting of Data Systems' stockholders
called for purposes of adopting and approving the proposed TekInsight
Merger. The Voting Agreement will terminate upon the earliest to occur of
the conclusion of the meeting held to vote on the TekInsight Merger or the
termination of the Agreement and Plan of Merger, dated as of February 18,
2000, among TekInsight, Astratek, and Data Systems. The address for each of
the Proxyholders is 5 Hanover Square, 24th Floor, New York, New York 10004.
(d) Mr. Cocke is a former Vice-President of Data Systems. His address is 25498
Arcadia Dr., Novi, Michigan 48374.
26
<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a portion of the consideration for certain 13% subordinated
promissory notes of Data Systems acquired by Mr. Grieves, Data Systems'
Chairman, President and Chief Executive Officer, pursuant to the Company's Plan
of Reorganization in 1992, a $200,000 promissory note was issued (the "Grieves
Note"). The Grieves Note was renegotiated effective January 1, 2000. Under the
renegotiated Grieves Note, payments will be made at the end of each fiscal
quarter with all outstanding principal and accrued interest paid by December 31,
2000. The renegotiated Grieves Note bears interest on the unpaid principal at an
annual rate of 9.5%.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) The financial statements required by Item 8 of
this report are listed and included in Item 8 of this
report.
(2) The following financial statement schedule of the
Company is submitted herewith.
Schedule II Valuation and Qualifying Accounts
(3) A list of the exhibits required to be filed as part of
this Form 10-K is included under the heading "Exhibit Index" in this Form 10-K
and incorporated herein by reference. Included in such list as Item 10.3 (1994
Stock Option Plan) and Items 10.21 and 10.22 ("Employment Agreement between Data
Systems and Michael Jansen dated November 2, 1998 and Employment Agreement
between Data Systems and Garrett Denniston dated December 20, 1999,
respectively) are Data Systems' management contracts and compensatory plans and
arrangements which are required to be filed as exhibits to this Form 10-K.
(b) Reports on Form 8-K.
The following filings occurred in the fourth quarter of 1999:
Date Information Reported
---- --------------------
October 1, 1999 Items 5 and 7
No financial statements were filed with this Report on Form 8-K.
27
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Michael W. Grieves
Chairman, President and Chief
Executive Officer
Dated - March , 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following person on behalf of the
Registrant an in the capcities indicated as of March , 2000.
By:/s/ Michael W. Grieves
Michael W. Grieves
Chairman of the Board, Director, President and Chief
Executive Officer (Principle Executive Officer)
By:/s/ Michael Jansen
Michael Jansen
Vice President, Treasurer and Chief Financial Officer
(Principle Financial Officer and Principle Accounting Officer)
By:/s/ Walter J. Aspatore
Walter J. Aspatore
Director
By:/s/ John O. Lychos Jr.
John O. Lychos
Director
28
<PAGE> 45
SCHEDULE II
DATA SYSTEMS NETWORK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Schedule II
Data Systems Network Corporation
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
beginning of costs and other Balance at end
period expenses accounts Deduction of period
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Description
Year ended December 31, 1999
Allowance for doubtful receivables $ 561,600 $ (135,074) $ (44,198) $ (92,328) $ 290,000
Valuation Allowance for deferred tax asset $ 4,077,000 $ 508,000 $ 4,585,000
Year ended December 31, 1998
Allowance for doubtful receivables $ 800,000 $ 204,981 $ - $(443,381) $ 561,600
Valuation Allowance for deferred tax asset $ 3,797,000 $ 280,000 $ - $ - $ 4,077,000
Year ended December 31, 1997
Allowance for doubtful receivables $ 67,609 $1,227,223 $ - $(494,832) $ 800,000
Valuation Allowance for deferred tax asset $ - $1,594,000 $ - $ - $ 1,594,000
</TABLE>
29
<PAGE> 46
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
2.1 Agreement and Plan of Merger, dated January 31, 1999, by and among Data
Systems and Alydaar Software Inc. Schedules to the Agreement, listed on
pp 4-5 of the Table of Contents of the Agreement, were not filed, but
will be provided to the Commission supplementally upon request. (7)
2.2 Confidential Termination and Release, effective as of September 15, 1999
by and between Information Architects Corporation, a/k/a Alydaar
Software Corporation, Alydaar Acquisition Corporation, Data Systems
Network Corporation and certain Data Systems directors and officers. (8)
2.3 Agreement Plan of Merger, dated February 18, 2000, among TekInsight.Com,
Inc., Astratek, Inc. and Data Systems Network Corporation, including
Form of DSNC Voting Agreement and Irrevocable Proxy as Exhibit A
thereto. Schedules to the Agreement, listed on page iv, were not filed,
but will be provided to the commission supplementally upon request.(9)
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws, as amended (1)
4.5 Form of Warrant issued to former unsecured creditors pursuant to Third
Amended Plan of Reorganization (5)
10.3(a) Form of non-qualified stock option agreement under 1994 Stock Option
Plan. (2)
10.3(c) 1994 Stock Option Plan, as amended and restated April 1997. (4)
10.3(d) Form of non-qualified stock option agreement under 1994 Stock Option
Plan (April 1997 version). (4)
10.8 Subordinated Promissory Notes issued to Michael Grieves and Richard
Burkhart, dated May 22, 1992. (1)
10.9 Promissory Note, dated January 1, 2000, from Michael Grieves. *
10.14 Shareholder Agreement, dated February 22, 1996, among Data Systems and
Unified Network Services.(3)
10.15 Stock Purchase Agreement, dated February 22, 1996, among Data Systems
and Unified Network Services.(3)
10.20 Loan and Security Agreement by and between Data Systems and Foothill
Capital Corporation dated as of September 30, 1998. (6)
10.21 Employment Agreement between Data Systems and Michael Jansen dated
November 2, 1998. *
10.22 Employment Agreement between Data Systems and Garrett Denniston dated
December 20, 1999. *
10.23 Employment Agreement between Data Systems and Diane L. Grieves dated
May 12, 1998. *
27 Financial Data Schedule *
* Filed herewith.
(1) Incorporated by reference from Data Systems' Registration Statement on Form
S-1, No. 33-81350, as amended.
(2) Incorporated by reference from Data Systems' Annual Report on Form 10-K for
the year ended December 31. 1995.
30
<PAGE> 47
(3) Incorporated by reference from Data Systems' Quarterly Report on Form l0-Q
for the period ended March 31, 1996.
(4) Incorporated by reference from Data Systems' Quarterly Report on Form l0-Q
for the period ended June 30, 1997.
(5) Incorporated by reference from Data Systems' Annual Report on Form 10-K for
the year ended December 31, 1997.
(6) Incorporated by reference from Data Systems' Quarterly Report on Form l0-Q
for the period ended September 30, 1998.
(7) Incorporated by reference from Data Systems' Current Report on Form 8-K
filed March 18, 1999.
(8) Incorporated by reference from Data Systems' Current Report on Form 8-K
filed October 1, 1999.
(9) Incorporated by reference from Data Systems' Current Report on Form 8-K
filed March 1, 2000.
31
<PAGE> 1
EXHIBIT 10.9
PROMISSORY NOTE
$200,000 JANUARY 1, 2000
In consideration, the undersigned, Data Systems Network Corporation (hereinafter
referred to as the "Maker") promises to pay Michael Grieves (hereinafter
referred to as the "Payee") at Farmington Hills, Michigan, or at such other
place as the holder hereof may designate, the sum of Two hundred Thousand
Dollars ($200,000). The principal and interest will be paid in full on or before
December 31, 2000. Interest will accrue on the unpaid principal portion at an
annual rate of 9.5%. The note will be paid in four (4) equal installments of
$50,000 plus the appropriate interest. Installment payments will be made March
31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000. See attached
for payment schedule.
This note replaces the Subordinated Notes dated May 22, 1992 that originated
from the Reorganization. The remaining balance on those notes is $200,000. This
note shall be governed by and construed in accordance with the laws of the State
of Michigan.
DATA SYSTEMS NETWORK CORPORATION
By: _______________________
Michael Jansen
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.21
DATA SYSTEMS NETWORK CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement') dated as of this 2nd day of
November, 1998, between Data Systems Network Corp., a Michigan corporation
(hereinafter referred to as the "Company"), and Michael Jansen (hereinafter
referred to as the "Executive"):
WITNESSETH:
WHEREAS, the Executive is serving as Vice President and Corporate
Controller of the Company; and
WHEREAS, the Executive has extensive experience with respect to the
management and operations of the Company which it considers extremely valuable
to the continued prosperity of the Company; and
WHEREAS, the Company wishes to ensure that it will continue to have the
Executive available to perform for the Company, duties as Vice President and
Corporate Controller; and
WHEREAS, the Company and the Executive desire to set forth in this
Agreement the terms, conditions and obligations of the parties with respect to
such employment and this Agreement is intended by the parties to supersede all
previous agreements and understandings, whether written or oral, concerning such
employment.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
1. EMPLOYMENT. The Company (or "Employer") shall continue to employ the
Executive upon the terms and conditions hereinafter set forth. The Executive
shall perform such duties and responsibilities for the Employer, which are
commensurate with his position as may be assigned him by the Company's President
and/or the Vice President and CFO. The Executive shall report to the Vice
President - Finance and CFO of the Company. Incident to the performance of such
duties, the Employer shall provide the Executive with office space, facilities
and secretarial assistance commensurate with that currently being provided to
the Executive.
2. TERM. Subject only to the provisions hereof set forth in Section 7,
the term of this Agreement (herein the "Term") shall be for a period beginning
on the date hereof and ending on November 1, 2003 or, if earlier, on the
Executive's 62nd birthday on which birthday this Agreement shall terminate
unless earlier terminated in accordance with the terms hereof,
3. COMPENSATION. During the Term, the Executive's salary shall be
payable at intervals not less often than semi-monthly. The Executive's salary
shall be established by either the Executive Committee of the Company, or in the
event the Executive is among the Company officers whose compensation is subject
to review by the Compensation and Stock Option Committee of the Board of
Directors of the Company, by such Committee (the
<PAGE> 2
applicable committee being referred to herein as the "Committee") and all
adjustments thereto, and all aspects of the Executive's incentive or
performance compensation shall be established by the Committee in its sole
discretion. In the event there is no Committee in existence at any time,
the term Committee shall be deemed to mean the Chief Executive Officer of
the Company. During the Term, the Executive shall also receive such
benefits and perquisites (the "Benefits") which are made available to
similarly positioned executives of the Employer including, without
limitation, incentive compensation, loans, awards, insurance, stock
options, stock purchase plans, benefits from qualified plans or
non-qualified plans or other benefit plans now or hereafter existing which
are adopted by the Employer for the benefit of its employees generally, and
for the benefit of the Employer's officers, all such Benefits to be
provided in such amounts, as may be determined from time to time by the
Committee in its sole discretion.
4. EXTENT OF SERVICE. During the Term, the Executive shall devote his
full time, attention, and energy to the business of the Employer and the
Executive shall not be engaged in any other business activity pursued for
gain, profit, or other pecuniary advantage which activity in any way
interferes with the Executive's duties and responsibilities provided for
herein.
5. NON-COMPETITION AND NON-SOLICLTATION. The Executive agrees that:
(a) During the Term and for a period of one year thereafter
or during any Severance Period, if longer (the "Restricted Period'), the
Executive agrees that he will not (without the written consent of the Chairman
of the Board) engage directly or indirectly in any business within the United
States (financially as an investor or lender or as an employee, director,
officer, partner, independent contractor, consultant or owner or in any other
capacity calling for the rendition of personal services or acts of management,
operation or control) which is directly competitive with the business, at any
time during the Restricted Period, conducted by the Company or any Affiliates
as defined below. Notwithstanding the foregoing, the Executive shall be
entitled to own securities of any corporation conducting a business
competitive with the business of the Company or any of its subsidiaries or
Affiliates so long as the securities of such corporation are listed on a
national securities exchange and the securities owned directly or indirectly
by the Executive do not represent more than two percent (2%) of any class of
the outstanding securities of such company.
(b) During the Restricted Period, in addition to the obligations
pursuant to Subsection 5(a), the Executive agrees that neither he
nor any business in which he engages directly or indirectly will (i) directly
or indirectly induce any customers of the Company or of corporations or
businesses which directly or indirectly control or are controlled by or under
common control with the Company ("Affiliates") to patronize any business
similar to that of the Company, (ii) canvass, solicit or accept any similar
business from any customer of the Company or any Affiliates, (iii) directly or
indirectly request or advise any customer of the Company or Affiliates to
withdraw, curtail or cancel such customer's business with the Company or
Affiliates, (iv) directly or indirectly disclose to any other person, firm or
corporation the names or addresses of any of the customers of the Company or
Affiliates, or
<PAGE> 3
(v) compete with the Company or Affiliates in acquiring or merging with any
other business or acquiring the assets of such other business.
(c) During the Restricted Period, in addition to the
obligations pursuant to Subsections 5(a) and 5(b), the Executive agrees that
neither he nor any business in which he engages directly or indirectly will, (i)
hire or attempt to hire any employee of the Company or its Affiliates nor, (ii)
directly or indirectly encourage any employee of the Company or its Affiliates
to terminate employment with the Company or its Affiliates. Notwithstanding the
foregoing, it shall not be deemed a violation of this subsection if a business,
which employs the Executive, hires or attempts to hire an employee of the
Company or its Affiliates and the Executive has no knowledge of, control over or
involvement with such solicitation.
(d) In the event that any of the provisions of this Section 5
should ever be deemed to exceed the time, geographic or occupational limitations
permitted by applicable laws, then such provisions shall be and are hereby
reformed to the maximum time, geographic or occupational limitations permitted
by law.
6. CONFIDENTIAL INFORMATION. The Executive acknowledges that in
his employment he is or will be making use of, acquiring or adding to the
Company's confidential information which includes, but is not limited to,
memoranda and other materials or records of a proprietary nature and records and
policy matters relating to finance, personnel, management and operations.
Therefore, in order to protect the Company's confidential information and to
protect other employees who depend on the Company for regular employment, the
Executive agrees that he will not in any way utilize any of said confidential
information except in connection with his employment by the Employer, and except
in connection with the business of the Company he will not copy, reproduce or
take with him the original or any copies of said confidential information and
will not disclose any of said confidential information to anyone.
7. TERMINATION.
(a) Death or Disability. If the Executive should become
physically or mentally disabled and unable to perform his duties hereunder for a
continuous period in excess of ninety (90) days (in the reasonable opinion of
the Committee), or if the Executive should die while an employee of the
Employer, this Agreement and the Executive's employment with the Employer shall
immediately terminate.
(b) Termination by the Employer for Cause. The following
events shall create in the Company a right to terminate the Executive's
employment under this Agreement prior to the expiration of the Term: (i) the
commission of fraud, embezzlement or theft by the Executive in connection with
the Executive's duties; (ii) the intentional wrongful damage to property of the
Company, and/or Affiliates by the Executive; (iii) the intentional wrongful
disclosure by the Executive of any secret process or confidential information of
the Company, and/or Affiliates; or (iv) the violation of the Executive's
non-disclosure, non-solicitation and non-competition covenants set forth in
Sections 5 and 6. In the event of such a Termination for cause pursuant to this
Subsection, all of the obligations of the Company under this Agreement shall
immediately terminate.
<PAGE> 4
(c) Other Termination by Employer. In the event the Company
shall elect to terminate the Executive's employment for any reason other than
those specified in Subsection 7(a) or 7(b), it shall provide written notice of
such termination to the Executive. In the event that there occurs without the
written consent of the Executive:
(i) a change in the Executive's title, a change in the
Executive's duties or responsibilities, a change in
the Executive's reporting relationships, or a change
in control of the Company (as defined below), any of
which results in or reflects a diminution of the
scope or importance of the Executive's position,
duties and responsibilities;
(ii) a reduction in the Executive's then current annual
base salary (other than as part of reductions in
annual base salary affecting the Employer's officers
generally);
(iii) a reduction in the level of benefits available or
awarded under employee and officer benefit plans and
programs, including, but not limited to annual and
long-term incentive and stock-based plans and
programs (other than as part of reductions in such
benefit plans or programs affecting the Employer's
officers generally); or
(iv) a relocation of Executive's primary employment
location to a location which is more than 50 miles
from his current location,
then, the Executive may deliver written notice of termination to the Company
within three months of such event (which shall be effective even if such three
months expire after the end of the Term). In either case and subject to the
execution and delivery by the Executive to the Company of the release described
in Section 9 hereof, the Company shall provide Executive with severance
compensation and benefits as follows:
(u) the Executive shall receive an amount equal to six month's
current base salary, payable at intervals not less frequently
than monthly over a period of months equal to the number of
months of severance pay (not less than six) provided for by
this subsection, (such period herein after referred to as the
"Severance Period");
(v) the Executive shall receive, with respect to any participation
rights in the Company's annual bonus or long-term incentive
plans, an award under any such plan, payable upon notice of
termination or, of exercise of any condition herein, an amount
equal to the pro-rated share earned during the months of
employment calculated by dividing the total annual award by
twelve (12) multiplied by the number of full and partial
months employed, less any amounts already paid for and during
the current year to date. In the event that termination occurs
after there has been a change in control, as defined by a
change in the Chief Executive Officer, a change in two-thirds
or more of the Company's Board of
<PAGE> 5
Directors, or, a change of more than thirty percent (30%) of
the total shares outstanding, an amount equal to the annual
award as if all pre-requisite conditions have been met, and as
if the total annual award were earned in full with out any
deductions for any amounts previously paid, shall be paid to
the Executive;
(w) with respect to the Executive's stock options, the Company
will recommend to the Compensation and Stock Option Committee
of the Board of Directors of the Company that the
exercisability of the Executive's outstanding stock options be
accelerated, such options shall remain exercisable during the
Severance Period (unless they shall expire earlier by their
terms) and such options shall otherwise be treated in
accordance with the terms of their respective grants;
(x) the Executive's medical, dental and/or other Benefits shall be
continued on the same basis as offered to active salaried
employees for the Severance Period or until such earlier time
as the Executive becomes employed and eligible for such
benefits under a plan of the new employer; and continuation
coverage under COBRA shall commence at the end of the
Severance Period;
(y) all other Benefits shall be paid or continued only to the
extent the terms thereof provide for payment or continuation
following the termination of employment.
The foregoing shall be in lieu of all salary, bonuses or incentive or
performance based compensation for the remainder of the Term. If Executive
should die during the Severance Period, any remaining severance payments
described in (u) and (v) above, shall be made to Executive's surviving spouse
or, if none, to his estate.
(d) Voluntary Termination. If during the Term the Executive
should voluntarily terminate his employment with the Employer for any reason,
including retirement, other than as described in Subsection 7(c) hereof, the
obligations of the Employer and the Company under this Agreement shall terminate
forthwith, other than obligations to (i) pay the Executive's base salary to the
date of termination, (ii) pay all incentive compensation earned by the Executive
for performance periods which are completed prior to the date of termination, at
such times and on the same basis amounts as such incentive compensation becomes
payable to other executives of the Employer and (iii) pay or make available to
the Executive all Benefits which by their terms or under applicable law survive
the voluntary termination of the Executive's employment; and the Executive shall
remain bound by his non-disclosure, non-solicitation and non-competition
covenants set forth in Sections 5 and 6 hereof. The exercisability of the
Executive's outstanding stock options shall be treated in accordance with the
terms of their respective grants or awards, except that in the case of
retirement on or after age 62, the Company will recommend to the Compensation
and Stock Option Committee of the Board of Directors of the Company that the
exercisability of Executive's outstanding stock options be accelerated.
9. GENERAL RELEASE AND COOPERATION AGREEMENT. Notwithstanding
anything in Subsection 7(c) to the contrary and in consideration therefor,
<PAGE> 6
severance benefits thereunder shall only become payable by the Company if the
Executive executes and delivers to the Company a General Release and Cooperation
Agreement on or after the date of written notice of termination of the
Executive's employment and in substantially the form attached as Exhibit A
hereto.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
deposited in the U.S. mail in a registered, postage prepaid envelope addressed:
If to the Executive, at his address set forth below, and if to the Company, c/o
Chairman of the Board, Data Systems Network Corporation, 34705 West Twelve Mile
Road, Suite 300, Farmington Hills, Michigan, 48333.
11. ASSIGNMENT. The Executive may not assign his obligations hereunder.
The rights of the Executive and the rights and obligations of the Company
hereunder shall inure to the benefit of and shall be binding upon their
respective heirs, personal representatives, successors and assigns.
12. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the laws of the
State of Michigan.
(b) Failure to insist upon strict compliance with any provisions hereof
shall not be deemed a waiver of such provisions or any other provision
hereof.
(c) This Agreement may not be modified except by an agreement in writing
executed by the parties hereto.
(d) The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision.
(e) This Agreement shall supersede any and all prior employment agreements
or understandings, written or oral, with the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
DATA SYSTEMS NETWORK
CORPORATION
------------------------
Michael W. Grieves,
Chairman, President and CEO
------------------------
Michael Jansen
36 Wellesley
Pleasant Ridge, Michigan 48069
<PAGE> 1
EXHIBIT 10.22
DATA SYSTEMS NETWORK CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement') dated as of this 20th day
of December, 1999, between Data Systems Network Corp., a Michigan corporation
(hereinafter referred to as the "Company"), and Garrett Denniston (hereinafter
referred to as the "Executive"):
WITNESSETH:
WHEREAS, the Executive is serving as Vice President of Sales of the
Company; and
WHEREAS, the Executive has extensive experience with respect to the
management and operations of the Company which it considers extremely valuable
to the continued prosperity of the Company; and
WHEREAS, the Company wishes to ensure that it will continue to have the
Executive available to perform for the Company, duties as Vice President of
Sales; and
WHEREAS, the Company and the Executive desire to set forth in this
Agreement the terms, conditions and obligations of the parties with respect to
such employment and this Agreement is intended by the parties to supersede all
previous agreements and understandings, whether written or oral, concerning such
employment.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
1. EMPLOYMENT. The Company (or "Employer") shall continue to employ the
Executive upon the terms and conditions hereinafter set forth. The Executive
shall perform such duties and responsibilities for the Employer, which are
commensurate with his position as may be assigned him by the Company's President
and CEO. The Executive shall report to the President and CEO of the Company.
Incident to the performance of such duties, the Employer shall provide the
Executive with office space, facilities and secretarial assistance commensurate
with that currently being provided to the Executive.
2. TERM. Subject only to the provisions hereof set forth in Section 7,
the term of this Agreement (herein the "Term") shall be for a period beginning
on the date hereof and ending on December 20, 2003 or, if earlier, on the
Executive's 62nd birthday on which birthday this Agreement shall terminate
unless earlier terminated in accordance with the terms hereof,
3. COMPENSATION. During the Term, the Executive's salary shall be
payable at intervals not less often than semi-monthly. The Executive's salary
shall be established by either the Executive Committee of the Company, or in the
event the Executive is among the
<PAGE> 2
Company officers whose compensation is subject to review by the Compensation
and Stock Option Committee of the Board of Directors of the Company, by such
Committee (the applicable committee being referred to herein as the
"Committee") and all adjustments thereto, and all aspects of the Executive's
incentive or performance compensation shall be established by the Committee in
its sole discretion. In the event there is no Committee in existence at any
time, the term Committee shall be deemed to mean the Chief Executive Officer
of the Company. During the Term, the Executive shall also receive such
benefits and perquisites (the "Benefits") which are made available to
similarly positioned executives of the Employer including, without limitation,
incentive compensation, loans, awards, insurance, stock options, stock
purchase plans, benefits from qualified plans or non-qualified plans or other
benefit plans now or hereafter existing which are adopted by the Employer for
the benefit of its employees generally, and for the benefit of the Employer's
officers, all such Benefits to be provided in such amounts, as may be
determined from time to time by the Committee in its sole discretion.
4. EXTENT OF SERVICE. During the Term, the Executive shall devote his
full time, attention, and energy to the business of the Employer and the
Executive shall not be engaged in any other business activity pursued for
gain, profit, or other pecuniary advantage which activity in any way
interferes with the Executive's duties and responsibilities provided for
herein.
5. NON-COMPETITION AND NON-SOLICLTATION. The Executive agrees that:
(a) During the Term and for a period of one year thereafter
or during any Severance Period, if longer (the "Restricted Period'), the
Executive agrees that he will not (without the written consent of the Chairman
of the Board) engage directly or indirectly in any business within the United
States (financially as an investor or lender or as an employee, director,
officer, partner, independent contractor, consultant or owner or in any other
capacity calling for the rendition of personal services or acts of management,
operation or control) which is directly competitive with the business, at any
time during the Restricted Period, conducted by the Company or any Affiliates
as defined below. Notwithstanding the foregoing, the Executive shall be
entitled to own securities of any corporation conducting a business
competitive with the business of the Company or any of its subsidiaries or
Affiliates so long as the securities of such corporation are listed on a
national securities exchange and the securities owned directly or indirectly
by the Executive do not represent more than two percent (2%) of any class of
the outstanding securities of such company.
(b) During the Restricted Period, in addition to the
obligations pursuant to Subsection 5(a), the Executive agrees that neither he
nor any business in which he engages directly or indirectly will (i) directly
or indirectly induce any customers of the Company or of corporations or
businesses which directly or indirectly control or are controlled by or under
common control with the Company ("Affiliates") to patronize any business
similar to that of the Company, (ii) canvass, solicit or accept any similar
business from any customer of the Company or any Affiliates, (iii) directly or
indirectly request or advise any customer of the Company or Affiliates to
withdraw, curtail or cancel such customer's business with the
<PAGE> 3
Company or Affiliates, (iv) directly or indirectly disclose
to any other person, firm or corporation the names or addresses of any of the
customers of the Company or Affiliates, or (v) compete with the Company or
Affiliates in acquiring or merging with any other business or acquiring the
assets of such other business.
(c) During the Restricted Period, in addition to the
obligations pursuant to Subsections 5(a) and 5(b), the Executive agrees that
neither he nor any business in which he engages directly or indirectly will, (i)
hire or attempt to hire any employee of the Company or its Affiliates nor, (ii)
directly or indirectly encourage any employee of the Company or its Affiliates
to terminate employment with the Company or its Affiliates. Notwithstanding the
foregoing, it shall not be deemed a violation of this subsection if a business,
which employs the Executive, hires or attempts to hire an employee of the
Company or its Affiliates and the Executive has no knowledge of, control over or
involvement with such solicitation.
(d) In the event that any of the provisions of this Section 5
should ever be deemed to exceed the time, geographic or occupational limitations
permitted by applicable laws, then such provisions shall be and are hereby
reformed to the maximum time, geographic or occupational limitations permitted
by law.
6. CONFIDENTIAL INFORMATION. The Executive acknowledges that in
his employment he is or will be making use of, acquiring or adding to the
Company's confidential information which includes, but is not limited to,
memoranda and other materials or records of a proprietary nature and records and
policy matters relating to finance, personnel, management and operations.
Therefore, in order to protect the Company's confidential information and to
protect other employees who depend on the Company for regular employment, the
Executive agrees that he will not in any way utilize any of said confidential
information except in connection with his employment by the Employer, and except
in connection with the business of the Company he will not copy, reproduce or
take with him the original or any copies of said confidential information and
will not disclose any of said confidential information to anyone.
7. TERMINATION.
(a) Death or Disability. If the Executive should become
physically or mentally disabled and unable to perform his duties hereunder for a
continuous period in excess of ninety (90) days (in the reasonable opinion of
the Committee), or if the Executive should die while an employee of the
Employer, this Agreement and the Executive's employment with the Employer shall
immediately terminate.
(b) Termination by the Employer for Cause. The following
events shall create in the Company a right to terminate the Executive's
employment under this Agreement prior to the expiration of the Term: (i) the
commission of fraud, embezzlement or theft by the Executive in connection with
the Executive's duties; (ii) the intentional wrongful damage to property of the
Company, and/or Affiliates by the Executive; (iii) the intentional wrongful
disclosure by the Executive of any secret process or confidential information of
the Company, and/or Affiliates; or (iv) the violation of the Executive's
non-disclosure, non-solicitation and non-competition covenants set forth in
Sections 5 and 6. In the event of such a Termination for
<PAGE> 4
cause pursuant to this Subsection, all of the obligations of the Company under
this Agreement shall immediately terminate.
(c) Other Termination by Employer. In the event the Company
shall elect to terminate the Executive's employment for any reason other than
those specified in Subsection 7(a) or 7(b), it shall provide written notice of
such termination to the Executive. In the event that there occurs without the
written consent of the Executive:
(i) a change in the Executive's title, a change in the
Executive's duties or responsibilities, a change in
the Executive's reporting relationships, or a change
in control of the Company (as defined below), any of
which results in or reflects a diminution of the
scope or importance of the Executive's position,
duties and responsibilities;
(ii) a reduction in the Executive's then current annual
base salary (other than as part of reductions in
annual base salary affecting the Employer's officers
generally);
(iii) a reduction in the level of benefits available or
awarded under employee and officer benefit plans and
programs, including, but not limited to annual and
long-term incentive and stock-based plans and
programs (other than as part of reductions in such
benefit plans or programs affecting the Employer's
officers generally); or
(iv) a relocation of Executive's primary employment
location to a location which is more than 50 miles
from his current location,
then, the Executive may deliver written notice of termination to the Company
within three months of such event (which shall be effective even if such three
months expire after the end of the Term). In either case and subject to the
execution and delivery by the Executive to the Company of the release described
in Section 9 hereof, the Company shall provide Executive with severance
compensation and benefits as follows:
(u) the Executive shall receive an amount equal to six month's
current base salary, payable at intervals not less frequently
than monthly over a period of months equal to the number of
months of severance pay (not less than six) provided for by
this subsection, (such period herein after referred to as the
"Severance Period");
(v) the Executive shall receive, with respect to any participation
rights in the Company's annual bonus or long-term incentive
plans, an award under any such plan, payable upon notice of
termination or, of exercise of any condition herein, an amount
equal to the pro-rated share earned during the months of
employment calculated by dividing the total annual award by
twelve (12) multiplied by the number of full and partial
months employed, less any amounts already paid for and during
the current year to date. In the event that termination occurs
after
<PAGE> 5
there has been a change in control, as defined by a change in
the Chief Executive Officer, a change in two-thirds or more of
the Company's Board of Directors, or, a change of more than
thirty percent (30%) of the total shares outstanding, an
amount equal to the annual award as if all pre-requisite
conditions have been met, and as if the total annual award
were earned in full with out any deductions for any amounts
previously paid, shall be paid to the Executive;
(w) with respect to the Executive's stock options, the Company
will recommend to the Compensation and Stock Option Committee
of the Board of Directors of the Company that the
exercisability of the Executive's outstanding stock options be
accelerated, such options shall remain exercisable during the
Severance Period (unless they shall expire earlier by their
terms) and such options shall otherwise be treated in
accordance with the terms of their respective grants;
(x) the Executive's medical, dental and/or other Benefits shall be
continued on the same basis as offered to active salaried
employees for the Severance Period or until such earlier time
as the Executive becomes employed and eligible for such
benefits under a plan of the new employer; and continuation
coverage under COBRA shall commence at the end of the
Severance Period;
(y) all other Benefits shall be paid or continued only to the
extent the terms thereof provide for payment or continuation
following the termination of employment.
The foregoing shall be in lieu of all salary, bonuses or incentive or
performance based compensation for the remainder of the Term. If Executive
should die during the Severance Period, any remaining severance payments
described in (u) and (v) above, shall be made to Executive's surviving spouse
or, if none, to his estate.
(d) Voluntary Termination. If during the Term the Executive
should voluntarily terminate his employment with the Employer for any reason,
including retirement, other than as described in Subsection 7(c) hereof, the
obligations of the Employer and the Company under this Agreement shall terminate
forthwith, other than obligations to (i) pay the Executive's base salary to the
date of termination, (ii) pay all incentive compensation earned by the Executive
for performance periods which are completed prior to the date of termination, at
such times and on the same basis amounts as such incentive compensation becomes
payable to other executives of the Employer and (iii) pay or make available to
the Executive all Benefits which by their terms or under applicable law survive
the voluntary termination of the Executive's employment; and the Executive shall
remain bound by his non-disclosure, non-solicitation and non-competition
covenants set forth in Sections 5 and 6 hereof. The exercisability of the
Executive's outstanding stock options shall be treated in accordance with the
terms of their respective grants or awards, except that in the case of
retirement on or after age 62, the Company will recommend to the Compensation
and Stock Option Committee of the Board of Directors of the Company that the
exercisability of Executive's outstanding stock options be accelerated.
<PAGE> 6
9. GENERAL RELEASE AND COOPERATION AGREEMENT. Notwithstanding anything
in Subsection 7(c) to the contrary and in consideration therefor, severance
benefits thereunder shall only become payable by the Company if the Executive
executes and delivers to the Company a General Release and Cooperation Agreement
on or after the date of written notice of termination of the Executive's
employment and in substantially the form attached as Exhibit A hereto.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
deposited in the U.S. mail in a registered, postage prepaid envelope addressed:
If to the Executive, at his address set forth below, and if to the Company, c/o
Chairman of the Board, Data Systems Network Corporation, 34705 West Twelve Mile
Road, Suite 300, Farmington Hills, Michigan, 48333.
11. ASSIGNMENT. The Executive may not assign his obligations hereunder.
The rights of the Executive and the rights and obligations of the Company
hereunder shall inure to the benefit of and shall be binding upon their
respective heirs, personal representatives, successors and assigns.
12. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the laws of the
State of Michigan.
(b) Failure to insist upon strict compliance with any provisions hereof
shall not be deemed a waiver of such provisions or any other provision
hereof.
(c) This Agreement may not be modified except by an agreement in writing
executed by the parties hereto.
(d) The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision.
(e) This Agreement shall supersede any and all prior employment agreements
or understandings, written or oral, with the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
DATA SYSTEMS NETWORK
CORPORATION
------------------------
Michael W. Grieves,
Chairman, President and CEO
------------------------
Garrett Denniston
20 Russett Road
Sandy Hook, CT 06482
<PAGE> 1
EXHIBIT 10.23
DATA SYSTEMS NETWORK CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement') dated as of this 12th day
of May, 1998, between Data Systems Network Corp., a Michigan corporation
(hereinafter referred to as the "Company"), and Diane L. Grieves (hereinafter
referred to as the "Executive"):
WITNESSETH:
WHEREAS, the Executive is serving as Vice President of Specialty
Services and Secretary of the Company; and
WHEREAS, the Executive has extensive experience with respect to the
management and operations of the Company which it considers extremely valuable
to the continued prosperity of the Company; and
WHEREAS, the Company wishes to ensure that it will continue to have the
Executive available to perform for the Company, duties as Vice President of
Specialty Services and Secretary; and
WHEREAS, the Company and the Executive desire to set forth in this
Agreement the terms, conditions and obligations of the parties with respect to
such employment and this Agreement is intended by the parties to supersede all
previous agreements and understandings, whether written or oral, concerning such
employment.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
1. EMPLOYMENT. The Company (or "Employer") shall continue to employ the
Executive upon the terms and conditions hereinafter set forth. The Executive
shall perform such duties and responsibilities for the Employer, which are
commensurate with his position as may be assigned him by the Company's President
and CEO. The Executive shall report to the President and CEO of the Company.
Incident to the performance of such duties, the Employer shall provide the
Executive with office space, facilities and secretarial assistance commensurate
with that currently being provided to the Executive.
2. TERM. Subject only to the provisions hereof set forth in Section 7,
the term of this Agreement (herein the "Term") shall be for a period beginning
on the date hereof and ending on May 11, 2003 or, if earlier, on the Executive's
62nd birthday on which birthday this Agreement shall terminate unless earlier
terminated in accordance with the terms hereof,
3. COMPENSATION. During the Term, the Executive's salary shall be
payable at intervals not less often than semi-monthly. The Executive's salary
shall be established by either the Executive Committee of the Company, or in the
event the Executive is among the Company officers whose compensation is subject
to review by the Compensation and Stock Option Committee of the Board of
Directors of the Company, by such Committee (the
<PAGE> 2
applicable committee being referred to herein as the "Committee") and all
adjustments thereto, and all aspects of the Executive's incentive or performance
compensation shall be established by the Committee in its sole discretion. In
the event there is no Committee in existence at any time, the term Committee
shall be deemed to mean the Chief Executive Officer of the Company. During the
Term, the Executive shall also receive such benefits and perquisites (the
"Benefits") which are made available to similarly positioned executives of the
Employer including, without limitation, incentive compensation, loans, awards,
insurance, stock options, stock purchase plans, benefits from qualified plans or
non-qualified plans or other benefit plans now or hereafter existing which are
adopted by the Employer for the benefit of its employees generally, and for the
benefit of the Employer's officers, all such Benefits to be provided in such
amounts, as may be determined from time to time by the Committee in its sole
discretion.
4. EXTENT OF SERVICE. During the Term, the Executive shall devote his
full time, attention, and energy to the business of the Employer and the
Executive shall not be engaged in any other business activity pursued for gain,
profit, or other pecuniary advantage which activity in any way interferes with
the Executive's duties and responsibilities provided for herein.
5. NON-COMPETITION AND NON-SOLICLTATION. The Executive agrees that:
(a) During the Term and for a period of one year thereafter or
during any Severance Period, if longer (the "Restricted Period'), the
Executive agrees that he will not (without the written consent of the Chairman
of the Board) engage directly or indirectly in any business within the United
States (financially as an investor or lender or as an employee, director,
officer, partner, independent contractor, consultant or owner or in any other
capacity calling for the rendition of personal services or acts of management,
operation or control) which is directly competitive with the business, at any
time during the Restricted Period, conducted by the Company or any Affiliates as
defined below. Notwithstanding the foregoing, the Executive shall be entitled to
own securities of any corporation conducting a business competitive with the
business of the Company or any of its subsidiaries or Affiliates so long as the
securities of such corporation are listed on a national securities exchange and
the securities owned directly or indirectly by the Executive do not represent
more than two percent (2%) of any class of the outstanding securities of such
company.
(b) During the Restricted Period, in addition to the obligations
pursuant to Subsection 5(a), the Executive agrees that neither he nor any
business in which he engages directly or indirectly will (i) directly or
indirectly induce any customers of the Company or of corporations or businesses
which directly or indirectly control or are controlled by or under common
control with the Company ("Affiliates") to patronize any business similar to
that of the Company, (ii) canvass, solicit or accept any similar business from
any customer of the Company or any Affiliates, (iii) directly or indirectly
request or advise any customer of the Company or Affiliates to withdraw, curtail
or cancel such customer's business with the Company or Affiliates, (iv) directly
or indirectly disclose to any other person, firm or corporation the names or
addresses of any of the customers of the Company or Affiliates, or
<PAGE> 3
(v) compete with the Company or Affiliates in acquiring or merging with any
other business or acquiring the assets of such other business.
(c) During the Restricted Period, in addition to the
obligations pursuant to Subsections 5(a) and 5(b), the Executive agrees that
neither he nor any business in which he engages directly or indirectly will, (i)
hire or attempt to hire any employee of the Company or its Affiliates nor, (ii)
directly or indirectly encourage any employee of the Company or its Affiliates
to terminate employment with the Company or its Affiliates. Notwithstanding the
foregoing, it shall not be deemed a violation of this subsection if a business,
which employs the Executive, hires or attempts to hire an employee of the
Company or its Affiliates and the Executive has no knowledge of, control over or
involvement with such solicitation.
(d) In the event that any of the provisions of this Section 5
should ever be deemed to exceed the time, geographic or occupational limitations
permitted by applicable laws, then such provisions shall be and are hereby
reformed to the maximum time, geographic or occupational limitations permitted
by law.
6. CONFIDENTIAL INFORMATION. The Executive acknowledges that in his
employment he is or will be making use of, acquiring or adding to the Company's
confidential information which includes, but is not limited to, memoranda and
other materials or records of a proprietary nature and records and policy
matters relating to finance, personnel, management and operations. Therefore, in
order to protect the Company's confidential information and to protect other
employees who depend on the Company for regular employment, the Executive agrees
that he will not in any way utilize any of said confidential information except
in connection with his employment by the Employer, and except in connection with
the business of the Company he will not copy, reproduce or take with him the
original or any copies of said confidential information and will not disclose
any of said confidential information to anyone.
7. TERMINATION.
(a) Death or Disability. If the Executive should become
physically or mentally disabled and unable to perform his duties hereunder for a
continuous period in excess of ninety (90) days (in the reasonable opinion of
the Committee), or if the Executive should die while an employee of the
Employer, this Agreement and the Executive's employment with the Employer shall
immediately terminate.
(b) Termination by the Employer for Cause. The following
events shall create in the Company a right to terminate the Executive's
employment under this Agreement prior to the expiration of the Term: (i) the
commission of fraud, embezzlement or theft by the Executive in connection with
the Executive's duties; (ii) the intentional wrongful damage to property of the
Company, and/or Affiliates by the Executive; (iii) the intentional wrongful
disclosure by the Executive of any secret process or confidential information of
the Company, and/or Affiliates; or (iv) the violation of the Executive's
non-disclosure, non-solicitation and non-competition covenants set forth in
Sections 5 and 6. In the event of such a Termination for cause pursuant to this
Subsection, all of the obligations of the Company under this Agreement shall
immediately terminate.
<PAGE> 4
(c) Other Termination by Employer. In the event the Company
shall elect to terminate the Executive's employment for any reason other than
those specified in Subsection 7(a) or 7(b), it shall provide written notice of
such termination to the Executive. In the event that there occurs without the
written consent of the Executive:
(i) a change in the Executive's title, a change in the
Executive's duties or responsibilities, a change in
the Executive's reporting relationships, or a change
in control of the Company (as defined below), any of
which results in or reflects a diminution of the
scope or importance of the Executive's position,
duties and responsibilities;
(ii) a reduction in the Executive's then current annual
base salary (other than as part of reductions in
annual base salary affecting the Employer's officers
generally);
(iii) a reduction in the level of benefits available or
awarded under employee and officer benefit plans and
programs, including, but not limited to annual and
long-term incentive and stock-based plans and
programs (other than as part of reductions in such
benefit plans or programs affecting the Employer's
officers generally); or
(iv) a relocation of Executive's primary employment
location to a location which is more than 50 miles
from his current location,
then, the Executive may deliver written notice of termination to the Company
within three months of such event (which shall be effective even if such three
months expire after the end of the Term). In either case and subject to the
execution and delivery by the Executive to the Company of the release described
in Section 9 hereof, the Company shall provide Executive with severance
compensation and benefits as follows:
(u) the Executive shall receive an amount equal to six month's
current base salary, payable at intervals not less frequently
than monthly over a period of months equal to the number of
months of severance pay (not less than six) provided for by
this subsection, (such period herein after referred to as the
" Severance Period");
(v) the Executive shall receive, with respect to any participation
rights in the Company's annual bonus or long-term incentive
plans, an award under any such plan, payable upon notice of
termination or, of exercise of any condition herein, an amount
equal to the pro-rated share earned during the months of
employment calculated by dividing the total annual award by
twelve (12) multiplied by the number of full and partial
months employed, less any amounts already paid for and during
the current year to date. In the event that termination occurs
after there has been a change in control, as defined by a
change in the Chief Executive Officer, a change in two-thirds
or more of the Company's Board of
<PAGE> 5
Directors, or, a change of more than thirty percent (30%) of
the total shares outstanding, an amount equal to the annual
award as if all pre-requisite conditions have been met, and as
if the total annual award were earned in full with out any
deductions for any amounts previously paid, shall be paid to
the Executive;
(w) with respect to the Executive's stock options, the Company
will recommend to the Compensation and Stock Option Committee
of the Board of Directors of the Company that the
exercisability of the Executive's outstanding stock options be
accelerated, such options shall remain exercisable during the
Severance Period (unless they shall expire earlier by their
terms) and such options shall otherwise be treated in
accordance with the terms of their respective grants;
(x) the Executive's medical, dental and/or other Benefits shall be
continued on the same basis as offered to active salaried
employees for the Severance Period or until such earlier time
as the Executive becomes employed and eligible for such
benefits under a plan of the new employer; and continuation
coverage under COBRA shall commence at the end of the
Severance Period;
(y) all other Benefits shall be paid or continued only to the
extent the terms thereof provide for payment or continuation
following the termination of employment.
The foregoing shall be in lieu of all salary, bonuses or incentive or
performance based compensation for the remainder of the Term. If Executive
should die during the Severance Period, any remaining severance payments
described in (u) and (v) above, shall be made to Executive's surviving spouse
or, if none, to his estate.
(d) Voluntary Termination. If during the Term the Executive
should voluntarily terminate his employment with the Employer for any reason,
including retirement, other than as described in Subsection 7(c) hereof, the
obligations of the Employer and the Company under this Agreement shall terminate
forthwith, other than obligations to (i) pay the Executive's base salary to the
date of termination, (ii) pay all incentive compensation earned by the Executive
for performance periods which are completed prior to the date of termination, at
such times and on the same basis amounts as such incentive compensation becomes
payable to other executives of the Employer and (iii) pay or make available to
the Executive all Benefits which by their terms or under applicable law survive
the voluntary termination of the Executive's employment; and the Executive shall
remain bound by his non-disclosure, non-solicitation and non-competition
covenants set forth in Sections 5 and 6 hereof. The exercisability of the
Executive's outstanding stock options shall be treated in accordance with the
terms of their respective grants or awards, except that in the case of
retirement on or after age 62, the Company will recommend to the Compensation
and Stock Option Committee of the Board of Directors of the Company that the
exercisability of Executive's outstanding stock options be accelerated.
<PAGE> 6
9. GENERAL RELEASE AND COOPERATION AGREEMENT. Notwithstanding anything
in Subsection 7(c) to the contrary and in consideration therefor, severance
benefits thereunder shall only become payable by the Company if the Executive
executes and delivers to the Company a General Release and Cooperation Agreement
on or after the date of written notice of termination of the Executive's
employment and in substantially the form attached as Exhibit A hereto.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
deposited in the U.S. mail in a registered, postage prepaid envelope addressed:
If to the Executive, at his address set forth below, and if to the Company, c/o
Chairman of the Board, Data Systems Network Corporation, 34705 West Twelve Mile
Road, Suite 300, Farmington Hills, Michigan, 48333.
11. ASSIGNMENT. The Executive may not assign his obligations hereunder.
The rights of the Executive and the rights and obligations of the Company
hereunder shall inure to the benefit of and shall be binding upon their
respective heirs, personal representatives, successors and assigns.
12. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the laws of the
State of Michigan.
(b) Failure to insist upon strict compliance with any provisions hereof
shall not be deemed a waiver of such provisions or any other provision
hereof.
(c) This Agreement may not be modified except by an agreement in writing
executed by the parties hereto.
(d) The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision.
(e) This Agreement shall supersede any and all prior employment agreements
or understandings, written or oral, with the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
DATA SYSTEMS NETWORK CORPORATION
------------------------
Michael W. Grieves,
Chairman, President and CEO
------------------------
Diane L. Grieves
8539 Pine Grove
Commerce, Michigan 48382
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