SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from to
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Commission file number 2-95050-D
DATA NATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-0958983
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11415 West I-70 Frontage Road North, Wheat Ridge, CO 80033
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(Address of principal executive offices)
(303) 431-1933
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
The number of shares outstanding of the issuers Common Stock, .001 par value
as of March 31, 1997 was 1,555,415 shares.
Transition Small Business disclosure format. Yes No X
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ITEM 1.
FINANCIAL STATEMENTS
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DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, March 31, September 30,
1997 1996 1996
---------- ----------- ------------
Assets
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Current Assets
Cash and equivalents $ 13,314 $ 30,342 $ 4,441
Receivables
Trade, less allowance
for bad debts of
$5,077 in 1997 and
1996, respectively 415,075 230,761 342,592
Other 12,970 39,525 15,305
Inventory, at cost 72,006 60,691 63,354
Other current assets 60,259 21,630 35,523
-------- -------- --------
Total current assets 573,624 382,949 461,215
Property and equipment,
at cost 826,354 579,923 724,414
Less accumulated
depreciation (413,709) (339,887) (373,709)
-------- -------- --------
412,645 240,036 350,705
-------- -------- --------
Deferred computer
software development
costs 245,373 68,465 169,977
Other assets 43,379 8,086 12,871
-------- ------- --------
$ 1,275,021 $ 699,536 $ 994,768
=========== ========= ==========
Liabilities and
Shareholder's
Deficit
Current Liabilities
Short-term
borrowings
- related parties $ - $ - $ 155,000
Short-term
borrowings -
bank line of credit 30,008 - -
Current portion -
capital lease
obligations 94,175 37,593 75,401
Accounts payable 256,625 80,690 138,426
Accrued expenses 181,219 27,844 81,271
Deferred revenue 46,642 133,210 26,419
--------- --------- --------
Total current
liabilities 608,669 279,337 476,517
--------- --------- --------
Note payable to
related parties 595,272 869,072 743,472
Capital lease
obligations, net of
current portion 165,098 82,213 155,958
Shareholders' Deficit
Common stock $.001
par value, authorized
100,000,000 shares;
1,555,420 and
1,498,190 shares
issued and outstanding
at March 31, 1997 and
September 30, 1996,
respectively 1,555 818 1,498
Additional paid-in
capital 416,892 31,929 188,050
Accumulated deficit (512,465) (563,833) (570,727)
-------- -------- --------
(94,018) (531,086) (381,179)
Commitments $ 1,275,021 $ 699,536 $ 994,768
See Notes to Consolidated Financial Statement
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ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
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DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three months ended Six months ended
March 31 March 31
1997 1996 1997 1996
-------- -------- -------- --------
Net
sales $1,258,486 $ 600,532 $1,888,605 $1,335,208
Cost of sales 785,256 396,300 1,171,680 783,577
---------- --------- ---------- ----------
Gross profit 473,230 204,232 716,925 551,631
Selling and
marketing
expense 78,496 69,042 175,338 132,495
General and
administrative
expense 244,181 181,118 421,128 338,768
---------- --------- --------- ---------
Operating income 150,553 (45,928) 120,459 80,368
Other income
(expense)
Interest and
other income 1,381 6,549 1,515 9,318
Interest expense,
including amounts
to related
parties of
$30,374 for the
six months ended
March 31, 1997
and $44,248 for
the six months
ended March 31,
1996 (31,445) (22,673) (59,161) (45,994)
Other expense (259) - (4,551) -
-------- -------- -------- -------
(30,323) (16,124) (62,197) (36,676)
-------- -------- -------- -------
Net income $ 120,230 $(62,052) $ 58,262 $ 43,692
========= ======== ========= =========
Primary Earnings
per Common share $ 0.08 $ (0.08) $ 0.04 $ 0.05
========= ======== ========= =========
Weighted average
shares
outstanding 1,523,621 818,190 1,523,621 818,190
See Note to Consolidated Financial Statement
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ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
--------- --------- ------------ ------------
Balance, October
1, 1995 818,190 $ 818 $ 31,929 $ (607,525)
Net income for
the six months
ended March 31,
1996 - - - 43,692
Balance, March
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31, 1996 818,190 818 31,929 (563,833)
--------
Issuance of
common stock
for reduction
of note payable
to related
parties 550,000 550 125,051 -
Issuance of
common stock
for services 137,500 138 32,862 -
Common stock
repurchased
and retired (7,500) (8) (1,792) -
Net (loss) for
the six months
ended September
30, 1996 - - - (6,894)
-------- ------- --------- ------
Balance,
September 30,
1996 1,498,190 1,498 188,050 (570,727)
Issuance of
common stock
for reduction
of note payable
to related
parties 37,500 37 149,962 -
Issuance of
common stock
for services 975 1 3,899 -
Issuance of
common stock 18,750 19 74,981 -
Net income for
the six months
ended March 31,
1997 - - - 58,262
--------- -------- -------- --------
Balance, March
31, 1997 1,555,415 $ 1,555 $ 416,892 $ (512,465)
========= ========= ========== ==========
See Note to Consolidated Financial Statement
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ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
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DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended March 31,
--------------------------
1997 1996
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Cash flow from operating activities
Net income $ 58,262 $ 43,692
Adjustments to reconcile net income
to cash flow from operating
activities
Depreciation 40,000 20,750
Common stock issued for services 3,900 -
Changes in assets and liabilities
(Increase) decrease in trade
receivables (72,483) 12,107
(Increase) decrease in other
receivables 2,335 (37,461)
(Increase) in inventory (8,652) (12,999)
(Increase) in other
current assets (19,102) (16,997)
(Increase) decrease in other assets (30,508) 7,599
Increase in accounts
payable 118,208 18,913
Increase in accrued
expenses 99,948 7,774
Increase in deferred
revenue 20,223 731
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Total adjustments 153,869 417
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Cash provided by
operating activities 212,131 44,109
-------- --------
Cash flow from investing activities
Purchases of property and equipment (39,590) (21,019)
Deferred computer software
development costs (75,396) (68,465)
Cash used in investing activities (114,986) (89,484)
-------- --------
Cash flow from financing activities
Short-term borrowings from related
parties 201,000 -
Short-term borrowings bank line of
credit 1,045,723 -
Sale of common stock 75,000 -
Increase in note payable-related
party 1,800 -
Repayment of short-term borrowings
from related parties (356,000) -
Repayment of short-term borrowings
bank line of credit (1,015,715) -
Repayment of capital lease
obligations (40,080) (15,642)
--------- --------
Cash used in financing
activities (88,272) (15,642)
--------- --------
Increase (decrease) in cash and cash
equivalents 8,873 (61,017)
Cash and cash equivalents, beginning
of period 4,441 91,359
-------- --------
Cash and cash equivalents, end of
period $ 13,314 $ 30,342
========= ==========
Supplemental cash flow information
Property and equipment acquired
under capital leases $ 67,984 $ 127,763
========= ==========
Common stock issued for reduction
of note payable to related parties $ 150,000 $ -
========= ==========
Income taxes paid $ - $ -
========= ==========
Interest paid $ 59,161 $ 45,994
========= ==========
See Notes to Consolidated Financial Statement
-5-
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------------------
DATA NATIONAL CORPORATION AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT'S STATEMENT
In the opinion of management, the accompanying financial statements
contain all adjustments (which consist only of normal, recurring
adjustments) necessary to fairly present the Company's financial position,
results of operations, and cash flows. The operating results presented
are not necessarily indicative of the expected operating results for the
years ending September 30, 1997 and 1996.
Reference should be made to the notes to the consolidated financial
statements included in Form 10-KSB for the year ended September 30, 1996,
for additional information.
NOTE 2- BANK LINE OF CREDIT
On January 3, 1997, the Company closed on a $500,000 revolving loan
facility with Norwest Business Credit. Under the terms of this facility,
the Company and Service Business Systems (a subsidary) pledged all of their
assets to collateralize the financing. The line of credit bears an interest
rate of 5% over Norwest's prime lending rate. Advances under the facility
may be made on the basis of 80% of the eligible receivables. As a
condition of the financing, the related party subordinated their debt to
Norwest. The facility was funded on January 15, 1997. The initial
termination date of the facility is December 31, 1998.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Results of Operations
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The following information should be read in conjunction with the condensed
consolidated financial statements and notes included in the Quarterly Report
and in the audited Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in
the Company's Form 10-K for the fiscal year ended September 30, 1996.
Quarter Ended March 31, 1997 compared to Quarter Ended March 31, 1996
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Net sales for the quarter ended March 31, 1997 were $1,258,486 compared to
$600,532 for the quarter ended March 31, 1996. This represents an increase
of $657,954 or 110%. During this quarter the Company commenced target mail
and Autotrac services for Penske Auto Centers and these services
generated approximately $708,000 of revenue during this quarter. Two new
gaming industry clients generated approximately $33,000 of revenue during
this quarter. These increases were offset by the following items: Sun Oil
Co. elected not to do the Customer Handout Program in 1997 that generated
approximately $28,000 of revenue in 1996; and Texaco Star did not have a
Target Mail Program in 1997 and this program generated approximately $31,000
of revenue in 1996. Printing revenue decreased by approximately $20,000
during this quarter. Printing is dependent on orders from new clients as
well as re-orders from existing clients and, as a result, will vary by
quarter.
Cost of sales were $785,256 or 62% of sales in 1997 compared to $396,300 or
66% of sales in 1996. Fixed costs increased, primarily due to a
depreciation increase of $7,750 due to the purchase of new equipment and
an increase of $12,000 for additional personnel in data processing and
outbound customer. These increases were offset by per unit cost savings
(on a percentage basis) of certain variable costs. Including a decrease in
printing costs due to increased volume. Also, the Company purchased
software providing additional postal sorting capabilities and lower postal
costs per piece.
Gross profit totaled $473,229 or 38% of sales in 1997 compared to $204,232
or 34% of sales in 1996. The increase in gross profit was attributable to
the factors stated above.
Selling and marketing expenses were $78,496 or 6% of sales in 1997 compared
to $69,042 or 11% of sales in 1996. Salaries, wages and commissions
increased approximately $18,000 due to the hiring of additional sales
personnel and increased sales. In 1996 these expenses included
approximately $7,000 of one time costs to produce a video about the Company
and its products for use in sales and marketing.
General and administrative expenses increased by $63,063 to $244,181 or 19%
of sales in 1997 compared to $181,118 or 30% of sales in 1996. The Total of
these expenses have increased due to the growth of the Company, Decreasing as
a percentage of sales. Approximately $7,000 of this increase is rent for
additional space. Depreciation has increased approximately $1,400 due to
purchases of furniture and equipment. In 1997 the Company obtained a line of
credit from a bank and incurred fees to obtain this loan. These fees are
being amortized over the initial life of the loan (two years) and totaled
$1,825 in this quarter. The Company has a profit sharing plan which pays
eligible employees 6% of net income on a quarterly basis. In this quarter
the amount was approximately $8,000 and in 1996 this amount was $0.
Bonuses for two officers of the Company were approximately $19,000 in this
quarter and were $0 in 1996. A part-time human resources consultant was
added at a cost for this quarter of $4,500.
Interest expense for 1997 was $31,445 compared to $22,673 for 1996. The
interest to related parties decreased approximately $7,000 due to the
conversion of debt to equity and a decrease in the principal amount of the
loan. This was offset by interest of approximately $6,000 on the bank line
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of credit. The remaining increase, approximately $9,000, was due to
additional leases added in the last twelve months.
During the quarter ended March 31, 1997 the Company spent $43,095 in
software development costs. These capitalized costs will be amortized over
three years when the project is completed and the new software is being
utilized. This software is projected to be completed in July of 1997.
Six Months Ended March 31, 1997 compared to Six Months Ended March 31, 1996
- ---------------------------------------------------------------------------
Net sales for the six months ended March 31, 1997 were $1,888,605 compared
to $1,335,208 for the six months ended March 31, 1997. This represents an
increase of $553,397 or 41%. During this period the Company commenced target
mail and Autotrac services for Penske Auto Centers and these services
generated approximately $708,000 of revenue. Two new gaming industry clients
generated approximately $33,000 of revenue during the period. This increase
was offset by a decrease in the sales of holiday greeting cards of
approximately $28,000. Also, two existing clients did not do two special
projects in 1997 which they had done in 1996. The revenue from these
projects was approximately $59,000 in 1996. Printing revenue decreased by
approximately $12,000 during this period. Printing is dependent on orders
from new clients as well as re-orders from existing clients and, as a result,
will vary by period.
Cost of goods sold was $1,171,680 or 62% of sales in 1997 and $783,577 or
59% of sales in 1996. Fixed costs increased , primarily due to a
depreciation increase of $15,400 due to the purchase of new equipment and
salaries increased during the period by approximately $28,000 due to the
addition of data processing and outbound customer service personnel. These
increases have been offset by per unit cost savings (on a percentage basis)
of certain variable costs. However, these savings did not have an effect on
cost of sales until the second quarter of the fiscal year. Due to
increased volume, printing costs decreased. Also, the Company purchased
software providing additional postal sorting capabilities and lower postal
costs per piece.
Gross profit totaled $716,925 or 38% of sales in 1997 compared to $551,631
or 41% of sales in 1996. The decrease in gross profit was attributable to
the factors stated above.
Selling and marketing expenses increased by $42,843 to $175,338 or 9% of
sales in 1997 compared to $132,495 or 10% of sales in 1996. Salaries, wages
and commissions increased approximately $40,000 due to the hiring of
additional sales personnel and increased sales. In 1996 these expenses
included approximately $7,000 of one time costs to produce a video about the
Company and its products for use in sales and marketing.
General and administrative expenses increased by $82,360 to $421,128 or 22%
of sales in 1997 compared to $338,768 or 25% of sales in 1996.The total of
These expenses have increased due to the growth of the company, while
decreasing as a percentage of sales. Approximately $10,000 of
this increase is rent for additional space. Depreciation has increased
approximately $3,200 due to purchases of furniture and equipment. In 1997
the Company obtained a line of credit from a bank and incurred fees to
obtain this loan. These fees are being amortized over the initial life of
the loan (two years) and totaled $1,825 in 1997. The Company has a profit
sharing plan which pays eligible employees 6% of net income on a quarterly
basis. In this six month period the amount was approximately $8,000 and in
1996 this amount was $0. Bonuses for two officers of the Company were
approximately $19,000 this period and were $0 in 1996. A part-time human
resources consultant was added in 1997 at a cost of $4,500.
Interest expense for 1997 was $59,161 compared to $45,994 for 1996. The
interest to related parties decreased approximately $14,000 due to the
conversion of debt to equity and a decrease in the principal amount of the
loan. This was offset by interest of approximately $6,000 on the bank line
of credit. The remaining increase, approximately $21,000, was due to
additional leases added in the last twelve months.
-8-
During the six months ended March 31, 1997 the Company spent $75,396 in
software development costs. These capitalized costs will be amortized over
three years when the project is completed and the new software is being
utilized. This software is projected to be completed in July of 1997.
Variability of Periodic Results and Seasonality
- -----------------------------------------------
Results from the three month and six month periods cannot be used to
predict the results for the entire year. Revenues fluctuate from period to
period. The Company received seasonal revenue from the sales of holiday
greeting cards of $199,963 for the quarter ended December 31, 1996 and
$228,243 for the quarter ended December 31, 1995.
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents increased over the last six months
by $8,873. Trade receivables increased by $72,000 due to the addition of
new clients and the resulting increase in sales. Other current assets
increased $19,000 for additional annual maintenance and support agreements
for new equipment and software as well as a new property and liability
insurance policy which provides higher property damage limits and increased
liability protection based on the growth of the Company. Other assets
increased $30,000 due to deposits on new leases, a deposit on additional
space for production facilities and fees incurred to obtain the bank line of
credit. These increases were funded by increases in accounts payable,
accrued expenses and deferred revenue as well as net income.
Short term borrowings from related parties decreased by $155,000 during
the six months ended March 31, 1997. These borrowings were repaid from the
bank line of credit with Norwest Business Credit. This facility was funded
on January 15, 1997. The bank line of credit used totaled $30,000 at
March 31 1997.
In December of 1996 the Company commenced a private placement of its
common stock. Under the terms of the offering, the Company expects to
raise a minimum of $200,000 and a maximum of $1,000,000. As of May 12,
1997 the Company has received $250,000: $100,000 in the form of cash and
an additional $150,000 from the related parties in the form of a reduction
on the $595,272 note to related parties.
The Company has received additional contracts for new business of
approximately $2,000,000. It is anticipated that approximately $1,500,000
of the new business will be completed during the fiscal year ending
September 30, 1997.
The Company believes the existence of the revolving loan facility,
internal cash flow generated from new and existing business, capital leases
to be obtained for the purchase of new equipment, and additional proceeds
from the private placement of the Company's common stock will enable the
Company to meet its currently projected working capital and cash
requirements through at least the end of the 1997 fiscal year. There can
be no assurance, however, that the additional funds will be raised and that
the capital leases will be obtained.
-9-
DATA NATIONAL CORPORATION
FORM 10-QSB
MARCH 31, 1997
OTHER INFORMATION
PART II
ITEM 1.Legal Proceedings.
The Company knows of no material pending legal proceedings to which the
Company is a party or to which any of its assets are subject.
ITEM 2.Changes in Securities.
The Changes in Securities of the Company are as follows:
On December 15, 1996 the Company gave each current employee 25 shares
of common stock. The total number of shares was 975 and these shares were
given in consideration for services to the Company by each of the employees.
On January 3, 1997 the Company sold 12,500 shares of common stock
to a private investor for cash at an offering price of $4.00 per share.
There were no discounts or commissions on this sale.
On January 3, 1997 a current shareholder received 37,500 shares of
common stock in exchange for a 150,000 reduction of the 595,272 note to
related parties. The exchange was made at a price of $4.00 per share
and there were no discounts or commissions due.
On March 3, 1997 the Company sold 6,250 shares of common stock to
a private investor for cash at an offering price of $4.00 per share.
There were no discounts or commissions on this sale.
The shares of the Company's Common Stock which were issued pursuant
to the transaction set forth above were issued in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933, as
amended. Each of the persons to whom such securities were issued in
exchange for cash or notes made an informed investment decision based
upon appropriate offering documents and access to material information
regarding the Company. The Company believes that such persons had
knowledge and experience in financial and business matters such that they
were capable of evaluating the merits and risks of the acquisition of the
Company's Common Stock in connection with these transactions. All
certificates representing such common shares bear an appropriate legend
restricting the transfer of such securities, except in accordance with the
Securities Act of 1933, as amended, and stop such transfer instructions
have been provided to the Company's transfer agent in accordance therewith.
ITEM 3.Defaults Upon Senior Securities. None
ITEM 4.Submission of Matters to a Vote of Security Holders. None
ITEM 5. Other Information. None
ITEM 6.Exhibits and Reports on Form 8-K. None
EX-27 Financial Data Schedule
-10-
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) DATA NATIONALCORPORATION
BY)Signature) /s/Rick S. Simms
(Dated) March 14, 1997
(Name and Title) Rick S. Simms,