SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the Quarterly period ended June 30, 1997
Commission File Number 2-95050-D
DATA NATIONAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Colorado 84-0958983
- --------------------------------------------- -----------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) No.)
11415 W. I-70 Frontage Road North, Wheat Ridge, CO 80033
------------------------------------------------------------
(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 June 30, 1997 was 1,567,915 shares.
Transition Small Business disclosure format. Yes _____ No __X__
ITEM 1.FINANCIAL STATEMENTS
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
June 30, June 30, September 30,
1997 1996 1996
Assets
---------- -------- ------------
Current Assets
Cash and equivalents 10,369 154 4,441
Receivables
Trade, less allowance
for bad debts of
$5,077 in 1997 and
1996, respectively 514,082 343,377 342,592
Other 16,496 19,022 15,305
Inventory, at cost 94,085 63,220 63,354
Other current assets 55,490 20,317 35,523
---------- -------- --------
Total current assets 690,522 446,090 461,215
Property and equipment, at cost 877,966 641,555 724,414
Less accumulated depreciation (437,359) (352,262) (373,709)
---------- -------- --------
440,607 289,293 350,705
---------- -------- --------
Deferred computer software
development costs 293,104 120,231 169,977
Other assets 43,290 8,450 12,871
---------- -------- --------
$1,467,523 $864,064 $994,768
---------- -------- --------
See accompanying note to consolidated financial statements.
2
ITEM 1.FINANCIAL STATEMENTS (CONTINUED)
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Continued)
June 30, June 30, September 30,
1997 1996 1996
---------- -------- ------------
Liabilities and Shareholder's Deficit
Current Liabilities
Short-term borrowings -
related parties $ 0 $ 95,000 $155,000
Short-term borrowings -
bank line of credit 266,686 0 0
Current portion - capital
lease obligations 100,869 49,569 75,401
Accounts payable 208,346 100,274 138,426
Accrued expenses 90,667 24,914 81,271
Deferred revenue 127,960 138,241 26,419
---------- -------- --------
Total current liabilities 794,528 407,998 476,517
---------- -------- --------
Note payable to related parties 595,272 775,472 743,472
Capital lease obligations, net of
current portion 163,019 106,159 155,958
Shareholders' Deficit
Common stock $.001 par value,
authorized 100,000,000
shares; 1,567,915 and
1,498,190 shares issued
and outstanding at June 30,
1997 and September 30, 1996,
respectively 1,568 1,338 1,498
Additional paid-in capital 466,880 156,209 188,050
Accumulated deficit (553,744) (583,112) (570,727)
---------- -------- --------
(85,296) (425,565) (381,179)
---------- -------- --------
$1,467,523 $864,064 $994,768
---------- -------- --------
See accompanying notes to consolidated financial statements
3
ITEM 1. FINANCIAL STATEMENTS(CONTINUED)
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three months ended Nine months ended
June 30 June 30
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales $1,065,319 $ 631,734 $2,938,378 $1,966,942
Cost of sales 685,829 367,181 1,841,962 1,150,757
---------- ---------- ---------- ----------
Gross profit 379,490 264,553 1,096,416 816,185
Selling and marketing expense 89,042 71,247 264,380 203,743
General and administrative
expense 296,835 192,379 717,964 531,146
---------- ---------- ---------- ----------
Operating income (6,387) 927 114,072 81,296
Other income (expense)
Interest and other
income 301 5,648 1,817 14,966
Interest expense, in-
cluding amounts to
related parties of
$45,255 for the nine
months ended June 30,
1997 and $65,746 for
the nine months ended
June 30, 1996 (34,371) (25,855) (93,533) (71,849)
Other expense (820) 0 (5,371) 0
---------- ---------- ---------- ----------
(34,890) (20,207) (97,087) (56,883)
---------- ---------- ---------- ----------
Net income $ (41,277) $ (19,280) $ 16,985 $ 24,413
---------- ---------- ---------- ----------
Primary Earnings
Per Common Share $ (0.03) $ (0.02) $ 0.01 $ 0.03
---------- ---------- ---------- ----------
Weighted average shares
outstanding 1,560,979 1,086,761 1,524,351 907,388
---------- ---------- ---------- ----------
See accompanying note to consolidated financial statements.
4
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)
Issuance of common stock
for services 130,000 130 31,070 0
Issuance of common stock
for reduction of note
payable to related parties 390,000 390 93,210 0
Net income for the nine
months ended June 30, 1996 0 0 0 24,413
--------- ------ -------- ---------
Balance, June 30, 1996 1,338,190 1,338 156,209 (583,112)
--------- ------ -------- ---------
Issuance of common stock
for services 7,500 8 1,792 0
Issuance of common stock
for reduction of note
payable to related parties 160,000 160 31,841 0
Common stock repurchased
and retired (7,500) (8) (1,792) 0
Net income for the three
months ended September 30,
1996 0 0 0 12,385
--------- ------ -------- ---------
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 38 149,962 0
Issuance of common stock
for services 975 1 3,899 0
Issuance of common stock 31,250 31 124,969 0
Net income for the nine
months ended June 30, 1997 0 0 0 16,985
--------- ------ --------- ---------
Balance, June 30, 1997 1,567,915 $1,568 $466,880 $(553,743)
--------- ------ --------- ---------
5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended June 30,
1997 1996
Cash flow from operating activities ---------- ----------
Net income $ 16,985 $ 24,413
Adjustments to reconcile net income to
cash flow from operating activities
Depreciation 63,650 33,125
Amortization 3,963 0
Common stock issued for services 3,900 31,200
Changes in assets and liabilities
(Increase) in trade receivables (171,490) (98,445)
(Increase) in other receivables (1,191) (13,033)
(Increase) in inventory (30,731) (15,528)
(Increase) in other current assets (19,967) (15,684)
(Increase) decrease in other assets (34,382) 1,246
Increase in accounts payable 69,920 38,496
Increase in accrued expenses 9,396 4,844
Increase in deferred revenue 101,541 5,763
--------- --------
Total adjustments (5,391) (28,016)
--------- ---------
Cash provided by operating activities 11,594 (3,603)
--------- ---------
Cash flow from investing activities
Purchases of property and equipment (55,955) (37,364)
Deferred computer software
development costs (123,127) (120,231)
--------- ---------
Cash used in investing activities (179,082) (157,595)
--------- ---------
Cash flow from financing activities
Short-term borrowings from related
parties 221,000 95,000
Short-term borrowings bank line
of credit 2,353,876 0
Sale of common stock 125,000 0
Increase in note payable-related party 1,800 0
Repayment of short-term borrowings from
related parties (376,000) 0
Repayment of short-term borrowings bank
line of credit (2,087,190) 0
Repayment of capital lease obligations (65,070) (25,007)
---------- ---------
Cash used in financing activities 173,416 69,993
---------- ---------
Increase (decrease) in cash and cash
equivalents 5,928 (91,205)
Cash and cash equivalents, beginning of
period 4,441 91,359
---------- ---------
Cash and cash equivalents, end of period $ 10,369 $ 154
---------- ---------
See accompanying notes to consolidated financial statements.
6
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
Nine months ended June 30,
1997 1996
Supplemental cash flow information --------- ----------
Property and equipment acquired under
capital leases $ 97,598 $173,050
-------- --------
Common stock issued for reduction of note
payable to related parties $150,000 $ 0
-------- --------
Income taxes paid $ 0 $ 0
-------- --------
Interest paid $ 90,635 $ 71,849
-------- --------
See accompanying notes to consolidated financial statements
7
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
DATA NATIONAL CORPORATION AND SUBSIDIARIES
NOTES 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 subsidiary) 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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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-KSB for the fiscal year ended September 30,
1996.
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
Net sales for the quarter ended June 30, 1997 were $1,065,319 compared
to $631,734 for the quarter ended June 30, 1996. This represents an increase
of $433,585 or 68.6%. During the previous quarter the Company commenced
target mail and Autotrac services for Penske Auto Centers as well as follow-up
mailings for Penske Truck. These services generated approximately $516,000 of
revenue during this quarter. Two new gaming industry clients generated
approximately $32,000 of revenue during this quarter. These increases were
offset by the following items: Sun Oil Co. elected not to implement the
Customer Handout and Target Mail Programs in 1997 that generated approximately
$83,000; and Texaco Star did not have a Target Mail Program in 1997 which had
generated approximately $44,000 of revenue to the Company in 1996.
Cost of sales were $685,829 or 64.4% of sales in 1997 compared to
$367,181 or 58.1% of sales in 1996. Fixed costs increased primarily due to:
a depreciation increase of $8,325 and an increase in maintenance agreements of
$6,663 due to the purchase of new equipment; an increase of $16,500 for
additional personnel in data processing and outbound customer service; and an
increase of approximately $6,500 for temporary labor during peak production
periods. Due to additional costs incurred in the "start-up" phase of the
Penske contract, cost of sales increased from approximately 61.5% to 64.4%.
Gross profit totaled $379,490 or 33.3% of sales in 1997 compared to
$264,553 or 41.9% of sales in 1996. The gross profit has increased due to
sales growth while decreasing as a percentage of sales due to the cost of
sales factors noted above.
Selling and marketing expenses were $89,042 or 7.8% of sales in 1997
compared to $71,247 or 11.3% 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. Salaries, wages and commissions increased approximately
$7,000 due to the hiring of additional sales personnel and increased sales.
Travel, meals, and entertainment expenses have increased approximately $16,000
due to increased travel to work with new and existing clients.
General and administrative expenses increased by $104,456 to $296,835 or
26.0% of sales in 1997 compared to $192,379 or 30.5% 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 $7,700 of this increase is rent for additional space.
- Depreciation has increased approximately $3,000, and property taxes have
increased approximately $3,500, due to purchases of furniture and
equipment.
9
- 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 $2,138 in this quarter. This has also
resulted in increased bank fees of approximately $3,800 in this quarter.
- The Company has added a credit insurance policy and increased general and
property liability coverages due to the growth of the Company. As a result
of these insurance changes these costs increased approximately $3,700 this
quarter.
- The Company recently installed a T1 line for Internet access at a cost of
$3,800 for this quarter.
Due to growth personnel costs have increased in the following areas:
- Recruiting for the Information Technology Department increased
approximately $8,100 this quarter due to recent staff turnover.
- A part-time human resources consultant was added at a cost for this quarter
of $4,500.
- A Vice-President of Marketing was hired during the third quarter and the
President and Vice-President of Operations received compensation increases
at the beginning of the calendar year resulting in increases of
approximately $36,000.
- Due to additional staffing in the Information Technology Department,
salaries, taxes and benefits have increased approximately 27,000 this
quarter.
- Bonuses for two officers of the Company were approximately $7,800 in this
quarter while no bonuses were declared in 1996.
Interest expense for 1997 was $34,371 compared to $25,855 for 1996.
The interest to related parties decreased approximately $6,600 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 $7,600 on the bank line of
credit. The remaining increase, approximately $7,500, was due to additional
leases added in the last fifteen months.
During the quarter ended June 30, 1997 the Company spent $47,731 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.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
Net sales for the nine months ended June 30, 1997 were $2,938,378
compared to $1,966,942 for the nine months ended June 30, 1997. This
represents an increase of $971,436 or 49.4%. During this period the Company
commenced target mail and Autotrac services for Penske Auto Centers as well as
follow-up mailings for Penske Truck and these services generated approximately
$1,219,000 of revenue. Two new gaming industry clients generated
approximately $66,000 of revenue during the period. These increases were
offset by a decrease in the sales
of holiday greeting cards of approximately $28,000. Also, two existing
clients did not engage the Company to complete five special projects in 1997.
The revenue from these projects was approximately $190,500 in 1996. Sunoco
has temporarily ceased participating in the new resident mailing program
resulting
10
in a decrease of revenues of approximately $32,000 compared to 1996. Also, one
Sunoco district has ceased participating in Computrac mailings. This
district, along with stations that have been sold or closed, has resulted in a
decrease in revenue of approximately $51,000. Printing revenue decreased by
approximately $9,300 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 $ 1,841,962 or 62.7% of sales in 1997 and
$1,150,757 or 58.5% of sales in 1996. Fixed costs increased primarily due to:
a depreciation increase of $23,800 and an increase in maintenance agreements
of $12,300 due to the purchase of new equipment; increased salaries during the
period by approximately $44,500 due to the addition of data processing and
outbound customer service personnel. Due to additional costs incurred in the
"start-up" phase of the Penske contract, cost of sales increased from
approximately 61.0% to 62.7%.
Gross profit totaled $1,096,416 or 36.2% of sales in 1997 compared to
$816,185 or 41.5% of sales in 1996. The decrease in gross profit was
attributable to the factors stated above.
Selling and marketing expenses increased by $60,637 to $264,380 or 8.7%
of sales in 1997 compared to $203,743 or 10.4% 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. Salaries, wages and commissions
increased approximately $47,000 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. Travel, meals, and entertainment expenses
have increased approximately $31,800 due to increased travel to work with
existing clients.
General and administrative expenses increased by $186,818 to $717,964 or
23.7% of sales in 1997 compared to $531,146 or 27% 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 $18,000 of this increase is rent for additional space.
- Depreciation has increased approximately $6,200, and property taxes have
increased approximately $3,500. 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 $3,963 in 1997. This has also resulted
in increased bank fees and charges of approximately $7,400.
- The Company has added a credit insurance policy and increased general and
property liability coverages due to the growth of the Company. As a result
of these insurance changes these costs increased approximately $7,300 this
quarter.
- The Company recently installed a T1 line for Internet access at a cost of
$4,600.
Due to growth personnel costs have increased in the following areas:
- The Company has a profit sharing plan which pays eligible employees 6% of
net income on a quarterly basis. In this nine month period the amount was
approximately $8,200 and in 1996 this amount was $0.
11
- Due to additional staffing in the Information Technology Department,
salaries, taxes and benefits have increased approximately $44,000.
- A Vice-President of Marketing was hired during the third quarter and the
President and Vice-President of Operations received compensation increases
at the beginning of the calendar year resulting in increases of
approximately $47,500.
- Bonuses for two officers of the Company were approximately $26,500 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 $93,533 compared to $71,849 for 1996. The
interest to related parties decreased approximately $20,500 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 $13,600 on the bank line
of credit. The remaining increase, approximately $14,800, was due to
additional leases added in the last fifteen months.
During the nine months ended June 30, 1997 the Company spent $123,127 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 nine 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 nine
months by $5,928.
Trade receivables increased by $171,000 due to the addition of new
clients and the resulting increase in sales. Other current assets increased
$20,000 for additional annual maintenance and support agreements for new
equipment and software as well as a new property and liability insurance
policy and credit insurance which will limit losses from non-collection of
accounts receivable as well as increase the funds available from the line of
credit. Other assets increased $34,000 due to: deposits on new leases, a
deposit on additional space for production facilities, offering costs incurred
to raise equity through a private placement of the Company stock, 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 $221,000 during
the nine months ended June 30, 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 $266,686 at June 30
1997.
In December of 1996 the Company commenced a private placement of its
common stock. Through this offering, which terminated on June 30, 1997 the
Company has received $275,000: $125,000 in the form of cash and an additional
$150,000 from
12
the related parties in the form of a reduction on the $595,272 note to related
parties.
On July 24, 1997 the Company commenced a new private placement. Under
the terms of the offering, the Company expects to raise a maximum of $725,000
(181,250 shares at $4.00 per share). There is no minimum for this private
placement.
Since September 30, 1996, 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.
PART II. OTHER INFORMATION
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 May 12, 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.
On May 29, 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 transactions 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 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 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
-13-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10.5 Stock Option Plan Filed herewith
electronically
Exhibit 27 Financial Data Schedule Filed herewith
electronically
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DATA NATIONAL CORPORATION
Dated: August 19, 1997 By /s/ Richard S. Simms
Chief Financial Officer