<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended September 30, 1996 OR
-------------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _________ to _________
Commission File Number 2-95050-D
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DATA NATIONAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0958983
------------------------------ ------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11415 West, I-70 Frontage Road-North
Wheat Ridge, Colorado 80033
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 431-1933
-------------
Securities registered pursuant to Section 12(b) of the Act: NONE
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-B 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-KSB or any amendment to
this Form 10-KSB.[ ]
Registrant's revenues for the fiscal year ended September 30, 1996 were
$2,666,148.
As of September 30, 1996, the aggregate market value of the common stock of
the Registrant held by non-affiliates was undeterminable at that time due to a
lack of any trading market for the Registrant's shares.
As of September 30, 1996, there were 1,498,190 shares of the Registrant's
$.001 par value common stock outstanding.
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DATA NATIONAL CORPORATION
CONTENTS
Pages
-------
PART I
Item 1. Description of Business
- --------------------------------
(a) Business Development. 2
(b) Business of Registrant 2-5
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a
Vote of Security Holders 5
PART II
Item 5. Market for Company's Common
Equity and Related Shareholder
Matters 6
Item 6. Management's Discussion and
Analysis or Plan of Operation
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 6-8
Item 7. Financial Statements
Independent Auditors' Reports 9-10
Consolidated Balance Sheets 11
Consolidated Statements of Income 12
Consolidated Statement of Shareholders' Equity 13
Consolidated Statements of Cash Flows 14
Notes to Consolidated Financial Statements 15-21
(2) Related Party Transactions 16-17
(3) Property and Equipment 17
(4) Capital Lease Obligations 17-18
(5) Commitments 18-19
(6) Common Stock 19
(7) Major Customers 19
(8) Income Taxes 19-20
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With Section
16(a) of the Exchange Act of the Company 21
Item 10. Executive Compensation 22
Option/ SARs Table 23
Item 11. Security Ownership of Certain Beneficial
Owners and Management 24
Item 12. Certain Relationships and Related Transactions 24
SIGNATURES 25
Financial Data Schedule 26
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
(a) Business Development.
------------------------
Data National Corporation (the Company) was formed under the laws of the
State of Colorado in November 1982. On March 23, 1987, the Company acquired,
through an exchange of its common stock, 97.8% of the outstanding common stock
of Data National Inc. (DNI). DNI is a holding company and owns 100% of the
shares Service Business Systems, Inc. (SBS) and National COM-LINK Systems,
Inc. (NCL). DNI acquired all of the common stock of SBS and NCL in June of
1986. The Company acts as a holding company for DNI and its subsidiaries and
coordinates their activities.
SBS is the only active entity, although, NCL receives royalties from
licensing a trademarked name and, in 1996, recognized deferred revenue as a
result of the termination of a contract for the sale of hardware and software
products.
(b) Business of Registrant.
---------------------------
Principal Products and Services
-------------------------------
The Company derives revenues from products and services provided by its
subsidiary, SBS, which is the only operating subsidiary. Since inception, SBS
has provided database marketing services to the automotive industry (service
stations of major oil companies and independent auto repair facilities).
These clients accounted for 88% and 100% of its revenues in 1996 and 1995,
respectively. In 1996, SBS began expanding its client base to include auto
dealerships and customers in the financial services industry. SBS is
continuing to expand into other industries and has signed contracts to provide
services to the entertainment industry.
By utilizing proprietary software developed for internal use, SBS
analyzes a client's customer database to develop segmentation profiles of
their customers. By developing a better understanding of who their customer is
and what their needs and expectations are, SBS assists its clients in
attempting to improve their business performance.
Once these customer segmentation profiles are developed, SBS develops
customer-centric programs to assist clients in enhancing customer loyalty,
attracting new customers and increasing customer retention.
The following are some examples of programs which have been developed by
SBS:
Existing Customer Programs
--------------------------
- Thank you cards
- Service reminders for the automotive market (tune-ups, oil changes,
etc.)
- Safety reminders for the automotive market (brakes, tires, shocks,
etc.)
- Holiday Greeting Cards
- Point of sale coupons
- Customer surveys
- Newsletters
- Preferred customer programs, including membership cards, and Coupon
books
- Telephone surveys
New Customer Programs
---------------------
- Promotions targeted to new residents and other customers matching
the segmentation profile in the client's market area.
- Informational mailings (i.e., interest rate updates on real estate
trends) to targeted customers
- Referral request programs
SBS also implements these programs for clients by maintaining and
managing the customer's database, selecting target customers for the various
programs and mailing the materials on the client's behalf. SBS can also
assist clients by obtaining names of potential customers from outside sources
which match the client's current segmentation profile.
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<PAGE>
SBS also generates sales by providing artistic and graphic design
services used in developing these programs and facilitating the printing of
the marketing materials to be used in the customer specific marketing program.
SBS expanded its customer base in fiscal 1996 with the addition of
commonly controlled auto dealerships and a mortgage loan origination company.
The Company has signed a contract with a company in the entertainment business
and will provide services to it in fiscal 1997.
Employees
---------
SBS employs all of the employees of the Company. As of September 30,
1996, SBS had 32 full-time employees working in the office of the Company. In
addition, SBS had 15 employees for coding and inputting the information
received from repair facilities into the SBS computer system, some of whom are
part-time. These employees are home based.
Status of Products
------------------
The Autotrac® system requires customer information to be input into
the database maintained by SBS. The information is either input by the SBS
home-based computer operators or downloaded directly from the subscriber's
computer. The information is processed by the proprietary software developed
by SBS, and the database for the customer is updated. Notices are printed and
mailed to the customers in the database. The Autotrac® system uses a
Novell network that includes PC equipment. The system also includes three
production printers. In addition, SBS has numerous PC work stations for use
by the account executives and data entry personnel. Management of SBS
believes this equipment, supplemented by additions in fiscal 1997 estimated at
$190,000 (including an estimated $70,000 of deferred computer software
development costs), will permit SBS to handle all of its present and
foreseeable data processing needs through September 30, 1997.
Sources and Availability of Raw Materials
-----------------------------------------
The Company has experienced no significant difficulty with the delivery
and availability of supplies that it sells to its customers, and no difficulty
is forecast for the immediate future.
Patents, Licenses, Franchises, Concessions, Etc.
------------------------------------------------
The Company has no patent protection for its existing products that the
Company considers to be proprietary items. Except in unusual circumstances,
which do not apply to the Company, computer software is generally not
patentable, but is protected by copyright and trade secret laws, as well as
contractual and nondisclosure provisions of the Company's licensing
agreements.
Seasonality
-----------
SBS sells holiday greeting cards in the first quarter of the fiscal year
ending September 30. This program has resulted in seasonal sales of $228,243
and $223,962 for the years ended September 30, 1996 and 1995, respectively.
The increased sales and resulting net income for the first quarter of the year
is material to the operations of the Company There are no other seasonal
factors to the Company's business.
Dependence Upon Small Number of Customers
-----------------------------------------
The business of SBS is very dependent upon a few major customers; the
loss of any one or more of these customers could have a material adverse
effect on the business and operations of the Company. During the fiscal year
ended September 30, 1996, major customers represented approximately the
following percentage of the SBS gross revenues:
Sun Company, Inc. - 40.0%
Mobil Oil Corporation - 12.4%
Amoco Oil Company - 10.8%
Under the Sun contract, SBS provides the Autotrac system to over 300
automotive repair locations under the Sun "Ultra Service Center" program. SBS
provides other services to Sun, including holiday greeting cards, new
residence programs, cashier handouts, and customer surveys. The other
services are determined at a regional level, as all of the repair locations
under the corporate contract for Autotrac do not participate in all of the
-3-
programs. The term of the contract is generally for twelve months, and the
current contract is scheduled to expire in July of 1997, at which time it will
be renegotiated. The contract is signed by Sun on behalf of the dealers, who
are independent business owners. Sun invoices the dealers for the SBS fees,
which are included in their franchise fees. The payment terms are net 30
days.
SBS also provides the Autotrac system to approximately 100 automotive
repair locations for Mobil under the Mobil "Car Care" program. SBS provides
other services to Mobil, including customer surveys and holiday greeting
cards. The term of this contract is for three years, with the contract
expiring on December 31, 1998. There is a 180 day cancellation provision.
Mobil bills the dealers for the SBS fees, which are included in their
franchise fees. The payment terms are net 30 days.
SBS provides the Autotrac system to approximately 75 automotive repair
locations for Amoco under the Amoco "Certicare" program and other programs.
SBS provides other services to Amoco. There are approximately six Amoco
districts that have contracted with SBS for services, and each district has
its own contract, which is generally on a month to month basis. In addition
to the SBS services, Amoco also contracted with NCL for computer software and
hardware. This contract terminated, and NCL recognized the revenue from this
contract, which had been deferred.
Competition
-----------
SBS believes that there are approximately 20 companies competing directly
with it in the automotive aftermarket business. Most of the competitors are
small companies like SBS with none of them having a market share of more than
20%. However, the largest competitor is Moore/BCS, a division of Moore
Business Forms in Toronto, Canada, a billion dollar conglomerate. Another
large competitor is IDS, a division of AON Insurance Company, based in
Chicago. Mailmark, Inc., based in Canoga Park, California, is a direct
marketing/data processing company, which provides a specialized service
reminder/customer contact program for the automotive industry. Other
companies like Reynolds and Reynolds, Brandt Contact Services, Computer Care,
and InteliMail are known competitors.
SBS believes it can effectively compete with these companies. SBS
provides valuable data and marketing strategies in addition to providing the
mailing services. SBS manages large databases for automotive businesses, and
provides marketing, creative, and customer-centric contact services. SBS also
provides management reports to assist its customers in managing their
businesses and contacting their customers.
SBS markets its services to the automotive aftermarket by becoming an
approved vendor through contacts made at the corporate level of oil companies
and automotive repair centers. SBS has three sales people making calls on
potential customers. Some of the customers are contacted though telephone
sales. SBS also employs customer service representatives that sell products
to existing customers in addition to providing customer service. SBS also has
one employee devoted to market research and development of new products for
new and existing markets.
In 1996, SBS expanded its marketing and sales efforts into new markets,
as follows:
Automotive Dealerships - in Colorado and California
- ----------------------
Financial Services - specifically the mortgage loan business in Colorado.
- ------------------
Entertainment - specifically the gaming industry in Colorado.
- -------------
The president of the Company has directed the sales efforts into the new
markets with assistance from the sales personnel and the director of
marketing.
Research and Development Expenditures
-------------------------------------
Although no costs were classified as research and development during each
of the past two fiscal years, SBS expends considerable effort for software
improvements on an annual basis. Such effort is a necessary element for
maintaining the competitiveness of its software modules, and such costs are
recorded as normal operating expenses.
SBS is developing a proprietary database application as the basis for its
core business functions. SBS has capitalized $169,977 in 1996 as deferred
computer software development costs. The costs deferred include the costs of
outside consultants and salary and benefit costs of programmers hired upon
completion of the design phase, to complete the programming of this software.
Upon completion of the software, these costs will be amortized using the
straight-line method over a useful life of 3 years.
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Governmental Regulation and Compliance
--------------------------------------
There are no governmental regulations pertinent to operations that would
differ from those applicable to any small manufacturer. There is no need for
government approval of the Company's products. Any costs or effects of
compliance with environmental laws are de minimis.
Item 2. Description of Property
- ---------------------------------
The Company occupies office space under one 3-year lease that expires in
February 1999 and requires an aggregate monthly payment of $3,805. This
amount includes $3,354 as base rent and $451 for tenant finish.
Item 3. Legal Proceedings
- --------------------------
There are no legal proceedings to report.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On September 30, 1996, the Company held its Annual Meeting of
Shareholders.
At the subject annual meeting, Richard S. Simms, Ray E. Dillon III and
Donald V. Warriner were elected to serve as directors of the Company until the
next Annual Meeting of Shareholders or until their earlier death, resignation
or removal. There are no other directors whose term of office as a director
continued after the date of the subject meeting.
The following matters were voted upon at the subject meeting:
(1) Election of Directors
Name of Nominee Votes in Favor Votes Against Abstentions
- --------------- -------------- ------------- -----------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Richard S. Simms 462,690,624 - 136,787,716
Ray E. Dillon III 462,690,624 - 136,787,716
Donald V. Warriner 462,690,624 - 136,787,716
</TABLE>
(2) The shareholders approved a reverse stock split whereby one new share
of the Company's Common Stock was issued in exchange for each 400 shares of
the Company's then currently outstanding Common Stock. To the extent that
this reverse stock split resulted in any shareholder owning less than a single
full share of the Company's Common Stock, the Company agreed to pay cash for
each such fractional share in an amount equal to the appropriate fraction of
$.40 per whole share (which represented the fair value of a whole share after
the consummation of the proposed reverse stock split as determined by the
Company's Board of Directors).
Votes in Favor Votes Against Abstentions
-------------- ------------- -----------
462,690,624 - 136,787,716
(3) The shareholders voted to amend the Company's Articles of
Incorporation to reduce its authorized capital from 600,000,000 shares of
$0.0001 par value Common Stock to 100,000,000 shares, and to change the par
value of the Company's shares from $0.0001 per share to $0.001 per share.
Votes in Favor Votes Against Abstentions
-------------- ------------- -----------
462,690,624 - 136,787,716
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<PAGE>
(4) The shareholders voted to engage the services of a nationally
recognized auditing firm.
Votes in Favor Votes Against Abstentions
-------------- ------------- -----------
462,690,624 - 136,787,716
Subsequently, the Board of Directors engaged the firm of KPMG Peat
Marwick LLP to serve as the company's independent auditors during the fiscal
year ended September 30, 1996.
(3) In connection with such meeting, the Company did not enter into any
settlement arrangement with any person terminating any solicitation subject to
Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of
1934.
PART II
Item 5. Market for Company's Common Equity and Related Shareholder Matters
- ---------------------------------------------------------------------------
(a) Market Information.
---------------------
The Company's common stock has not been traded on the over-the-counter
market. Because of the lack of any viable trading market for the Company's
securities, no accurate market information is currently available.
(b) Holders
----------
The number of holders of record of the Company's $.001 par value
common stock at September 30, 1996, was approximately 320, after giving effect
to the Company's 400 to 1 reverse stock split.
(c) Dividends
-------------
Holders of common stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors. No dividends have been paid
with respect to the Company's common stock and no dividends are anticipated to
be paid in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation
- --------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
September 30, 1996 as Compared to September 30, 1995
----------------------------------------------------
Revenue for the year ended September 30, 1996 was $2,666,148 compared to
$2,369,096 for the year ended September 30, 1995. Almost all of the revenue
for the Company is generated by SBS, with the exception of licensing revenue,
and sales of hardware and software deferred in prior years, received by NCL in
the amount of $130,486 for 1996 and $20,000 for 1995. The increase in revenue
is primarily attributable to increased sales to new SBS customers in new
markets. Revenue from automotive dealerships amounted to $103,742 and revenue
from the mortgage loan business amounted to $113,709 in 1996. In addition,
the Company recorded 1996 revenue in NCL in the amount of $120,486 as a result
of termination of a contract that was entered into in 1987. The Company
fulfilled its obligation under the contract and has recognized the revenue
that had previously been deferred.
Cost of goods sold as a percentage of revenue amounted to 50% and 53% in
fiscal 1996 and 1995, respectively. The cost of goods sold was lower as a
percentage of revenue in fiscal 1996 due to the recognition of the revenue in
NCL that had been deferred, and the fact that there were no cost of goods sold
associated with the deferred revenue. Excluding this additional revenue, cost
of goods sold as a percentage of revenue for the Company was 52%.
Selling and marketing expenses increased to $453,928, or 17% of revenue,
in fiscal 1996 from $366,290, or 15% of revenue, in fiscal 1995. The dollar
increase is primarily due to additional sales and marketing personnel used to
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<PAGE>
penetrate the new markets and existing markets. There were also expenses of
producing additional sales and marketing material, including brochures and a
marketing video.
General and administrative expenses increased to $761,255, or 29% of
revenue, in fiscal 1996 from $575,808, or 25% of revenue, in fiscal 1995. The
absolute dollar increase in the amount of $185,477 is primarily due to an
increase of approximately $100,000 in the information technology department of
the Company, an increase of approximately $70,000 in executive salaries,
including $31,200 in a stock bonuses, an increase of approximately $23,000 in
rent and other operating expenses, and an increase of $20,000 in legal fees
associated with updating the filings with the Securities and Exchange
Commission and legal fees associated with the shareholders meeting of the
Company. The increase in information technology reflects the commitment to
upgrade the information systems and improve the products offered by SBS.
Interest expense increased from $88,793 to $95,546. The increase was due
to additional equipment purchased by SBS under financing lease arrangements.
Interest to related parties amounted to $83,988 in 1996 and $88,698 in 1995.
The Company did not record any income tax expense due to the utilization
of net operating loss carryforwards for income tax purposes.
September 30, 1995 as Compared to September 30, 1994
----------------------------------------------------
For the year ended September 30, 1995, the nature of the Company's
operations was unchanged and focused on providing marketing services to repair
facilities and similar entities, nationally. One major customer accounted for
40% of net sales in 1995, as compared to 41% in 1994. The loss of this
customer would have a material adverse effect, including possible cessation of
operations. Another customer accounted for 18% of net sales in 1995, as
compared to 12% in 1994. One other group of customers, affiliated with a
national oil company, has been aggregated and constituted 12% of net sales in
1995 but did not exceed 10% in 1994. However, this group of customers is not
subject to the same contractual relationship as the other two major customers
discussed above and presumably subjects the Company to less risk of loss of
the customers.
Sales were essentially unchanged in 1995 as compared to 1994. Cost of
sales increased from 51% of sales in 1994 to 53% in 1995, primarily because
production salaries increased by approximately $45,000 as new positions were
created. The other components of cost of sales (postage and materials)
remained constant as a percentage of sales (22% in 1995 and 1994 for postage,
and 7% in 1995 and 1994 for materials).
Selling and marketing expenses decreased by $55,682, or 13%, in 1995.
The decrease resulted primarily from the elimination of certain consulting
fees, approximately $18,000 to an independent party and $12,000 to a member of
the Board of Directors. Such services are now provided by Company staff.
Other changes that resulted in cost reduction included not attending trade
shows of two major customers, which occur biannually, and termination of
employment of the Company president in July, which reduced travel and related
expenses.
General and administrative expenses increased by $36,694, or 7%, in
1995. Executive salaries increased approximately $14,000 because of an
increase in salary for the former president and the employment of a Chief
Operating Officer in July 1995. Administrative salaries also increased by
approximately $10,500, a result of raises for existing employees and
employment of additional clerical staff. There were no other significant
changes in individual expense accounts.
Interest expense amounted to $88,793 in 1995 and $95,284 in 1994. The
interest expense was substantially payable to related parties, and the
interest payable to related parties amounted to $88,698 and $91,358 in 1995
and 1994 respectively.
Liquidity and Capital Resources
- -------------------------------
In fiscal 1996, cash and cash equivalents decreased by $86,918. The Company
utilized $542 of cash for operating activities in fiscal 1996. The Company
used $196,376 of cash for the acquisition of equipment and development of the
Company's proprietary software for internal use.
The Company refinanced their note with a related party in January of 1996.
Under the terms of the note, the Company is to pay interest at the rate of 10%
per annum and the principal and interest is due on October 1, 2001. The
principal amount of the note as of January 1, 1996 was $677,000 plus accrued
interest on prior indebtedness in the amount of $192,072. In May of 1996 the
related party sold $93,600 of their note to certain officers of the Company.
The officers exchanged the notes for common stock. In July of 1996 the
related parties sold $32,000 of their note to an officer of the Company who
exchanged the note for common stock. As of September 30, 1996, the balance of
the note is $743,472. As of September 30, 1996, the note was secured by all
of the assets of the Company and its subsidiaries.
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<PAGE>
SBS borrowed $155,000 as of September 30, 1996 from related parties to finance
the Company's operations and capital investments. These borrowings have been
made on a short term basis until the Company is able to secure a revolving
loan facility. SBS also borrowed $254,864 under capital leases to finance the
acquisition of equipment.
The Company's principal source of liquidity includes cash and cash equivalents
of $4,441 at September 30, 1996. As of September 30, 1996 the Company had
negative working capital of ($15,302). SBS sells holiday greeting cards in
the first quarter of the fiscal year ending September 30. This program
resulted in seasonal sales of $228,243 and $223,962 for the years ended
September 30, 1996 and 1995, respectively. The increased sales, resulting net
income and increase in cash flow for the first quarter of the year is material
to the operations and cash flow of the Company. There are no other seasonal
factors to the Company's business.
The Company will supplement its cash and cash equivalents by additional equity
and debt financing to fund anticipated expansion and to finance the Company's
operations and capital investment needs through fiscal 1997. On January 3,
1997, the Company closed on a $500,000 revolving loan facility with Norwest
Business Credit. Under the terms of the facility, the Company and SBS 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.
As of January 8, 1997, Norwest had not funded the facility. When the facility
is funded, which is anticipated to be no later than January 15, 1997, short
term advances made by related parties to SBS to finance the short term needs
of SBS will be repaid. Any remaining funds available after repayment will be
used for operations.
In December of 1996 the Company commenced sales of restricted stock. Under
the terms of the offering, the Company will raise a minimum of $200,000 and a
maximum of $1,000,000. As of January 3, 1997 the Company had received $50,000
in cash and an additional $150,000 from the related party in reduction of the
$737,472 note payable to the related party. There can be no assurance that
additional funds will be raised.
-8-
<PAGE>
Item 7. Financial Statements
- -----------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Data National Corporation
We have audited the consolidated balance sheet of Data National Corporation
and subsidiaries as of September 30, 1996, and the related consolidated
statements of income, shareholders' 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 significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Data National Corporation and subsidiaries as of September 30, 1996, and
the results of their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
November 12, 1996
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<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Shareholders and Board of Directors
Data National Corporation
I have audited the consolidated balance sheet of Data National Corporation and
subsidiaries as of September 30, 1995, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
consolidated financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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 significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Data
National Corporation and subsidiaries as of September 30, 1995, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
William G. Lajoie, P.C.
Littleton, Colorado
January 10, 1996
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<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 and 1995
Assets
------
1996 1995
---------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
Current Assets
Cash and equivalents $ 4,441 $ 91,359
Receivables
Trade less allowance for bad
debts of $5,077 in 1996 and
$5,077 in 1995 342,592 244,932
Other 15,305 5,989
Inventory, at cost 63,354 47,692
Other current assets 35,523 4,633
-------- -------
Total current assets 461,215 394,605
Property and equipment, at cost 724,414 431,141
Less accumulated depreciation (373,709) (319,137)
------- -------
350,705 112,004
------- -------
Deferred computer software development
costs 169,977 -
Other assets 12,871 9,696
------- -------
$ 994,768 $ 516,305
======= =======
Liabilities and Shareholders' Deficit
-------------------------------------
Current Liabilities
Short-term borrowings -
related parties $ 155,000 $ -
Current portion -
capital lease obligations 75,401 6,932
Accounts payable 138,426 61,778
Accrued expenses 81,271 20,070
Deferred revenue 26,419 132,478
------- -------
Total current liabilities 476,517 221,258
------- -------
Commitments
Note payable to related parties 743,472 869,072
Capital lease obligations,
net of current portion 155,958 753
Shareholders' Deficit
Common stock $.001 par value,
authorized 100,000,000
shares; 1,498,190 and 818,190
shares issued and outstanding
at September 30, 1996 and 1995,
respectively 1,498 818
Additional paid-in capital 188,050 31,929
Accumulated deficit (570,727) (607,525)
------- -------
(381,179) (574,778)
------- -------
$ 994,768 $ 516,305
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-11-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended September 30, 1996 and 1995
1996 1995
---------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
Net sales $2,666,148 $2,369,096
Cost of sales 1,334,042 1,256,193
--------- ---------
Gross profit 1,332,106 1,112,903
Selling and marketing
expense 453,928 366,290
General and administ-
rative expense 761,225 575,808
Operating income 116,953 170,805
Other income (expense)
Interest and other
income 16,714 5,824
Interest expense,
including amounts
to related parties
of $83,988 in 1996
and $88,698 in 1995 (95,546) (88,793)
Other expense (1,323) (349)
------ ------
(80,155) (83,318)
------ ------
Net income $ 36,798 $ 87,487
====== ======
Net income per share $ 0.04 $ 0.11
====== ======
Weighted average shares
outstanding 1,040,922 818,190
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-12-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Years Ended September 30, 1996 and 1995
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
-------- -------- ----------- ------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance, October 1, 1994 818,190 $ 818 $ 31,929 $(695,012)
Net income - - - 87,487
------- ----- ------ -------
Balance, September 30,
1995 818,190 818 31,929 (607,525)
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 repur-
chased and retired (7,500) (8) (1,792) -
Net income - - - 36,798
------- ------ ------ ------
Balance, September 30,
1996 1,498,190 $1,498 $188,050 $(570,727)
========= ====== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
-13-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1996 and 1995
1996 1995
Cash flow from operating activities ------ -------
<TABLE>
<CAPTION>
<S> <C> <C>
Net income $ 36,798 $ 87,487
Adjustments to reconcile net income
to cash flow from operating
activities
Depreciation 54,572 32,280
Common stock issued for services 33,000 -
Changes in assets and liabilities
(Increase) decrease in trade receivables (97,660) 289
(Increase) decrease in other receivables (9,316) 9,145
(Increase) decrease in inventory (15,662) (6,124)
(Increase) decrease in other current
assets (30,890) 3,210
(Increase) decrease in other assets (3,175) (6,808)
Increase (decrease) in accounts payable 76,649 (2,697)
Increase (decrease) in accrued expenses 61,201 (40,896)
Increase (decrease) in deferred revenue (106,059) 4,501
------- ------
Total adjustments (37,340) (7,100)
------- ------
Cash flow provided by (used in) operating
activities (542) 80,387
------- ------
Cash flow from investing activities
Purchases of property and equipment (26,399) (63,035)
Deferred computer software development costs (169,977) -
------- ------
Cash flow used in investing activities (196,376) (63,035)
------- ------
Cash flow from financing activities
Short-term borrowings from related parties 340,000 864
Repayment of short-term borrowings
from related parties (185,000) -
Repayment of capital lease obligations (43,200) (11,102)
Common stock repurchased and retired (1,800) -
------- ------
Cash flow provided by (used in) financing
activities 110,000 (10,238)
------- ------
Increase (decrease) in cash and
equivalents (86,918) 7,114
Cash and equivalents, beginning of year 91,359 84,245
------- ------
Cash and equivalents, end of year $ 4,441 $ 91,359
======= ======
Supplemental cash flow information
Property and equipment acquired
under capital leases $ 254,864 $ -
======= ========
Common stock issued for reduction
of note payable to related parties $ 125,601 $ -
======= ========
Income taxes paid $ - $ -
======= ========
Interest paid $ 87,612 $ 87,929
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
(1) Organization, Operations, and Significant Accounting Policies
---------------------------------------------------------------
Organization and Operations
---------------------------
Data National Corporation (DNC) was incorporated under the laws of the State
of Colorado on November 5, 1982. On March 23, 1987, the Company acquired,
through an exchange of its common stock, 97.8% of the outstanding common stock
of Data National Inc. (DNI). DNI is a holding company and owns 100% of the
shares Service Business Systems, Inc. (SBS) and National COM-LINK Systems,
Inc. (NCL). DNI acquired all of the common stock of SBS and NCL in June of
1986. The Company acts as a holding company for DNI and its subsidiaries and
coordinates their activities.
NCL receives royalties from licensing a trademarked name and, in 1996,
recognized deferred revenue as a result of the termination of a contract for
the sale of hardware and software products.
The Company derives revenues from products and services provided by its
subsidiary, Service Business Systems (SBS), which is the Company's only
operating subsidiary. Since inception, SBS has provided database marketing
services to the automotive industry (service stations of major oil companies
and independent auto repair facilities). These clients accounted for 88% and
100% of the Company's net sales in 1996 and 1995, respectively. In 1996, SBS
began expanding its client base to include auto dealerships and customers in
the financial services industry.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
are eliminated in consolidation.
Use of Estimates
----------------
Preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates.
Cash Equivalents
----------------
The Company considers investments with an original maturity of three
months or less to be cash equivalents.
Inventory
---------
Inventory consists of card stock and is carried at cost determined on a
first-in-first-out basis.
Property and Equipment
----------------------
Property and equipment is stated at cost, and is depreciated over useful
lives ranging from 5 to 7 years, primarily using the straight-line method.
Deferred Computer Software Development Costs
--------------------------------------------
The Company is developing a proprietary database application as the basis for
its core business functions. The Company has capitalized $169,977 in 1996 as
deferred computer software development costs. The costs deferred include the
costs of outside consultants and salary and benefit costs of programmers hired
-15-
<PAGE>
upon completion of the design phase, to complete the programming of this
software. Upon completion of the software, these costs will be amortized
using the straight-line method over a useful life of 3 years.
Deferred Revenue
----------------
Prepayments for products are recorded as deferred revenue until the
product is delivered.
Reverse Stock Split
-------------------
All share amounts, share prices, and per share amounts have been adjusted to
give effect to a 400 to 1 reverse stock split that was effective on September
30, 1996.
Sales and Credit Risk
---------------------
Sales are recognized upon completion of services or mailing of marketing
materials as applicable.
Sales are made by extending credit to customers on a short-term basis,
using informal credit evaluations, and are on an uncollateralized basis.
Advertising
-----------
The Company expenses advertising costs as incurred. Such costs amounted
to $10,415 and $6,001 in 1996 and 1995, respectively.
Income Taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes, as prescribed by Statement of Financial Accounting Standards No.
109 (SFAS 109). Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years in which these
temporary differences are expected to be recovered or settled. Changes in tax
rates are recognized in income in the period that includes the enactment date.
Net Earnings Per Share of Common Stock
--------------------------------------
Net earnings per share has been computed based on the weighted average
number of common shares outstanding during the year.
(2) Related Party Transactions
--------------------------
Short-Term Borrowings - Related Parties
---------------------------------------
The Company has borrowed funds to meet short-term working capital needs
from two of its shareholders. Interest on the unpaid balance is at the rate
of 10% per annum. The principal balance is payable when the Company enters
into a line of credit agreement with a bank.
Note Payable to Related Parties
-------------------------------
The Company refinanced certain existing indebtedness to two shareholders
on January 10, 1996. One of the shareholders is now Chairman of the Board of
Directors and owns or controls 206,299 shares of the Company's common stock.
The principal amount of the note is $743,472, including accrued interest on
prior indebtedness of $192,072, with interest at 10%, due on or before October
1, 2001. The note is secured by inventory; trade receivables; the right to
the name, "Data National Corporation," and related trademarks, licensing
agreements, patents, and similar rights; bank accounts; and the stock of DNI
and all of its subsidiary corporations. Interest expense on the related party
note amounted to $81,980 and $87,443 in 1996 and 1995, respectively.
-16-
<PAGE>
Purchase of Note Payable to Related Parties and Conversion of Note to Stock
---------------------------------------------------------------------------
On May 15, 1996, three officers of the Company purchased $93,600 of the
indebtedness from the shareholders in exchange for notes from the officers.
The officers exchanged the debt to purchase 390,000 shares of common stock at
a purchase price of $0.24 per share.
On July 31, 1996, the Chief Financial Officer of the Company purchased
$32,000 of the indebtedness from the shareholders in exchange for a note. The
Chief Financial Officer exchanged the debt to exercise a warrant to purchase
160,000 shares of common stock of the Company at a purchase price of $0.20 per
share.
Compensation to Related Party
-----------------------------
A member of the Board of Directors received $3,000 per month for 8 months
in 1995 for consulting services. Additionally, a company that he controls was
indebted to the Company in the amount of $2,924 at September 30, 1995. At
September 30, 1995, the Company was indebted to this individual for $3,000.
Lease Payments to Related Party
-------------------------------
The son of the Chief Financial Officer leased equipment to the Company
under three capital leases, which are summarized in Note 4. All of these
leases were paid in full as of September 30, 1996.
(3) Property and Equipment
-----------------------
A summary of property and equipment at September 30, 1996 and 1995
follows:
1996 1995
---------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture and fixtures $ 35,593 $ 13,584
Office equipment 121,120 66,535
Production equipment 557,643 340,964
Vehicles 10,058 10,058
------- -------
$724,414 $431,141
======= =======
</TABLE>
(4) Capital Lease Obligations
-------------------------
The Company leases various equipment under capital leases. Following is
a summary of minimum lease payments required under capital leases as of
September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $100,752
1998 100,752
1999 64,583
2000 8,335
2001 2,259
--------
Total minimum commitments 276,681
Less portion representing
interest (45,322)
-------
Present value of net
minimum commitments 231,359
Less current portion (75,401)
Non-current portion $155,958
</TABLE>
-17-
<PAGE>
Assets held under capital leases at September 30, 1996 and 1995 are
summarized as follows:
1996 1995
-------- --------
<TABLE>
<CAPTION>
<S> <C> <C>
Assets at cost $254,864 $ 20,758
Less accumulated depreciation (21,809) (4,448)
------- ------
$233,055 $ 16,310
======== ========
A summary of capital leases follows:
1996 1995
------ ------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Monthly payment of $692 to
related party, interest at
14%, due in September 1996 $ - $7,685
Monthly payment of $8,396,
interest ranging from 4.9%
to 19.9%, due from October
1998 through February 2001 231,359 -
Less current portion (75,401) (6,932)
------- -----
$155,958 $ 753
======== =======
</TABLE>
Amortization of capital leases is included in depreciation expense.
Interest expense attributable to capital leases of the Company is
included in interest expense in the accompanying consolidated financial
statements and amounted to $12,151 and $1,350 in 1996 and 1995, respectively.
(5) Commitments
------------
Office Lease
------------
The Company occupies office space under a lease that expires in February
1999 and requires monthly payments of $3,805. Following is a summary of
future rental commitments under this lease:
<TABLE>
<CAPTION>
<S> <C>
1997 $45,662
1998 $45,662
1999 $19,026
</TABLE>
Rent expense amounted to $37,836 in 1996 and $33,600 in 1995.
Incentive Plans
---------------
In July 1994, the Company adopted an Employee Incentive Plan, which
provided for a contribution to the plan of 5% of quarterly sales in excess of
$480,000. For 1995, this contribution amounted to $1,424 and has been accrued
in the accompanying consolidated balance sheets. This plan was terminated as
of December 31, 1995.
Also in July 1994, the Company adopted an Executive Compensation
Incentive Plan, which provides for a contribution to the plan of 20% of
quarterly net income in excess of $75,000. Through September 30, 1995, there
were no contributions due. In September of 1995, the Board of Directors
replaced the 1994 plan with a new executive compensation plan for the year
ending September 30, 1996. The plan provided for a bonus of 40% of the net
income of the Company in excess of $125,000. Through September 30, 1996, no
contributions have been made to the plan, and the plan has been terminated.
During fiscal 1996, the Board of Directors adopted the 1996 Incentive
Plan, which is made available to all of the Company's full time employees as
an incentive to achieve greater profitability. Pursuant to the terms of the
plan, the Company will contribute an amount equal to six percent of the
Company's net profit on a calendar quarterly basis for the calendar year
-18-
<PAGE>
beginning January 1, 1996. Full time employees of the Company each receive a
number of shares in the plan based upon their respective categories of
employee classification. Nothing has been contributed to the 1996 Profit
Sharing Plan, and no amount has been distributed to employees as the Company
was not profitable for the nine months ended September 30, 1996.
Profit Sharing Plan
-------------------
In August 1992, the Company adopted a 401(k) Profit Sharing Plan, which
covers all employees with three months service and who are at least 21 years
old. A participant may defer a maximum of 15% of his compensation to the
statutory limit, and the Company matches the first 5% of the deferral. In
1996 and 1995, such matching contributions amounted to $1,435 and $1,433,
respectively.
(6) Common Stock
---------------
On May 15, 1996, the Company entered into agreements with three officers of
the Company to sell them shares of its common stock at $0.24 per share.
Certain restrictions have been placed on the transfer of these shares and
lapse with respect to one-third of the shares each August 1 during each of the
three consecutive calendar years beginning on August 1, 1996. The
restrictions lapse if the officer is an employee on August 1, and has not had
a break in service. Restrictions also lapse upon one of the following
events: sale of all or substantially all of the assets of the Company,
officer's death, permanent total disability or retirement or, the Board
decides that a significant corporate event has occurred (merger,
consolidation, etc.). If an officer terminates employment with the Company,
all shares still subject to the restrictions shall be sold by the officer to
the Company at the original purchase price.
The Vice-President, Marketing resigned as of August 23, 1996, and the Company
repurchased his shares.
On July 31, 1996, the Chief Financial Officer exercised warrants to purchase
160,000 shares of common stock at a purchase price of $0.20 per share. The
warrants were assigned to the Chief Financial Officer from a related party in
1993.
(7) Major Customers
-----------------
The following customers each accounted for more than 10% of sales in 1996
and 1995:
% of Sales
-------------
Customer 1996 1995
- -------- ------ ------
<TABLE>
<CAPTION>
<S> <C> <C>
A 40.0 40.1
B 12.4 18.1
C 10.8 12.2
</TABLE>
(8) Income Taxes
-------------
The approximate tax effect of each type of temporary difference and
carryforward that gives rise to a significant portion of deferred tax
liabilities and deferred tax assets at September 30, 1996, computed in
accordance with SFAS No. 109, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred Tax Assets
Net operating loss carryforward $ 494,000
Allowance for doubtful accounts 2,000
Accrued interest - note payable
to related party 65,000
-------
Total Gross Deferred Tax Assets 561,000
Less valuation allowance (561,000)
-------
Net Deferred Tax Assets $ -
========
</TABLE>
-19-
<PAGE>
At September 30, 1996 the Company has net operating loss carryforwards
which expire as follows:
<TABLE>
<CAPTION>
Expiration Amount
---------- -------------
<S> <C>
1999 $ 6,000
2000 208,000
2001 87,000
2002 11,000
2003 501,000
2004 432,000
2005 207,000
---------
$1,452,000
=========
</TABLE>
This amount may be further limited by separate return year limitations
for the years 1984 to 1987, which aggregate $437,000 and would reduce the
carry forwards with expirations from 1999 to 2002.
Income tax expense is different from amounts computed by applying the
statutory Federal income tax rate for the following reasons:
1996 1995
------- -------
<TABLE>
<CAPTION>
<S> <C> <C>
Tax expense at 34% of net earnings $13,000 $30,000
Change in valuation allowance for net
deferred tax assets (15,000) (32,000)
Other 2,000 2,000
------ ------
Income tax expense $ - $ -
====== ======
</TABLE>
-20-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
In June of 1994 the Company reported a change in its independent
accountant. The firm of Miller and McCollom had performed the last audit of
the Company's consolidated financial statements as of September 30, 1989, and
for the year then ended. There were no reportable disagreements with that
firm, and its report for 1989 was qualified regarding the Company's ability to
continue as a going concern.
The Company engaged the firm of William G. Lajoie, P.C., to audit its
consolidated financial statements for the years ending September 30, 1993,
1994, and 1995. There were no reportable disagreements with that firm, and
its reports for 1993, 1994, and 1995 were unqualified.
In 1996, the Company engaged the firm of KPMG Peat Marwick LLP to audit
its consolidated financial statements for the year ended September 30, 1996.
These actions were approved by the Company's Board of Directors.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act of the Company
----------------------------------------------------------------
The Directors and Officers of the Company at September 30, 1996, are as
follows:
Name Age Position
- ----------------- ----- ----------------------------------------------
Ray E. Dillon III 43 Director and Chairman of the Board
Richard S. Simms 46 Chief Financial Officer, Director, Treasurer
Donald V. Warriner 46 Chief Executive Officer, President and Director
J. Scott Fowler 32 Chief Operating Officer and Secretary
There is no family relationship between any director, executive officer,
or person nominated or chosen by the Company to become a director or executive
officer. All directors will hold office until the next annual meeting of
shareholders. There are no arrangements or understandings between any
director of the Company or any other person or persons pursuant to which such
director was or is to be selected as a director.
The Board of Directors held four meetings during the past fiscal year,
and all of the members then on the Board were present at all of the meetings.
There were no meetings of any of the committees of the Board of Directors
during the past fiscal year.
All officers of the Company hold office at the discretion of the Board of
Directors. Except as set forth herein, there is no arrangement or
understanding between any such officer or any other person pursuant to which
such officer is to be selected as an officer of the Company. There is no
person who is not a designated officer who is expected to make any significant
contribution to the business of the Company.
The following sets forth biographical information as to the business
experience of each officer and director of the Company.
Ray E. Dillon III has been a Director of the Company since March 23,
-----------------
1987, and of DNI since its inception. He is Vice President of Dillon
Investments, a private trust management company for the Dillon family, where
he has been employed since 1985. Mr. Dillon devotes only such time to the
business of the Company as is necessary in his position.
Richard S. Simms is the Vice President of Finance of the Company. He was
----------------
President and Chief Executive Officer of the Company from October 1990 to July
1993. He has been a Director of the Company since March 23, 1987, and of DNI
since its inception. Since 1986, he has practiced as a certified public
-21-
<PAGE>
accountant and an independent financial advisor. Mr. Simms devotes part of
his time to the business of the Company and its subsidiaries.
Donald V. Warriner is President and CEO of the Company as of August
------------------
1995. Prior to joining the Company, Mr. Warriner was employed by Cherry Creek
Mortgage Company. Prior to working for Cherry Creek, Mr. Warriner was
President of Bainbridge International, a company that was involved in
acquisitions and buy outs of small to medium-sized firms. Mr. Warriner
devotes all of his time to the business of the Company.
J. Scott Fowler is the Chief Operating Officer of the Company. From 1994
---------------
to 1995 he was a consultant for Raymond James Consulting. From 1993 to 1994
he was a consultant for Infovisa, Inc. From 1988 to 1993 he was a Senior
Management Consultant with Electronic Data Systems. Mr. Fowler holds a
Bachelor's degree in Industrial Engineering from the University of Texas and
an MBA from the University of Colorado.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 does not require any
of the Company's officers, directors or persons who own more than ten percent
of the Company's equity securities to file any reports of ownership or changes
in ownership with the Securities and Exchange Commission because the Company
does not currently have any class of securities registered under Section 12 of
that Act.
Item 10. Executive Compensation
- --------------------------------
The following table sets forth the compensation paid or accrued to the
Chief Executive Officer and each executive officer of the Company and its
subsidiaries who received compensation in excess of $100,000 during the fiscal
years ended September 30, 1996 and 1995:
Summary Compensation
Annual Compensation 1
Other Annual
Name and Principle Position Year Salary Bonus Compensation
($) ($) ($)
- --------------------------- ---- ------ ----- -------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
William Eyerdom, CEO 1995 75,000
Donald V. Warriner, CEO 1996 67,900 22,500
Donald V. Warriner, CEO 1995 3,000
Richard S. Simms, CFO 1996 48,000
Richard S. Simms, CFO 1995 58,000
J. Scott Fowler, COO 1996 49,900 7,800
J. Scott Fowler, COO 1995 10,000
- ----------------------------------------------------------------
</TABLE>
Summary Compensation
(cont.)
Long-Term Compensation
All
Restricted Options/ LTIP Other
Stock Awarded SARs (#) Payouts Compensation
Year ($) ($) ($) ($)
---- ------------- --------- ------- ------------
Name and Principle Position
<TABLE>
<CAPTION>
<S> <C>
William Eyerdom, CEO 1995
Donald V. Warriner, CEO 1996
Donald V. Warriner, CEO 1995
Richard S. Simms, CFO 1996
Richard S. Simms, CFO 1995
J. Scott Fowler, COO 1996
J. Scott Fowler, COO 1995
</TABLE>
- --------------------------------------------------------------------
(1) There were no executive officers whose compensation exceeded $100,000
in either 1995 or 1996.
(2) As described earlier, Mr. Eyerdom was offered certain restricted stock
as reimbursement for moving expenses incurred in 1993. However, such stock
was refused and the payment of the expenses was the subject of litigation
filed in December of 1995 and settled in February of 1996.
-22-
<PAGE>
The following table shows certain information with respect to stock
options granted to the Company's executive officers during the fiscal year
ended 1996:
Option/SAR Grants in Last Fiscal Year
Individual Grants
- ------------------------------------------------------------------------------
% of Total
Options/SARs
Numbers of Securities Granted to Exercise or
Underlying Options / employees in base price Expiration
SARs Granted (#) Fiscal year ($/Sh) Date
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Donald V. Warriner 0 N/A N/A N/A
Richard S. Simms 0 N/A N/A N/A
J. Scott Fowler 0 N/A N/A N/A
</TABLE>
The following table sets forth certain information with respect to
option exercises during the fiscal year ended September 30, 1996 by the
executive officers of the Company and the value of each such officer's
unexercised options at September 30, 1996:
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year - End Option/SAR Values
- ------------------------------------------------------------------------------
Number of
Securities
Shares Underlying
Acquired Value Unexercised
on Exercise Realized Options/SARs at
(#) ($) fiscal year-end
Exercisable Unexercisable
Name ------------- --------------
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Donald V. Warriner None None 0 0
Richard S. Simms None None 0 0
J. Scott Fowler None None 0 0
</TABLE>
Value of Unexercised
in-the-Money
Option/SARs at Fiscal
Year-End ($)
Exercisable Unexercisable
Name ----------- -------------
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Donald V. Warriner $ 0 0
Richard S. Simms 0 0
J. Scott Fowler 0 0
</TABLE>
Numbers of Performance or
Shares, Units Other Period
or Other Util Maturation
Name Rights (#) or Payout
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Donald V. Warriner 0 0
Richard S. Simms 0 0
J. Scott Fowler 0 0
</TABLE>
Estimated Future Payout under
Non-Stock Price-Based Plans
Threshold Target Maximum
($ or #) ($ or #) ($ or #)
Name --------- --------- --------
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Donald V. Warriner N/A N/A N/A
Richard S. Simms N/A N/A N/A
J. Scott Fowler N/A N/A N/A
</TABLE>
-23-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth information as of September 30, 1996,
with respect to the beneficial ownership of the Company's $0.001 par value
common stock by (a) each person known by the Company to be beneficial owner
of 5% or more of the Company's outstanding common stock, (b) the directors of
theCompany, and (c) the directors and officers of the Company as a group:
Nature of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Richard S. Simms
20 Dutch Creek Drive
Littleton, CO 80123 445,428 (1) 29.73
Donald V. Warriner
4 Glenview Drive
Littleton, CO 80123 375,000 25.03
J. Scott Fowler
6485 South Parfet Street
Littleton, CO 80127 130,000 8.68
Ray E. Dillon III
1 Compound Drive
Hutchinson, KS 67502 206,299 (2) 13.77
All directors and executive
officers as a group 1,156,727 77.21
</TABLE>
(1)Includes shares owned by the Simms Family Partnership, controlled by Mr.
Simms.
(2)Includes 76,267 shares owned by other members of the Dillon family.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
No director or executive officer of the Company, nominee for election as
a director, security holder who is known to the Company to own of record or
beneficially more than 5% of any class of the Company's voting securities, or
any member of the immediate family of any such persons, has had any
transaction or series of similar transactions, during the Company's last two
fiscal years, or had any currently proposed transaction, or series of similar
transactions, to which the Company was or is to be a party, in which the
amount involved exceeds $60,000 or in which any of such persons had or will
have any direct or indirect material interest, except as follows:
The Company refinanced certain existing indebtedness to Ray E. Dillon,
Jr. And Ray E. Dillon, III (father and son), considered collectively in the
note (the "Dillon note"), in January, 1996. Ray E. Dillon III is now
Chairman of the Board of Directors and owns and controls 206,299 shares of
the Company's common stock. The principal amount of the note was $677,000,
with interest at 10%, and was originally due on or before October 1, 1996.
Additionally, the Company owed $192,072 in accrued interest from the prior
indebtedness. The note and this accrued interest are secured by inventory;
trade receivables; the right to the name, "Data National Corporation," and
related trademarks, licensing agreements, patents, and similar rights; bank
accounts; and the stock of DNI and all of its subsidiary corporations.
The Dillons entered into agreements with Richard S. Simms in 1990 and
1993 whereby, in consideration for him becoming and continuing as president,
they sold to him certain shares of stock, agreed to pay him 10% of any
principal paid to them (i.e., the $677,000 referred to above), agreed to pay
him 50% of interest payments collected by them, and assigned warrants to
purchase 160,000 shares of common stock to him. The warrants were issued to
-24-
<PAGE>
the Dillons in 1992 as a result of a previous refinancing of the Dillon note
and were transferred to Mr. Simms in 1993.
On May 15, 1996, the Dillons assigned $93,600 of their note to Donald V.
Warriner, President and CEO, J. Scott Fowler, Vice-President and COO, and
Robert Banner, Vice President of Marketing in exchange for notes payable to
the Dillons. The officers exchanged the $93,600 of indebtedness to purchase
390,000 shares of common stock at a purchase price of $0.24 per share.
On July 31, 1996, the Dillons assigned $32,000 of their note to Richard
S. Simms, Chief Financial Officer in exchange for a note payable to the
Dillons. The officer exchanged the $32,000 of indebtedness to exercise a
warrant to purchase 160,000 shares of common stock at a purchase price of
$0.20 per share.
Interest expense on the Dillon note amounted to $81,980 in 1996 and
$87,443 in 1995.
Ray E. Dillon III and Richard S. Simms have loaned $155,000 to SBS as of
September 30, 1996 to meet certain operating expenses until a line of credit
is secured from a bank. The loan bears interest at a rate of 10% plus
transaction costs. 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 SBS 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. As of
January 6, 1997 Norwest had not funded this facility. When the facility is
funded, which is anticipated to be no later than January 15, 1997, these
short-term advances will be repaid.
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATA NATIONAL CORPORATION
Registrant
/s/ Richard S. Simms
Date: January 8, 1997 By:_______________________________________
Richard S. Simms, Chief Financial Officer,
Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard S. Simms
Date: January 8, 1997 By:_______________________________________
Richard S. Simms, Chief Financial Officer,
Director and Treasurer
/s/ Ray E. Dillon III
Date: January 8, 1997 By:____________________________________
Ray E. Dillon III, Chairman of the
Board and Director
/s/ Donald V. Warriner
Date: January 8, 1997 By:____________________________________
Donald V. Warriner, Chief Executive
Officer and Director
-25-
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<ARTICLE> 5
<PAGE>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,441
<SECURITIES> 0
<RECEIVABLES> 347,669
<ALLOWANCES> 5,077
<INVENTORY> 63,354
<CURRENT-ASSETS> 461,215
<PP&E> 724,414
<DEPRECIATION> (373,709)
<TOTAL-ASSETS> 994,768
<CURRENT-LIABILITIES> 476,517
<BONDS> 0
0
0
<COMMON> 1,498,190
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 994,768
<SALES> 2,666,148
<TOTAL-REVENUES> 2,666,148
<CGS> 1,334,042
<TOTAL-COSTS> 2,549,195
<OTHER-EXPENSES> 80,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,546
<INCOME-PRETAX> 36,798
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,798
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
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