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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, 1997 OR
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[ ] 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
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(Exact name of registrant as specified in its charter)
Colorado 84-0958983
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11415 West, I-70 Frontage Road-North
Wheat Ridge, Colorado 80033
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 431-1933
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: NONE
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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, 1997 were
$3,897,350.
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As of December 31, 1997, 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 December 31, 1997, there were 1,592,565 shares of the Registrant's
$.001 par value common stock outstanding.
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PART I
Item 1. Description of Business
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(a) Business Development.
-------------------------
Data National Corporation (the Company) was formed under the laws of the
State of Colorado in November 1982. The Company currently owns 97.8% of the
outstanding Common Stock of Data National Inc. (DNI). DNI owns 100% of the
shares Service Business Systems, Inc. (SBS) and National COM-LINK Systems,
Inc. (NCL). The Company acts as a holding company for DNI and its
subsidiaries and coordinates their activities.
Most of the revenue of the Company is generated by SBS. NCL receives
royalties from licensing a trademark and, in 1996, recognized revenue that
was previously deferred as a result of the termination of a contract for the
sale of hardware and software products.
(b) Business of Registrant.
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Principal Products and Services and Their Markets
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The Company derives revenues from products and services provided by its
subsidiary, SBS. Since inception, SBS has provided database marketing
services to the automotive industry, specifically service stations of major
oil companies and independent auto repair facilities. Services provided to
clients in the automotive industry accounted for 83% and 88% of its revenues
in fiscal 1997 and fiscal 1996, respectively. In fiscal 1996, SBS began
expanding its client base to include auto dealerships and customers in the
financial services and entertainment industries. SBS continues to expand
into other industries.
By utilizing proprietary software developed internally, SBS analyzes a
client's customer database to develop segmentation profiles of the client's
customers. By developing a better understanding of who their customers are
and what their needs and expectations are, SBS assists its clients in
improving 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
The first three programs have been marketed under the name Autotrac .
This program is designed to retain customers through periodic reminders for
services.
New Customer Programs
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- 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 or 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 profiles. SBS also generates sales
by providing artistic and graphic design services used in developing these
programs.
SBS also provides marketing and technical consulting services to its clients
and facilitates the printing of the marketing materials to be used in the
customer specific marketing programs.
SBS expanded its customer base in fiscal 1996 with the addition of commonly
controlled auto dealerships and a mortgage loan origination company. The
Company expanded its customer base in 1997 with the addition of two casino
clients located in an area with limited stakes gambling as well as a
significant client in the automotive industry. The Company has also begun
to provide mailing services, on a limited basis, to utilize available
production capacity.
Employees
---------
SBS employs all of the employees of the Company. As of September 30,
1997, SBS had 35 full-time employees working in the office of the Company.
In addition, SBS had 11 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.
Sources and Availability of Raw Materials
-----------------------------------------
The Company has experienced no significant difficulty with the delivery
and availability of paper supplies that it uses in its business, and no
difficulty is forecast for the immediate future.
Patents, Trademarks, Licenses, Franchises, Concessions, Etc.
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The Company has no patent protection for its existing products which 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.
The subsidiaries of the Company hold two trademarks for the names Autotrac
and Autolink.
Seasonality
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SBS sells holiday greeting cards in the first quarter of the fiscal year
ending September 30. This program has resulted in seasonal sales of $225,010
and $223,962 for the years ended September 30, 1997 and 1996, respectively.
There are no other seasonal factors to the Company's business.
Dependence Upon Small Number of Customers
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During the fiscal year ended September 30, 1997, the Company received
approximately 65% of its consolidated gross revenues from sales to only
three of its customers. Two of these customers, Penske Auto Centers, Inc.
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and Sun Company, Inc., each accounted for sales in an aggregate amount of
more than 10% of the Company's consolidated revenues during the past fiscal
year, and the loss of either of such customers would have a material adverse
effect on the Company and its subsidiaries taken as a whole.
Competition
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SBS competes in the Technology-Enabled Relationship Marketing (TERM)
services business. In defining such systems, the Gartner Group, an
information technology advisory company, maintains definitions for first and
second generation capabilities. Based on Gartner's criteria, SBS's offering
overlaps both generations.
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First generation database and relationship marketing services are
characterized as product centric, list selection systems that typically
target and send monologues at customers. They use proprietary file
structures and deal with aggregate summary data only.
Second generation offerings are more customer-centric in their focus in that
they initiate and maintain dialogues with customers. These systems are most
often supported by "open" relational database technology with massive volumes
of actual encounter/transaction details.
Although the majority of SBS' attention is focused on the development and
marketing of second generation capabilities, the Company still supports and
invites client business that by Gartner's definition would be considered
first generation in nature.
Gartner Group estimates that as many as 70% of the database marketing systems
and services in use today are still in their first generation.
Market-leaders that supply such first generation offerings include: Polk,
Metromail, Data Base America, Axiom, Harte-Hanks, Mey&Speh, David Sheppard,
Okra, and CIC.
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 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 through 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 fiscal 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.
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Entertainment - specifically the gaming industry in Colorado.
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The President of the Company has directed the sales efforts into the new
markets with assistance from the sales personnel and the Vice President of
Marketing
Research and Software 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
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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 $310,064 as deferred
computer software development costs as of September 30, 1997. 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.
During the fourth quarter of 1997, the Company performed a functional
evaluation of the project and the costs capitalized to date and determined
that costs previously capitalized for certain modules should be written
down as the modules did not perform as designed and were abandoned. This
write down totaled $113,661.
Upon completion of the software, the capitalized costs will be amortized
using the straight-line method over a useful life of 3 years.
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
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The Company occupies office space under one 3-year lease that expires in
February 1999 and requires an aggregate monthly payment of $6,375.
Item 3. Legal Proceedings
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There are no legal proceedings to report.
Item 4. Submission of Matters to a Vote of Security Holders
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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 death, resignation
or removal, whichever is earliest. There are no other directors whose terms
of office as directors 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
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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
(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
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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
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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
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462,690,624 - 136,787,716
(4) The shareholders voted to engage the services of a nationally recognized
auditing firm.
Votes in Favor Votes Against Abstentions
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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.
(4) 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.
No other matters have been submitted to a vote of security holders during
the fiscal year ended September 30, 1997.
PART II
Item 5. Market for Company's Common Equity and Related Shareholder Matters
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(a) Market Information.
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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
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The number of holders of record of the Company's $.001 par value
Common Stock at September 30, 1997 was approximately 360, after giving effect
to the Company's 400 to 1 reverse stock split.
(c) Dividends
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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.
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Item 6. Management s Discussion and Analysis or Plan of Operation
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Year Ended September 30, 1997 as Compared to the Year Ended September 30,
1996
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Revenue for the year ended September 30, 1997 was $3,897,350 compared to
$2,666,148 for the year ended September 30, 1996. Almost all of the revenue
for the Company is generated by SBS, with the exception of licensing revenue
recorded by NCL of $10,000 for fiscal 1996 which did not recur in fiscal
1997. In addition, NCL recorded revenue in fiscal 1996 in the amount of
$120,486 as a result of termination of a contract for hardware and software
that was entered into in 1987. NCL fulfilled its obligation under the
contract and recognized the revenue that had previously been deferred. The
increase in revenue for SBS is primarily attributable to a new client in the
automotive industry, which generated revenue of $1,541,841 in fiscal 1997.
Revenues from other automotive industry clients decreased in 1997 from 1996.
This was the result of SBS focusing its efforts on obtaining larger, more
profitable, contracts and continuing to expand into new industries.
Revenues generated from these new industries are as follows:
1997 1996
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Automotive Dealerships $134,707 $104,501
Mortgage Loan 98,643 113,709
Entertainment 90,836 -
Mailing Services 347,759 55,959
SBS sells holiday greeting cards in the first quarter of its fiscal year.
This program resulted in seasonal sales of $225,010 and $223,962 for the
years ended September 30, 1997 and 1996, respectively. There are no other
seasonal factors to the Company's business.
Cost of sales as a percentage of revenue amounted to 66% and 56% in fiscal
1997 and fiscal 1996, respectively. The cost of sales was lower as a
percentage of revenue in fiscal 1996 due to the recognition of the
revenue in NCL that had previously been deferred, and the fact that there
was no cost of sales associated with the revenue recognized. Excluding this
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additional revenue, cost of sales as a percentage of revenue for fiscal 1996
was 59%. The remainder of the increase in 1997 was primarily due to: an
increase in depreciation expense of $30,600 and an increase in the cost of
maintenance agreements of $15,400 due to the purchase of new equipment; and
an increase in salaries during the period of approximately $112,900 primarily
due to the addition of data processing and outbound customer service
personnel as well as production personnel.
Selling and marketing expenses increased to $367,881, or 9% of revenue, in
fiscal 1997 from $287,676, or 11% of revenue, in fiscal 1996. The total of
these expenses has increased due to the growth of the Company, while
decreasing as a percentage of sales. Salaries, wages and commissions
increased approximately $53,100 due to the hiring of additional sales
personnel and increased commissions as a result of 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 $48,900 due to increased travel to work with new and existing
clients.
General and administrative expenses increased to $1,011,914, or 26% of
revenue, in fiscal 1997 from $751,472, or 28% of revenue, in fiscal 1996.
The total of these expenses has increased due to the growth of the
Company, while decreasing as a percentage of sales.
The increase in 1997 was primarily due to increased costs in
the following areas:
Approximately $25,800 of this increase is rent for additional space.
Due to additional staffing in the Information Technology Department,
salaries, taxes and benefits have increased approximately $81,000.
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
in compensation expense of approximately $77,000.
Bonuses for two officers of the Company were approximately $35,200 in
1997. There were no bonuses paid in 1996.
Interest expense for 1997 was $135,875 compared to $95,546 for 1996. The
interest to related parties decreased approximately $16,000 due to the
conversion of debt to equity and a resulting decrease in the principal
amount of the loan. This was offset by interest of approximately $25,000
on the new bank line of credit. Approximately $29,300 of the increase was
due to additional equipment purchased by SBS under lease financing
arrangements.
The Company did not record any income tax benefit due to the uncertainty
over the Company's ability to realize its deferred tax asset.
Liquidity and Capital Resources
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In fiscal 1997, cash and cash equivalents increased by $11,351. Cash of
$76,311 was provided by operating activities in fiscal 1997. The Company
used $208,518 of cash for the acquisition of equipment and development of the
Company's proprietary software for internal use in fiscal 1997. Cash
provided by financing activities amounted to $143,558, primarily representing
proceeds from the issuance of Common Stock.
Trade receivables decreased $22,072 due to a significant ($43,000) special
project which had been completed and billed in September 1996 and this
project did not recur in 1997. This was offset by an increase in sales of
$25,000 in September of 1997 from September of 1996. Prepaid postage
increased $44,646 for additional postage purchased the last week of
September 1997 in preparation for a large project completed the first
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week of October 1997. Prepaid expenses increased $13,266 for the purchase of
names in preparation for a targeted mailing for a client. Other assets
increased a total of $38,136. This increase is attributable to $9,300 for
costs incurred to perfect the Company's interests in its trademarks, $11,600
for loan fees incurred to obtain the revolving loan facility from Norwest
Business Credit, $4,000 for rent and utility deposits for additional space,
and $6,300 for deposits on equipment leases. These increases were funded by
increases in accounts payable and accrued expenses. Deferred revenue
increased $61,309 for prepayments of postage costs by two clients.
The Company's principal source of liquidity includes cash and cash
equivalents of $15,792 at September 30, 1997 and cash provided by its
operations. The Company had negative working capital in the amount of
$346,107 at September 30, 1997. The Company believes that internal cash
flow generated from the holiday card program during the quarter ended
December 31, 1997, and new and existing business, short-term borrowings,
capital leases to be obtained for the purchase of new equipment, proceeds
from the private placement of the Company's Common Stock and long-term
borrowings will enable the Company to meet its currently projected working
capital needs and cash requirements though at least the end of the 1998
fiscal year.
The Company has had an accumulated deficit from losses incurred prior to
September 30, 1991. The Company was profitable for the fiscal years ended
September 30, 1991 through September 30, 1996 which reduced the deficit in
those years. For the fiscal year ended September 30, 1997 the Company had a
net loss of $(354,879) which increased the deficit. This was offset by net
proceeds from the private placement of the Company's Common Stock in the
amount of $174,895 and the exchange of $150,000 of the debt to the related
party for 37,500 shares of Common Stock. The deficit was funded in the past
by proceeds from the issuance of Common Stock and notes from related parties.
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 cash and an additional $150,000 from the
related parties in the form of a reduction on the $597,272 note payable to
the related parties. These funds were used for the purchase of new computer
equipment and software, marketing expenses and to fund working capital needs.
SBS had borrowed $74,723 as of September 30, 1997 under a bank line of
credit from Norwest Business Credit. This line of credit was entered into
on January 3, 1997 and was funded on January 15, 1997. The initial
termination date is December 31, 1998. This line of credit bears interest
at the rate of 5% over Norwest's prime lending rate with a minimum interest
charge of $7,500 per quarter. At September 30, 1997 approximately
$125,000 was available under the facility.
On July 24, 1997, the Company commenced a new private placement. Under the
terms of the offering, the Company is seeking to raise a maximum of $725,000
(181,250 shares at $4.00 per share). There was no minimum for this private
placement. The Company has received $57,000 as of September 30, 1997 through
this offering. These proceeds were used for the purchase of new computer
equipment and software, marketing expenses and to fund working capital needs.
Costs incurred in raising these additional funds are expected to total 10,000.
SBS had borrowed $157,000 as of September 30, 1997 from related parties to
finance the Company's operations and capital investments. These borrowings
were made on a short term basis. SBS also entered into capital
leases to finance the acquisition of $91,964 of equipment during fiscal 1997.
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 243,799 shares of the Company's Common Stock.
The principal amount of the note is $595,272, including accrued interest on
prior indebtedness of $192,072. Interest is payable at 10% and the note is
due on or before October 1, 2001.
On January 3, 1997, in anticipation of obtaining a line of credit from a
lending institution, the related party restated their note and entered into
a subordination agreement. The related party required the note to be
amended to bear interest at the rate of 10% per annum compounded daily. At
the same time the related party exchanged $150,000 of the debt for 37,500
shares of Common Stock at a price of $4.00 per share.
On May 15, 1996, three officers of the Company purchased $93,600 of the note
payable to related parties from the related parties in exchange for notes
payable to related parties from the officers. The officers exchanged
the notes for 390,000 shares of Common Stock at a price of $0.24 per share.
On July 31, 1996, the Chief Financial Officer of the Company purchased
$32,000 of the note payable to related parties from the related parties in
exchange for a note payable to the related parties from the officer. The
Chief Financial Officer exchanged the note to exercise a warrant to purchase
160,000 share of Common Stock of the Company at a price of $0.20 per share.
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On December 10, 1997 the Company closed on a loan of $1,500,000 with
Sirrom Investments, Inc. (Sirrom). The proceeds of the loan will be
utilized for working capital, to pay a portion of the existing indebtedness
to certain shareholders, and to pay off the senior secured bank credit
facility. The loan provides for a stated interest rate of 13.75% per annum,
payable monthly. Principal is due on December 10, 2002.
The loan, which is secured by all of the assets of the Company, is
subordinate only to the existing $500,000 bank line of credit. The bank line
of credit remains available to the Company under the terms previously
described.
In connection with the loan, the Company issued warrants to Sirrom to
purchase up to 13% of the Common Stock of the Company at a purchase price of
$.01 per share. There are certain provisions of the loan agreement
which could increase the amount of warrants to be issued.
The Company is required to issue warrants up to an additional 5% of the
Common Stock of the Company if the Company does not meet certain income
performance measures for the yeatr ending September 30, 1998, and up to
an additional 3.75% if the loan is not paid by December 10, 2002.
The Company also paid certain fees in obtaining the loan, including a
$37,500 fee to Sirrom to process the loan, a $105,000 fee to an investment
banking firm that assisted in obtaining the loan and closing the loan, and
fees to attorneys of approximately $35,000.
Impact of the year 2000 Issue
-----------------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company's proprietary database application, the basis for its core
business functions, has been developed so that it will properly utilize
dates beyond December 31, 1999. In addition, the Company has recently
purchased new accounting software and this software has also been developed
to properly utilize dates beyond December 31, 1999. The Company's
Information Technology personnel have reviewed the remaining software and
hardware applications used by the Company and determined that no additional
work is required to remediate the Company's Year 2000 issue.
The Company has initiated communications with all of its significant
suppliers and large clients to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. There can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
The Company has determined it has no exposure to contingencies related to
the Year 2000 Issue for the products it has sold.
New Accounting Standards
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In February of 1997, the FASB issued Statements of Financial Accounting
Standards No. 128 Earnings per Share ("SFAS 128") effective for years ending
after December 15, 1997. Statement No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS")
for entities with publicly held Common Stock or potential Common Stock. The
Company will adopt SFAS 128 in its financial statements for the quarter
ending December 31, 1997. The adoption is not expected to have a material
effect on the reported earnings (loss) per share of the Company.
In June of 1997, the FASB issued Statements of Financial Accounting
Standards No. 130. Reporting Comprehensive Income ("SFAS 130"), and No. 131.
Disclosure About Segment of An Enterprise and Related Information
("SFAS 131"), effective for years beginning after December 15, 1997, SFAS
130 established standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
The Company has not yet adopted SFAS 130. The Company will comply with the
reporting and display requirements under this statement when required. SFAS
131 establishes standards for reporting information about operating segments
and the methods by which such segments were determined. The Company
has not yet adopted SFAS 131. As the Company currently operates within one
industry segment, the reporting of such information is not expected to be
significant.
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Item 7. Financial Statements
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INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Data National Corporation
We have audited the consolidated balance sheets of Data National
Corporation and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and
cash flows for the years 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, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
December 10, 1997
-13-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets (Note 4)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents. . . . . . . . . . .$ 15,792 $ 4,441
Receivables
Trade less allowance for bad debts of
$5,077 in 1997 and $5,077 in 1996. . . . . . 320,520 342,592
Other . . . . . . . . . . . . . . . . . . . . . . 8,104 15,305
Inventory, at cost . . . . . . . . . . . . . . . . 53,781 63,354
Prepaid postage . . . . . . . . . . . . . . . . . 45,040 394
Prepaid expenses . . . . . . . . . . . . . . . . . 54,029 35,129
------- -------
Total current assets . . . . . . . . . . . . . . .497,266 461,215
Property and equipment, at cost (Note 3) . . . . . . .884,807 724,414
Less accumulated depreciation. . . . . . . . . . (466,654) (373,709)
--------- ---------
418,153 350,705
------- -------
Deferred computer software development costs . . . . 196,403 169,977
Other assets . . . . . . . . . . . . . . . . . . . . 44,051 12,871
---------- ----------
$1,155,873 $ 994,768
========== ==========
Liabilities and Shareholders' Deficit
-------------------------------------
Current Liabilities
Short-term borrowings - related parties
(Note 2) . . . . . . . . . . . . . . . . $ 157,000 $ 155,000
Short-term borrowings - bank line of credit
(Note 4) . . . . . . . . . . . . . . . . 74,723 -
Current portion - capital lease obligations
(Note 5). . . . . . . . . . . . . . . . 113,154 75,401
Accounts payable . . . . . . . . . . . . . . . 268,939 138,426
Accrued interest . . . . . . . . . . . . . . . 48,684 7,242
Accrued expenses . . . . . . . . . . . . . . . 93,145 74,029
Deferred revenue . . . . . . . . . . . . . . . 87,728 26,419
------- -------
Total current liabilities. . . . . . . . . . 843,373 476,517
------- -------
Note payable to related parties (Note 2) . . . . . 595,272 743,472
Capital lease obligations, net of current portion
(Note 5) . . . . . . . . . . . . . . . . 124,491 155,958
Shareholders' Deficit
Common stock $.001 par value, authorized
100,000,000 shares; 1,582,165 and 1,498,190
shares issued and outstanding at September 30,
1997 and 1996, respectively (Note 7). . . . . . 1,582 1,498
Additional paid-in capital . . . . . . . . . . . 516,761 188,050
Accumulated deficit. . . . . . . . . . . . . . . (925,606) (570,727)
--------- ---------
(407,263) (381,179)
-14-
<PAGE>
Commitments
$ 1,155,873 $ 994,768
=========== ==========
_______________________________________
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Net sales $3,897,350 $2,666,148
Cost of sales
Materials, postage, labor and other costs 2,509,492 1,455,475
Depreciation and amortization 75,454 44,819
--------- ---------
Gross profit 1,312,404 1,165,854
Selling and marketing expense 367,881 287,676
General and administrative expense 1,011,914 751,472
Impairment of software development costs 113,661 -
Depreciation and amortization 24,447 9,753
---------- -------
Operating income (loss) (205,499) 116,953
Other income (expense)
Interest and other income 1,817 16,714
Interest expense, including amounts to
related parties of $68,020 in 1997 and
$83,988 in 1996 (135,875) (95,546)
Other expense (15,322) (1,323)
--------- --------
(149,380) (80,155)
----------- ----------
Net income (loss) $ (354,879) $ 36,798
=========== =========
Earnings (loss) per share $ (0.23) $ 0.04
=========== =========
Weighted average shares outstanding 1,544,966 1,040,922
=========== =========
</TABLE>
-16-
<PAGE>
- ----------------------------------------------
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
-------- ------- --------- -----------
<S> <C> <C> <C> <C>
Balance, October 1, 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 repurchased and
retired. . . . . . . . . . . (7,500) (8) (1,792) -
Net income . . . . . . . . - - - 36,798
--------- ------ -------- --------
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 -
Issuance of common stock for
services . . . . . . . . . . 975 1 3,899 -
Issuance of common stock,
net of offering costs of $7,105 . 45,500 45 174,850 -
Net loss - - - (354,879)
--------- ------- -------- ----------
Balance, September 30, 1997. . . 1,582,165 $ 1,582 $516,761 $(925,606)
========= ======= ======== ==========
</TABLE>
-18-
<PAGE>
- ---------------------------------------------
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Cash flow from operating activities
Net income(loss). . . . . . . . . . . . . . $ (354,879) $ 36,798
Adjustments to reconcile net income to cash
flow from operating activities
Depreciation and amortization . . . . . . . . 99,901 54,572
Impairment of software development costs 113,661 -
Common stock issued for services. . . . . . . 3,900 33,000
Changes in assets and liabilities
(Increase) decrease in trade receivables. . . 22,072 (97,660)
(Increase) decrease in other receivables. . . 7,201 (9,316)
(Increase) decrease in inventory. . . . . . . 9,573 (15,662)
(Increase) decrease in prepaid postage. . . . (44,646) 1,098
(Increase) in prepaid expenses. . . . . . . . (13,266) (31,988)
(Increase) in other assets. . . . . . . . . . (19,588) (3,175)
Increase in accounts payable. . . . . . . . . 130,514 76,649
Increase in accrued interest. . . . . . . . . 41,443 7,242
Increase in accrued expenses. . . . . . . . . 19,116 53,959
Increase (decrease) in deferred revenue . . . 61,309 (106,059)
-------- ---------
Total adjustments . . . . . . . . . . . . 431,190 (37,340)
------- ---------
Cash provided by (used in) operating activities 76,311 (542)
------- ---------
Cash flow from investing activities
Purchases of property and equipment . . . . . . (68,429) (26,399)
Deferred computer software development costs. . (140,089) (169,977)
--------- ---------
Cash used in investing activities . . . . . . . (208,518) (196,376)
--------- ---------
Cash flow from financing activities
Short-term borrowings from related parties. . . 358,000 340,000
Short-term borrowings from bank line of credit. 3,085,949 -
Capitalized loan fees . . . . . . . . . . . . . (18,548) -
Sale of common stock, net of offering costs . . 174,895 -
Increase in note payable related party. . . . . 1,800 -
Repayment of short-term borrowings from related
parties . . . . . . . . . . . . . . . . . . . . (356,000) (185,000)
Repayment of short-term borrowings from bank
line credit . . . . . . . . . . . . . . . . . .(3,011,226) -
Repayment of capital lease obligations. . . . (91,312) (43,200)
Common stock repurchased and retired. . . . . - (1,800)
---------- ---------
Cash provided by financing activities . . . . 143,558 110,000
---------- ---------
Increase (decrease) in cash and cash equivalents. 11,351 (86,918)
Cash and cash equivalents, beginning of year. . . 4,441 91,359
--------- --------
Cash and cash equivalents, end of year. . . . . . $ 15,792 $ 4,441
========= ========
Supplemental cash flow information
Property and equipment acquired under
capital leases . . . . . . . . . . . . . . . $ 91,964 $254,864
========= ========
Common stock issued for reduction of note
payable to related parties. . . . . . . . . . $ 150,000 $125,601
========= ========
Income taxes paid . . . . . . . . . . . . . . . $ - $ -
========= ========
-20-
<PAGE>
Interest paid . . . . . . . . . . . . . . . . . $ 87,985 $ 87,612
========= ========
</TABLE>
- --------------------------------------------
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(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. The Company currently owns 97.8% of
the outstanding Common Stock of Data National Inc. (DNI). DNI owns 100% of
the shares Service Business Systems, Inc. (SBS) and National COM-LINK
Systems, Inc. (NCL). The Company acts as a holding company for DNI and its
subsidiaries and coordinates their activities.
NCL receives royalties from licensing a trademark and, in 1996,
recognized revenue that was previously deferred as a result of the
termination of a contract for the sale of hardware and software products.
The Company derives revenue 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 83% and
88% of the Company's net sales in fiscal 1997 and fiscal 1996, respectively.
In fiscal 1996, SBS began expanding its client base to include auto
dealerships and customers in the financial services and tourism industries.
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
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-22-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to
the 1997 presentation.
Cash Equivalents
----------------
The Company considers investments with an original maturity of three
months or less to be cash equivalents.
Fair Value of Financial Instruments
-----------------------------------
The Company estimates the fair value of its monetary assets and
liabilities based upon existing interest rates related to such assets and
liabilities compared to current rates of interest for instruments with a
similar nature and degree of risk. The Company estimates that the carrying
value of all its monetary assets and liabilities approximates fair value as
of September 30, 1997.
Inventory
---------
Inventory consists of card stock and is carried at the lower of cost
or market. Cost is 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.
-23-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Impairment of Long-Lived Assets
-------------------------------
Statement of Financial Accounting Standards No. 121 Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of (SFAS No. 121), was adopted by the Company effective October 1, 1996. SFAS
No. 121 requires that impairment losses be recorded on long-lived assets used
in operations when indicators of impairment are present and the
undiscounted future cash flows estimated to be generated by those assets
are less than the assets carrying amount. The adoption
of SFAS No. 121 had no effect on the Company's financial statements.
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 $310,064
as deferred computer software development costs as of September 30, 1997.
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.
During the fourth quarter of 1997 the Company performed a functional
evaluation of the project and the costs capitalized to date and determined
that costs previously capitalized for certain modules should be written
down as the modules did not perform as designed and were abandoned. This
write down totaled $113,661.
Upon completion of the software, the capitalize costs will be
amortized using the straight-line method over a useful life of 3 years.
Other Assets
------------
Costs of perfecting the Company's interests in its trademarks have
been capitalized as part of the cost of the trademarks. The Company
capitalized $9,329 in fiscal 1997 which is being amortized
over an estimated life of 10 years.
-24-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
The Company obtained a revolving loan facility from Norwest Business
Credit on January 3, 1997. The Company incurred $18,458 of costs to obtain
this facility, which have been capitalized. These costs are being amortized
over 2 years which is the initial term of the facility. Accumulated
amortization totaled $6,956 at September 30, 1997.
Deferred Revenue
-----------------
Prepayments for products are recorded as deferred revenue until the
products are 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 $13,087 and $10,415 in fiscal 1997 and fiscal 1996, respectively.
-25-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
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.
Stock-Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123), effective for the fiscal years beginning after
December 15, 1995. This statement defines a fair value method of accounting
for employee stock options and encourages entities to adopt that value
method of accounting for its stock compensation plans. SFAS 123 allows an
entity to continue to measure compensation costs for these plans using the
intrinsic value method of accounting as prescribed in Accounting Pronouncement
Bulletin Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).
The Company has elected to continue to account for its employee stock
compensation plans as prescribed under APB 25. The pro forma disclosure
of net loss and loss per share required for SFAS 123 are included in Note 7.
Net Earnings (Loss) Per Share of Common Stock
---------------------------------------------
Net earnings (loss) per share is computed based on the weighted
average number of common shares, and when dilutive, common equivalent shares
outstanding during the year.
-26-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(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 on December 31,
1997.
Interest expense on the short-term borrowings to related parties
amounted to $4,513 and $1,414 in fiscal 1997 and fiscal 1996, respectively.
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 240,049 shares of the
Company's Common Stock. The principal amount of the note is $595,272,
including accrued interest on prior indebtedness of $192,072. Interest is
payable at 10% and the note is due on or before October 1, 2001.
On January 3, 1997, in anticipation of obtaining a line of credit
from a lending institution, the related party restated their note and entered
into a subordination agreement. The related party required the note to be
amended to bear interest at the rate of 10% per annum compounded daily. At
the same time the related party exchanged $150,000 of the debt for 37,500
shares of Common Stock at a price of $4.00 per share under the terms of a
private placement of its common stock.
Interest expense on the note payable to related parties amounted to
$63,507 and $82,574 in fiscal 1997 and fiscal 1996, respectively.
Purchase of Note Payable to Related Parties and Exchange of Note for
Common Stock
--------------------------------------------------------------------
On May 15, 1996, three officers of the Company purchased $93,600 of
the note payable to related parties from the related parties in exchange for
notes payable to related parties from the officers. The officers exchanged
the notes for 390,000 shares of Common Stock at a price of $0.24 per share.
-27-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
On July 31, 1996, the Chief Financial Officer of the Company
purchased $32,000 of the note payable to related parties from the related
parties in exchange for a note payable to the related parties from the
officer. The Chief Financial Officer exchanged the note to exercise a warrant
to purchase 160,000 shares of Common Stock of the Company at a price of
$0.20 per share.
Lease Payments to Related Party
-------------------------------
The son of the Chief Financial Officer leased equipment to the
Company under three capital leases, which expired as of September
30, 1996.
(3) Property and Equipment
- ----------------------------
A summary of property and equipment at September 30, 1997 and 1996
follows:
1997 1996
---------- ----------
Furniture and fixtures $ 52,832 $ 35,593
Office equipment 157,568 121,120
Production equipment 664,349 557,643
Vehicles 10,058 10,058
------- -------
884,807 724,414
Less accumulated depreciation (466,654) (373,709)
---------- ----------
$ 418,153 $ 350,705
========= =========
(4) Bank Line of Credit
- -----------------------
On January 3, 1997 the Company obtained 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. As a
condition of the financing , the related party subordinated its debt to
Norwest. The facility bears interest at the rate of 5% over Norwest's prime
-28-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
lending rate with a minimum interest charge of $7,500 per quarter. Advances
under the facility are limited to 80% of the eligible accounts receivable.
As of September 30, 1997 approximately $125,000 was available under the
facility. The facility expires on December 31, 1998.
Interest expense attributable to this facility amounted to $25,036 in fiscal
1997.
(5) 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, 1997:
1998 $140,105
1999 103,318
2000 27,270
2001 6,249
2002 1,330
--------
Total minimum commitments 278,272
Less portion representing interest (40,627)
---------
Present value of net minimum commitments 237,645
Less current portion (113,154)
---------
Non-current portion $124,491
Assets held under capital leases at September 30, 1997 and 1996 are
summarized as follows:
1997 1996
--------- ---------
Assets at cost . . . . . . . . . . . . . . . . . . $ 346,828 $ 254,864
Less accumulated depreciation . . . . . . (73,783) (21,809)
---------- ----------
$ 273,045 $ 233,055
========= =========
Amortization of capital leases is included in depreciation expense.
-29-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Interest expense attributable to capital leases of the Company is
included in interest expense in the accompanying consolidated financial
statements and amounted to $41,931 and $12,151 in fiscal 1997 and fiscal
1996, respectively.
(6) Commitments
- -----------------
Office Lease
------------
The Company occupies office space under a lease that expires in
February 1999 and requires monthly payments of $6,375. Following is a
summary of future rental commitments under this lease:
1998 $76,500
1999 $31,875
Rent expense amounted to $63,649 in fiscal 1997 and $37,836 in
fiscal 1996.
Incentive Plan
--------------
During fiscal 1996, the Board of Directors offered an incentive
plan, which is made available to all of the Company's full time employees as
an incentive to achieve improved 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 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. As the
Plan is on a calendar year basis and the financial statements are for the
fiscal year ended September 30, 1996 net income for the quarter ended
December 31, 1995 of $105,744 attributable to seasonal sales of holiday
greeting cards, was not included in the incentive plan in 1996. During the
following three quarters the Company had net losses totaling $68,946.
Therefore, no shares were contributed to the 1996 incentive plan. During
the first calendar quarter of 1997 $8,175 was contributed to the Plan based
on the Company's profitability for that quarter. No additional contributions
have been made to the Plan as the Company was not profitable during the two
quarters from April 1, 1997 through September 30, 1997.
-30-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 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 amount
deferred. As of January 1, 1997 this match was increased to the first 10% of
the amount deferred. In fiscal 1997 and fiscal 1996, such matching
contributions amounted to $3,331 and $1,435, respectively.
Common Stock
- ------------
Stock Options
-------------
In 1997 the Company adopted the 1997 Stock Option Plan. Under the
terms of the plan the Company may grant options to its employees to purchase
up to 250,000 shares of Common Stock. Options granted under the Plan may be
either Incentive Stock Options or Non-Qualified Stock Options. In accordance
with the terms of the Plan, the exercise price of each incentive stock
option will be determined by the Stock Option Committee (the Committee),
except that the price shall not be less than the fair market value of the
Company's Common Stock on the date of grant. For options issued as
non-qualified stock options, the exercise price will be determined in good
faith by the Committee in its discretion except that if there is a public
market for the common shares, the exercise price shall be the mean of the
bid and ask price on the date of grant. The maximum term of options granted
is 10 years and vesting is generally over a four-year period.
-31-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
A summary of the status of the Company's stock option plan as
of September 30, 1997, and changes during the year then ended are presented
below:
1997
---- Weighted-Average
Shares Exercise Price
------ ----------------
Outstanding at beginning or year - -
Granted 209,500 $6.15
Exercised - -
Forfeited - -
-------
Outstanding at end of year 209,500 $6.15
=======
Options exercisable at year-end 84,500 $4.00
Weighted-average fair value of
options granted during the year $1.02
The following table summarizes information about stock
options outstanding at September 30, 1997:
Options Outstanding Options Exercisable
Range of Weighted-Average Weighted- Weighted-
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Exercise Exercisable Exercise
Life Price Price
- ------- ----------- ----------- -------- ----------- ---------
$4-6 153,250 9.9 years 4 84,500 $4
7-9 18,750 10 8 - -
10-12 18,750 10 12 - -
13-16 18,750 10 16 - -
------- ------
4-16 209,500 10 6.15 84,500 4
======= ======
-32-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
At September 30, 1997 the Company had one fixed option plan which is
described above. The Company did not have a stock option plan during 1996.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. As all employee stock option grants were at or
above fair market value, no compensation cost has been recognized for the
plan. Had compensation cost for the Company's fixed option plan been
determined on the fair value at the grant dates for awards under the plan
consistent with the method of FASB Statement 123, the Company's current year
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1997
------
Net Loss:
As reported $354,879
Pro forma (1) 441,375
Net loss per share:
As reported $0.23
Pro forma 0.29
-33-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of 0% for all grants;
expected volatility of .001, risk-free interest rates of 6% for all grants;
and expected life of 5 years.
During 1997 the Company issued options to purchase 18,750 shares at $8
per share; 18,750 shares at $12 per share and 18,750 shares at $16 per share,
all of which were priced above the fair market value of the Company's stock
at the date of grant.
Other
-----
On May 15, 1996, the Company entered into agreements with three officers
of the Company tosell 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 annually on August 1 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, the officer's death, permanent total disability or retirement
or, the Board determines 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.
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 cash and an additional
$150,000 from a related party in the form of a reduction on the note payable
to the related party.
-34-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
On July 24, 1997 the Company commenced a private placement. Under
the terms of the offering, the Company is seeking to raise a maximum of
$725,000 (181,250 shares at $4.00 per share). There is no minimum for this
private placement. The Company has received $57,000 as of September 30,
1997.
(8) Major Customers
- ---------------------
The following customers each accounted for more than 10% of sales in
fiscal 1997 and fiscal 1996:
% of Sales
--------------------
Customer 1997 1996
---- ----
A 39.6 -
B 19.3 40.0
C 6.5 12.4
D 4.1 10.8
.(9) Income Taxes
- -------------------
The tax effect of each type of temporary difference and carryforward
that give rise to a significant portion of deferred tax assets at September
30, 1997 and 1996, is as follows:
1997 1996
-------- -------
Deferred Tax Assets
Net operating loss carryforward $ 583,081 $ 486,982
Allowance for doubtful accounts 1,700 1,700
Depreciation 3,538 1,091
Accrued interest - note payable to related party 86,247 68,160
-------- --------
Total Gross Deferred Tax Assets 674,566 557,933
Less valuation allowance (674,566) (557,933)
--------- ---------
Net Deferred Tax Assets $ - $ -
========= =========
-35-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
At September 30, 1997 the Company has net operating loss carryforwards
which expire as follows:
Expiration Amount
---------- ----------
1999 $ 130,300
2000 207,700
2001 87,100
2002 11,400
2003 357,700
2004 431,400
2005 206,700
2012 282,700
-----------
$1,715,000
===========
A portion of the loss carryforwards, aggregating approximately
$437,000, are subject to separate return limitations.
Income tax expense is different from amounts computed by applying the
statutory Federal income tax rate to earnings (loss) before income taxes
for the following reasons:
1997 1996
-------- --------
Tax expense (benefit) at 34% of earnings (loss)
before income taxes $(120,658) $ 12,511
Change in valuation allowance for net
deferred tax assets 116,633 (14,262)
Other 4,025 1,751
--------- ---------
Income tax expense (benefit) $ - $ -
========= =========
-36-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(10) Subsequent Event
- ---------------------
On December 10, 1997 the Company closed on a loan of $1,500,000 with Sirrom
Investments, Inc. (Sirrom). The proceeds of the loan will be utilized for
working capital, to pay a portion of the existing indebtedness to certain
shareholders, and to pay off the senior secured bank credit facility. The
loan provides for a stated interest rate of 13.75% per annum, payable
monthly. Principal is due on December 10, 2002.
The loan, which is secured by all of the assets of the Company, is
subordinate only to the existing $500,000 bank line of credit. This bank
line of credit remains available to the Company under the terms as described
in Note 4.
In connection with the loan, the Company issued warrants to Sirrom to
purchase up to 13% of the Common Stock of the Company at a purchase price of
$.01 per share. There are certain provisions of the loan agreement
which could increase the amount of warrants to be issued. The Company is
required to issue warrants up to an additional 5% of the Common Stock of the
Company if the Company does not meet certain income performance measures
for the year ending September 30, 1998, and up to an additional 3.75% if the
loan is not paid by December 10, 2002.
The Company also paid certain fees in obtaining the loan, including a
$37,500 fee to Sirrom to process the loan, a $105,000 fee to an investment
banking firm that assisted in obtaining the loan, and fees to attorneys
of approximately $35,000.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------
The Company engaged the firm of William G. Lajoie, P.C., to audit its
consolidated financial statements for the years ended 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 years ended September 30, 1996
and 1997.
-37-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 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
- ----------------------------------------------------------------------
The Directors and Officers of the Company at September 30, 1997, are
as follows:
Name Age Position
- ----------------- --- ----------------------------------
Ray E. Dillon III 44 Director and Chairman of the Board
Richard S. Simms 47 Chief Financial Officer, Director, Treasurer
Donald V. Warriner 47 Chief Executive Officer, President and
Director
J. Scott Fowler 33 Chief Operating Officer and Secretary
Jeffrey W. Clayton 42 Vice President, Sales
David T. Clements 57 Vice President, Marketing & Business
Development
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 seven 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.
-38-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
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 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. Mr. Warriner holds
a bachelors degree in accounting from Metropolitan State College and an MBA
from the University of Colorado.
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 1987 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.
Jeffrey W. Clayton is the Vice President of Sales for the Company. From
1996 to 1997 he was Director of Financial Services for dbIntellect/EDS.
From 1995 to 1996 he was Vice President of Sales for Broadway & Seymour. He
was Vice President of Marketing and Sales for INFOVISA, Inc. from 1993 to
1995. From 1983 to 1993 he held positions with various divisions of EDS.
-39-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
David T. Clements is the Vice President of Marketing & Business Development
for the Company. From 1992 to 1997 he was the Managing Director of Stratecom
Management Partners. From 1981 to 1992 he was with Teradata Corporation in a
variety of positions including Senior Director of Communications.
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 $100,000 during the
fiscal years ended September 30, 1997 and 1996:
Summary Compensation
Annual Compensation Long-Term Compensation
Other
Annual Restricted All Other
Name and Compen- Stock Options/ LTIP Compen-
Principle Salary Bonus sation Awarded SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------- ---- ------ ------ ------ ------- ------ ------- -------
Donald V.
Warriner,
CEO 1996 67,900 22,500
Donald V.
Warriner,
CEO 1997 91,990 23,782
Richard S.
Simms, CFO 1996 48,000
Richard S.
Simms CFO 1997 30,000
-39-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Summary Compensation
Annual Compensation Long-Term Compensation
Other
Annual Restricted All Other
Name and Compen- Stock Options/ LTIP Compen-
Principle Salary Bonus sation Awarded SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------- ---- ------ ------ ------ ------- ------ ------- -------
J. Scott
Fowler,
COO 1996 49,900 7,800
J. Scott
Fowler,
COO 1997 73,612 11,387
Jeffrey W.
Clayton,
VP 1997 4,273 23,000
David T.
Clements,
VP 1997 47,600 50,000
________________________
-40-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
The following table shows certain information with respect to stock
options granted to the Company's executive officers during the fiscal year
ended 1997:
Option/SAR Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------------------------
% of Total
Number of Securities Options/SARs Exercise or
Underlying Options / Granted to Emps. Base Price Expiration
SARs Granted (#) in Fiscal Year ($/Sh) Date
- ------------------------------------------------------------------------------
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
Jeffrey W.
Clayton 23,000 100 $4.00 2007
David T.
Clements 50,000 100 $4.00 2007
-41-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
The following table sets forth certain information with respect to
option exercises during the fiscal year ended September 30, 1997 by the
executive officers of the Company and the value of each such officer's
unexercised options at September 30, 1997:
Aggregated Options/SAR Exercise in Last Fiscal Year
and Fiscal Year - End Options/SAR Values
-------------------------------------------------------------
Number of Securities
Shares Underlying Value of Unexercised
Acquired Value Unexercised In-the-Money
on Exercise Realized Options/SARs at Option/SARs at Fiscal
(#) ($) Fiscal Year-End (#) Year-End ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------
Donald V.
Warriner None None 0 0 0 0
Richard S.
Simms None None 0 0 0 0
J. Scott
Fowler None None 0 0 0 0
Jeffrey W.
Clayton None None 0 23,000 0 0
David T.
Clements None None 0 50,000 0 0
-42-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth information as of September 30, 1997,
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 the Company, 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
------------------- ---------- --------
Richard S. Simms 449,178 (1) 28.39
20 Dutch Creek Drive
Littleton, CO 80123
Donald V. Warriner 375,000 23.70
4 Glenview Drive
Littleton, CO 80123
J. Scott Fowler 150,000 9.48
6485 South Parfet Street
Littleton, CO 80127
Ray E. Dillon III 240,049 (2) 15.17
1 Compound Drive
Hutchinson, KS 67502
All Directors and executive 1,214,227 76.74
officers as a group
- ---------------------------------------
(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.
-43-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
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), (the "Dillon Note"), in January,
1996. Ray E. Dillon III is now Chairman of the Board of Directors and
owns and controls 240,049 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 Dillon 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. However, the Dillon
Note is subordinate to the positions of Norwest Business Credit and Sirrom.
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 the Dillons in 1992 as a result of a previous refinancing of the Dillon
Note and were transferred to Mr. Simms in 1993.
Interest expense on the Dillon Note amounted to $63,507 in fiscal
1997 and $82,574 in fiscal 1996.
-44-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
On May 15, 1996, three officers of the Company purchased $93,600 of the
note payable to related parties from the related parties in exchange for
notes payable to the related parties from the officers. The officers
exchanged the notes for 390,000 shares of common stock at a price of $0.24
per share.
On July 31, 1996, the Chief Financial Officer of the Company
purchased $32,000 of the note payable to related parties from the related
parties in exchange for a note payable to the related parties from the
officer. The Chief Financial Officer exchanged the note to exercise a
warrant to purchase 160,000 shares of Common Stock of the Company at a price
of $0.20 per share.
On January 3, 1997 the Company was desirous of obtaining a line of
credit from a lending institution. The Company anticipated that this lender
would require subordination of the note payable to related parties. As
consideration for entering into this subordination agreement the related
party required that this indebtedness be refinanced to bear interest at the
rate of 10% per annum compounded daily. At the same time the related party
exchanged $150,000 of the debt for 37,500 shares of Common Stock at a price
of $4.00 per share.
Ray E. Dillon III and Richard S. Simms have loaned $157,000 to SBS as
of September 30, 1997 to meet certain operating expenses. These loans bear
interest at a rate of 10%.
-45-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
Item 13. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Description Location
- ------- ------------------------ ---------------------------------------
3.1 Articles of Incorporation Incorporated by reference to the
Company's Post Effective Amendment No.
7 to the Company's Registration
Statement on Form S-18 (SEC File No.
2-95050-D)
3.2 Bylaws Incorporated by reference to the
Company's Post Effective Amendment
No. 7 to the Company's Registration
Statement on Form S-18 (SEC File No.
2-95050-D)
10.1 Revolving Note Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.2 Credit and Security Incorporated by reference to Exhibit
Agreement 10.2 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.3 Collateral Account Incorporated by reference to Exhibit
Agreement 10.3 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.4 Agreement as to Lockbox ServiceIncorporated by reference to
Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB for the quarter
ended December 31, 1996.
-46-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
10.5 Landlord's Disclaimer and Incorporated by reference to Exhibit
Consent 10.5 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.6 Support Agreement - Incorporated by reference to Exhibit
Richard S. Simms 10.6 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.7 Support Agreement- Incorporated by reference to Exhibit
Donald V. Warriner 10.7 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.8 Guaranty by Corporation Incorporated by reference to Exhibit
10.8 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.9 Security Agreement for Incorporated by reference to Exhibit
Guaranty 10.9 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.10 Security Agreement in Incorporated by reference to Exhibit
Favor of Norwest Bank NA 10.10 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.11 Subordination Agreement Incorporated by reference to Exhibit
10.11 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
10.12 Assignment Incorporated by reference to Exhibit
10.12 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
December 31, 1996.
-47-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
10.13 Stock Option Plan Incorporated by reference to Exhibit
10.5 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended
June 30, 1997.
10.14 Penske Autotrac Contract Filed herewith electronically
(Pricing information
deleted)
10.15 Penske Newsletter Contract Filed herewith electronically
(Pricing information
deleted)
10.16 Penske PTL Mover Contract Filed herewith electronically
(Pricing information
deleted)
10.17 Penske Target Mail Contract Filed herewith electronically
(Pricing information
deleted)
10.18 Sirrom Investments, Inc. Filed herewith electronically
loan documents
10.19 Sun Company, Inc. Contract Filed herewith electronically
(Pricing information
deleted)
10.20 Sun Company, Inc. Contract Filed herewith electronically
including Supplement #4
(Pricing information deleted)
21.1 Subsidiaries of the Filed herewith electronically
registrant
27.1 Financial Data Schedule Filed herewith electronically
-48-
<PAGE>
DATA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
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.
(Registrant) DATA NATIONAL CORPORATION
BY(Signature) /s/Richard S. Simms
(Date) January 12, 1998
(Name and Title Richard S. Simms,
Chief Financial Officer,
Treasurer and Director
(Principal Accounting Officer)
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.
BY(Signature) /s/Richard S. Simms
(Date) January 12,1998
(Name and Title) Richard S. Simms,
Chief Financial Officer,
Director and Treasurer
BY(Signature) /s/
(Date) January 12,1998
(Name and Title) Ray E. Dillon III, Chairman of the
Board and Director
BY(Signature) /s/
(Date) January 12,1998
(Name and Title) Donald V. Warriner, President,
Chief Executive Officer and
Director
-49-
<PAGE>
Description of Services
AutoTrac - Customer Follow-up Program
---------------------------------------
Service Business Systems (SBS), a subsidiary of Data National Corporation,
shall provide each of the 840 Penske Auto Center (PAC) locations with the
following services:
Database Management
-------------------
A computerized database that is updated through a tape or electronic
download process. The data will be provided by Penske Auto Center every two
weeks.
SBS will coordinate efforts to maintain the integrity of the customer
database. SBS will provide a combination of three methods to ensure that
the customer database is accurate and timely. The three available methods
are:
1. SBS will provide real-time access to the database to maintain the
database per the store's instructions. Updates can occur over the
phone as the Customer Service Representative can add, update, or
delete a customer record from the database.
2. SBS will send the Penske Auto Center database to a certified
National Change Of Address (NCOA) vendor on an annual basis to have
all the addresses verified and updated. If an existing customer
has moved in the last twelve months, the NCOA process will provide
their current address. SBS will work with Penske Auto Centers to
determine the optimal method for updating the database after the
NCOA process.
3. SBS will produce a report listing all customers in the database for
each store, if requested by the store. This list is sent to the
store for review, updates, and corrections. The updates are then
entered into the database.
Customer Communications
-----------------------
The same card will be utilized for all of the mailings. The card is an
over-sized postcard, 7" x 5", minimum 8 pt stock, with four color artwork
on the front and a collapsed variable message on the back. SBS recommends
an over-sized postcard to eliminate the possibility of the card being
overlooked in the customers' mail. This size allows for customized messages,
additional coupon space, and attractive graphics without compromising the
integrity of the piece. A new card is designed every three months.
SBS will mail communications to customers in the form of a "Mobil 1
Reinforcer" card for customers who purchase a Mobil 1 oil change. These cards
will display a unique graphic that is intended to reinforce their decision to
purchase Mobil 1 oil.
-1-
<PAGE>
Program Reporting
SBS will provide additional information as reasonably required by Penske
Auto Centers. SBS and PAC will jointly determine what the appropriate level
of reporting will be as the program progresses. A balanced scorecard will be
developed by SBS and PAC. The scorecard will include shared objectives with
common measures and company-specific objectives with shared measures. These
objectives and measures must be linked to the performance evaluations of the
appropriate parties.
The primary performance measure is response rate. Response rate is determined
by the number of customers who visit a PAC location compared to the list of
customers SBS mailed a reminder notice.
Customer Service
SBS provides one Customer Service Representative devoted to the Penske Auto
Centers account. The Customer Service Representative is available from 6 a.m.
until 5 p.m. (MST) for store inquiries. The Customer Service Representative
is responsible for day-to-day account activities including:
* Contacting locations for customer handouts, target mail, and other
marketing initiatives
* Problem resolution (as needed)
* Presentations to Regional meetings
* Maintenance and revisions to the store Master File
SBS maintains a toll-free number to assist Penske Auto Centers and its stores
in facilitating message changes, database updates and answering questions on
an on-going basis. All inquiries are responded to by the end of the next
business day.
SBS understands that there are three levels of service needed to deliver a
successful database marketing program. The three levels of service include
store-level support, regional support, and corporate support. SBS provides a
full-time, experienced National Sales Representative dedicated to regional
support as well as corporate support.
SBS recommends a quarterly meeting between SBS and Penske Auto Centers to
discuss past program results, current programs, and future marketing
initiatives.
Initially, Don Warriner and/or Scott Fowler will spend the required time to
provide "hands-on" support service to meet the needs of PAC. SBS will locate
a full-time person in Detroit as the Penske Account Executive in the event
the account grows to a mutually beneficial size.
-2-
<PAGE>
Transition Plan
SBS provides the most efficient and seamless transition of any potential
vendor. We can begin evaluating alternative methods of data transfer,
developing creative marketing pieces, and determine marketing strategies for
1997 as soon as Penske Auto Centers is ready in the judgment of PAC.
Time Frames
SBS can begin delivery of products and services outlined in this proposal
within 60 days of this agreement. The time frame is based on the cooperation
of all involved parties.
-3-
<PAGE>
Fee Structure
AutoTrac - Customer Follow-up Program
Any variation from the description of services required or the projected
volumes may impact the fees.
Follow-up Program Costs
The customer follow-up program will be billed at a per card rate of $
for the first full six month period following the initial mailing, which will
be considered the "Initial Period". With respect to the mailings after the
Initial Period (referred to as the "Subsequent Period"), the customer follow-
up program will be billed at a per card rate of $ . PAC will pay such
invoice in accordance with the terms set forth below.
The prices include postage costs.
Performance Incentives
The performance incentives outlined below are based on percentage response
rate. Within thirty days after the end of the Initial Period, SBS and PAC
will jointly determine the percentage response rate of the program for the
Initial Period, which will become the baseline for the Subsequent Period.
SBS and PAC will jointly determine the percentage response rate for the month
in question between 90 and 105 days after the end of each calendar month. If
SBS is entitled to the incentive rate with respect to any month, SBS will
invoice PAC for the difference between the incentive rate and the initial
rate paid for all cards mailed during the month in question. PAC will pay
such invoice in accordance with the terms set forth below. If such
calculation entitles PAC to a refund then, at PACs' option, SBS will either
refund such amount or such amount will be offset against subsequent amounts
due. The incentive rates will be as follows:
Monthly Response Rate Price Per Piece
Less than Baseline -10% $
Baseline +/-10% $
Baseline +10% to Baseline +20% $
Greater than Baseline +20% $
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<PAGE>
Set-up Fee
The initial one-time set-up fee is $ . The fee covers the enrollment of
all PAC locations into the program, data preparation and conversion, and
custom programming. Other than the price per piece and the set-up fee of $
, SBS will not charge PAC any additional amount except as expressly provided
under additional services below, including any corporate overhead charges,
postage charges or otherwise. In the event that SBS cancels this agreement
and there are fewer than 24 mailings in 1997, then SBS shall immediately
refund to PAC an amount equal to $ multiplied by the difference between
the number of mailings and the number of mailings actually made in 1997.
Mailing Frequency
The mailing frequency is one mailing every two weeks. SBS will work with
Penske Auto Centers to determine the optimal mailing frequency for the
program as the program matures.
Term of Agreement
The term of the agreement for the AutoTrac Program ends January 31, 1998.
Program reporting would continue through February, 1998. This agreement may
be extended by PAC upon 60 days prior written notice from the end of any term
of this agreement for one or more additional years and the price per piece
will be mutually agreed upon by SBS and PAC but in no event will exceed
current pricing plus mutually agreed upon inflation adjustments, subject to
equal or greater volumes. Upon such renewal, if any, SBS will not charge PAC
an additional set-up fee or other similar charges.
Prepaid Postage
SBS will require PAC to provide postage fees prior to the delivery of each
mailing. By mutual agreement, PAC and SBS will investigate alternatives to
prepaid postage including EFT, a dedicated postage account, or a declining
balance program and would utilize the most cost-effective method.
Additional Services
The services to be provided are all-inclusive. All additional services,
except for the AutoTrac Customer Follow-up Program, will only be rendered
when approved in advance by Roger S. Penske, Jr., Tim Findlay, or Peter Klein.
Some aspects of a particular project can not be anticipated. In these
cases a quote will be prepared for any work not covered in the above
price schedule.
-5-
<PAGE>
Payment Terms and Conditions
SBS will invoice PAC directly for all Services provided under the terms and
conditions of this agreement. Upon request, SBS will provide verifications
of all completed mailings. This verification will be in the form of receipts
and reports provided by the USPS.
Terms of payment are net thirty (30) days from the date of invoice. The
date of invoice is the date that the pieces are dropped with USPS provided
that PAC receives such invoice within fifteen (15) days of such drop and, if
not, then the date of the invoice will be the date falling fifteen (15) days
prior to the date of receipt of such invoice by PAC. Payments not received
within 30 days are subject to an interest rate of 1.5% per month. Payments
not received within 60 days constitute a material breach of this agreement.
Price Protection
Pricing will be firm through the term of the contract, with the exception
that SBS will be entitled to increase the pricing in the event of changes
initiated by PAC or postal or paper costs increase at any time during the
term of this agreement. Increases in paper or postage costs would affect
PAC pricing on a direct pass-through basis with no additional charges for
corporate overhead or similar charges.
Conflict of Interest
Each party, in performing its obligations under this agreement, shall
establish and maintain appropriate business standards, procedures and controls
including those necessary to avoid any real or apparent impropriety or adverse
impact on the interest of the other party. Each party shall review with
reasonable frequency during the term of the agreement, such business standards
and procedures including, without limitation, those related to the activities
of its employees and agents in their relations with other party's
employees, agents and representatives, and other third parties.
Governing Law
The validity and interpretation of this agreement and the legal obligation
of the parties to it shall be governed by the laws of the State of Colorado,
unless otherwise agreed in writing by representatives of PAC and SBS at the
time of the order.
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<PAGE>
Notices
All notices pertaining to this Agreement shall be in writing, addressed to
the party for whom intended at the address set forth below or at such other
address as may be furnished by such party in writing and shall be deemed
given on the date of mailing.
The address of PAC is: The address of SBS is:
Penske Auto Center Service Business Systems
Attn:Roger S. Penske, Jr. Attn: Don Warriner
3270 W. Big Beaver Rd. 11415 West I-70 Frontage Road N.
Suite 130 Wheat Ridge, CO 80033
Troy, MI 48084
Indemnity
SBS agrees to indemnify and hold harmless PAC, its officers, employees and
agents with respect to any damages, claims or losses arising out of SBS's
nonperformance or misperformance of its obligations under this agreement.
PAC agrees to indemnify and hold harmless SBS, its officers, employees and
agents with respect to any damages, claims or losses arising out of PAC's
nonperformance or misperformance of its obligations under this agreement and
for any alleged trademark infringement or infringement of any intellectual
property of third parties. PAC also agrees to indemnify SBS against any and
all losses regarding any dispute over the ownership of information contained
in the database between PAC and its employees/contractors.
Confidentiality
SBS shall hold all customer and client information obtained from PAC, its
officers, employees or agents in strict confidence. SBS acknowledges that
all such information is confidential and proprietary to PAC. SBS agrees not
to divulge this information without prior written permission of PAC.
Information obtained in the performance of this agreement is to be used only
in connection with providing Services under this agreement. SBS, however,
shall be permitted to disclose said information to its employees and vendors
as reasonably necessary to provide the Services described herein, provided
that SBS takes steps to ensure that its employees and vendors keep said
information confidential. This provision shall survive any termination of
this agreement.
-7-
<PAGE>
Non-exclusive
PAC acknowledges that SBS is in the business of providing information
services and database marketing services to the automotive markets. SBS will
continue to provide said services to its current customers, which include
major and independent oil companies, automobile dealerships and other local
and regional automotive service providers. For the duration of this
agreement, SBS will not provide customer acquisition services as outlined in
this agreement to other direct automotive full-service national competitors
of PAC, including but not limited to WalMart, Montgomery Wards, Target,
and Pep Boys, without prior written approval from PAC. For the duration of
this agreement, SBS can provide customer follow-up services to other direct
automotive full-service national competitors of PAC. Without limiting the
nature of SBS's confidentiality obligations set forth in the immediately
preceding paragraph, in the event of a conflict between this paragraph and
the immediately preceding paragraph, the terms of the immediately preceding
paragraph shall control.
Cancellation
Without Cause: Either party is entitled to terminate this contract by
providing written notice to the other of such termination with at least
sixty (60) days advance notice.
With Cause: The breach of the terms of this contract by either party,
provided such breach is not cured within seven (7) days following
notification (or reasonable action taken to correct such a breach within a
reasonable time period) by the other party, shall entitle such other party
to terminate this contract. Upon any cancellation of this agreement, SBS
agrees return to PAC within fifteen (15) days of the date of notice of
cancellation any and all information obtained by SBS under the terms of this
agreement, including without limitation the then current database.
Separability
The invalidity or unenforceability of any of the terms, covenants or
conditions contained in this agreement shall not render invalid or
unenforceable any of the other terms, covenants or conditions of this
contract.
If the foregoing is in accordance with your understanding of our
agreement, please sign both copies in the space provided and return one copy
to this office.
Agreed and Accepted Agreed and Accepted
Penske Auto Centers, Inc.Service Business Systems
By: By:
Title: Title:
Date: Date:
Penske AutoTrac Program January, 1997
CONFIDENTIAL Service Business Systems
-8-
<PAGE>
Penske Newsletter Contract January, 1997
- ----------------------------------------------------------------------------
Penske Auto Center, located at 3270 West Big Beaver Road, Suite 130, Troy,
Michigan 48084, agrees to purchase and Data National Corporation with offices
located at 11415 West I-70 Frontage Road North, Wheat Ridge, Colorado 80033
(hereinafter called "DNC") agrees to provide Marketing Services (hereinafter
called "Services") as may be required by Penske Auto Center during the period
of this Agreement and under the terms and conditions set forth herein.
1. Term: The term of this Agreement shall be from January 1, 1997 through
December 31, 1997. This Agreement will automatically renew for periods of
one (1) year unless 60 days written notice of changes or cancellation is
given by either party.
2. Services: DNC shall provide Penske Auto Center with the following
Services:
a. Newsletter Mailing
database management
layout and design of newsletter
print management
addressing, sorting, bundling, and delivery to USPS
quality control
storage and inventory of mailing materials
project management
3. Pricing of Services: DNC shall provide the Services as outlined in
paragraph 2a and as discussed in negotiations between DNC and Penske Auto
Center. Pricing includes the Services as detailed below.
Newsletter Program
Mailed Newsletter
First Class $ piece
Standard Class $ /piece
Shipped Newsletter $ /piece
4. Responsibilities: Under the terms and conditions of this Agreement, the
parties have the following responsibilities:
Penske Auto Center will:
a) Provide written copy, preferably in electronic media, by the dates
specified by DNC
b) Meet with DNC to coordinate newsletter mailings on an ongoing basis
c) Provide creative approval of the newsletter in a timely manner
-1-
<PAGE>
Data National Corporation will:
a) Complete all Services as set forth in this Agreement
b) Meet with key individuals at Penske Auto Center to assure the
satisfactory progress of the programs
c) Maintain a current inventory of materials and provide Penske Auto Center
with inventory updates on a frequent basis and/or as requested
d) Maintain complete confidentiality of all database information provided
DNC by Penske Auto Center
Payment Terms and Conditions: DNC will invoice Penske Auto Center directly
for all Services provided under the terms and conditions of this Agreement.
Upon request, DNC will provide verifications of all completed mailings.
Terms of payment are net thirty (30) days from the date of invoice.
5. Price Protection: Pricing will be firm through the term of the contract
as stated in paragraph 1, with the exception that DNC will be entitled to
increase the pricing in the event that changes initiated by Penske Auto
Center, or postal costs increase at any time during the term of this
Agreement.
6. Conflict of Interest: Each party, in performing its obligations under
this Agreement, shall establish and maintain appropriate business standards,
procedures and controls including those necessary to avoid any real or
apparent impropriety or adverse impact on the interest of the other party.
Each party shall review with reasonable frequency during the term of the
Agreement, such business standards and procedures including, without
limitation, those related to the activities of its employees and agents in
their relations with other party's employees, agents and representatives, and
other third parties.
7. Governing Law: The validity and interpretation of this Agreement and the
legal obligation of the parties to it shall be governed by the laws of the
State of Colorado, unless otherwise agreed in writing by representatives of
Penske Auto Center and DNC at the time of the order.
8. Notices: All notices pertaining to this Agreement shall be in writing,
addressed to the party for whom intended at the address set forth below or at
such other address as may be furnished by such party in writing and shall be
deemed given on the date of mailing.
The address of Penske Auto Center is: The address of DNC is:
Penske Auto Center Data National Corporation
Attn: Roger S. Penske, Jr. Attn: Don Warriner
3270 W Big Beaver Rd, Suite 130 11415 West I-70 Frontage Rd North
Troy, MI 48084 Wheat Ridge, CO 80033
-2-
<PAGE>
9. Indemnity: DNC agrees to indemnify and hold harmless Penske Auto Center,
its officers, employees and agents with respect to any damages, claims or
losses arising out of DNC's nonperformance or misperformance of its
obligations under this Agreement.
Penske Auto Center agrees to indemnify and hold harmless DNC, its officers,
employees and agents with respect to any damages, claims or losses arising
out of Penske Auto Centers' nonperformance or misperformance of its
obligations under this Agreement. Penske Auto Center also agrees to
indemnify DNC against any and all losses regarding any dispute over the
ownership of information contained in the database between Penske Auto Center
and its employees/contractors.
10. Confidentiality: DNC shall hold all customer and client information
obtained from Penske Auto Center, its officers, employees or agents in strict
confidence. DNC acknowledges that all such information is confidential and
proprietary to Penske Auto Center. DNC agrees not to divulge this information
without prior written permission of Penske Auto Center. Information obtained
in the performance of this Agreement is to be used only in connection with
providing Services under this Agreement. DNC, however, shall be permitted to
disclose said information to its employees and vendors as necessary to provide
the Services described herein, provided that DNC takes steps to ensure that
its employees and vendors keep said information confidential. This provision
shall survive any termination of this Agreement.
11. Separability: The invalidity or unenforceability of any of the terms,
covenants or conditions contained in this Agreement shall not render invalid
or unenforceable any of the other terms, covenants or conditions of this
contract.
If the foregoing is in accordance with your understanding of our Agreement,
please sign both copies in the space provided and return one copy to this
office.
Agreed and Accepted Agreed and Accepted
Penske Auto Center Data National Corporation
By:___________________________ By:___________________________
Title:__________________________ Title:________________________
Date:__________________________ Date:_________________________
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Penske Mover Contract March, 1997
- ----------------------------------------------------------------------------
Penske Auto Center, located at 3270 West Big Beaver Rd, Suite 130, Troy,
Michigan 48084, agrees to purchase and Service Business Systems with offices
located at 11415 West I-70 Frontage Road North, Wheat Ridge, Colorado 80033
(hereinafter called "SBS") agrees to provide Marketing Services (hereinafter
called "Services") as may be required by Penske Auto Center (PAC) during the
period of this Agreement and under the terms and conditions set forth herein.
Term of Agreement
The term of the agreement for the PTL Mover Program ends April 30, 1998.
This agreement may be extended by PAC upon 60 days prior written notice from
the end of any term of this agreement for one or more additional years and
the price per piece will be mutually agreed upon by SBS and PAC but in no
event will exceed current pricing plus mutually agreed upon inflation
adjustments, subject to equal or greater volumes. Upon such renewal, if any,
SBS will not charge PAC an additional set-up fee or other similar charges.
Description of Services:
PTL Mover Customer Acquisition and Retention Program
Service Business Systems (SBS) shall provide Penske Auto Center with the
following services:
Database Management
- -------------------
A computerized database will be updated through either a media transfer or
electronic download process is used to target potential PAC customers. The
data will be provided by Penske Truck Leasing (PTL) on a daily basis. The
information will include the full name and address of the customer, date of
move, and destination city and state. PTL is responsible for all costs
associated with the transfer of data to SBS.
Customer Communications
- -----------------------
The information provided by Penske Truck Leasing will be used to target those
customers by PAC. A generic letter will be mailed to the potential PAC
customer. The destination information will be used to determine which PAC
locations are nearest to customers' new place of residence.
The same letter will be utilized for all mailings. The letter is 8 1/2" x 11"
letterhead provided by PTL. The letter will be tri-folded and inserted into
a #10 envelope. The PAC logo and return address is pre-printed on the
envelope. The customized insert providing an offer to the customer will also
be inserted into the envelope. The insert will be approximately 2_" x 6", 2
color. The insert will list the nearest PAC location to the customers moving
destination.
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<PAGE>
Program Reporting
- -----------------
SBS will provide additional information as reasonably required by Penske Auto
Centers. SBS and PAC will jointly determine what the appropriate level of
reporting will be as the program progresses. A balanced scorecard will be
developed by SBS and PAC. The scorecard will include shared objectives with
common measures and company-specific objectives with shared measures. These
objectives and measures must be linked to the performance evaluations of the
appropriate parties.
The insert will be coded to provide tracking information. The accuracy of
the tracking information is dependent on the data capture at the point of
sale. The primary performance measure is response rate. Response rate is
determined by the number of customers who visit a PAC location compared to
the list of customers receiving the letter.
Customer Service
- ----------------
SBS provides one Customer Service Representative devoted to the Penske Auto
Centers account. The Customer Service Representative is available from 7 a.m.
until 5 p.m. (MST) for store inquiries. The Customer Service Representative
is responsible for day-to-day account activities.
SBS maintains a toll-free number to assist Penske Auto Center as well as
Penske Truck Leasing in facilitating changes, database updates and answering
questions on an on-going basis. All inquiries are responded to by the end of
the next business day.SBS recommends a quarterly meeting between SBS and
Penske Auto Center to discuss past program results, current programs, and
future marketing initiatives.
Time Frame
- ----------
SBS can begin delivery of products and services outlined in this proposal
within 30 days of this agreement. The time frame is based on the cooperation
of all involved parties.
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<PAGE>
Fee Structure
Any variation from the description of services required or the projected
volumes may impact the fees.
Program Costs
The PTL Mover program will be billed at a per piece rate of $ . The
pricing is based on an estimated volume of 8,000 pieces per month. PAC will
pay such invoice in accordance with the terms set forth below. The price
include postage costs. Some aspects of a particular project can not be
anticipated. In these cases a quote will be prepared for any work not
covered in the above price schedule.
Set-up Fee
The initial one-time set-up fee is $ . The fee covers program development,
data preparation and conversion, and internal custom programming. Other than
the price per piece and the set-up fee of $ , SBS will not charge PAC any
additional amount except as expressly provided under additional services
below, including any corporate overhead charges, postage charges or otherwise.
In the event that SBS cancels this agreement and there are fewer than 100
mailings in 1997, then SBS shall immediately refund to PAC an amount equal to
$ multiplied by the difference between the number of mailings and the
number of mailings actually made in 1997.
Mailing Frequency
The mailing frequency is daily. SBS will work with Penske Auto Centers to
determine the optimal mailing frequency for the program as the program
matures.
Prepaid Postage
SBS will require PAC to provide postage fees on a monthly basis. The amount
of the pre-paid postage is based on mutually-agreed upon estimated monthly
volumes multiplied by $ . By mutual agreement, PAC and SBS will
investigate alternatives to prepaid postage including EFT, a dedicated
postage account, or a declining balance program and would utilize the most
cost-effective method.
Additional Services
The services to be provided are all-inclusive. All additional services,
except for the PTL Mover Program, will only be rendered when approved in
advance by Roger S. Penske, Jr., Tim Findlay, or Dave Baptisti.
-3-
<PAGE>
Payment Terms and Conditions
SBS will invoice PAC directly for all Services provided under the terms and
conditions of this agreement. Upon request, SBS will provide verifications
of all completed mailings. This verification will be in the form of receipts
and reports provided by the USPS.
Invoices are prepared monthly. Terms of payment are net thirty (30) days
from the date of invoice. Payments not received within 30 days are subject
to an interest rate of 1.5% per month. Payments not received within 60 days
constitute a material breach of this agreement.
Price Protection
Pricing will be firm through the term of the contract, with the exception
that SBS will be entitled to increase the pricing in the event of changes
initiated by PAC or postal or paper costs increase at any time during the
term of this agreement. Increases in paper or postage costs would affect PAC
pricing on a direct pass-through basis with no additional charges for
corporate overhead or similar charges.
Conflict of Interest
Each party, in performing its obligations under this agreement, shall
establish and maintain appropriate business standards, procedures and controls
including those necessary to avoid any real or apparent impropriety or adverse
impact on the interest of the other party. Each party shall review with
reasonable frequency during the term of the agreement, such business standards
and procedures including, without limitation, those related to the activities
of its employees and agents in their relations with other party's employees,
agents and representatives, and other third parties.
Governing Law
The validity and interpretation of this agreement and the legal obligation of
the parties to it shall be governed by the laws of the State of Colorado,
unless otherwise agreed in writing by representatives of PAC and SBS at the
time of the order.
-4-
<PAGE>
Notices
All notices pertaining to this Agreement shall be in writing, addressed to
the party for whom intended at the address set forth below or at such other
address as may be furnished by such party in writing and shall be deemed
given on the date of mailing.
The address of PAC is: The address of SBS is:
Penske Auto Center Service Business Systems
Attn:Roger S. Penske, Jr. Attn: Don Warriner
3270 W. Big Beaver Rd. 11415 West I-70 Frontage Road N.
Suite 130 Wheat Ridge, CO 80033
Troy, MI 48084
Indemnity
SBS agrees to indemnify and hold harmless PAC, its officers, employees and
agents with respect to any damages, claims or losses arising out of SBS's
nonperformance or misperformance of its obligations under this agreement.
PAC agrees to indemnify and hold harmless SBS, its officers, employees and
agents with respect to any damages, claims or losses arising out of PAC's
nonperformance or misperformance of its obligations under this agreement and
for any alleged trademark infringement or infringement of any intellectual
property of third parties. PAC also agrees to indemnify SBS against any and
all losses regarding any dispute over the ownership of information contained
in the database between PAC and its employees/contractors.
Confidentiality
SBS shall hold all customer and client information obtained from PAC, its
officers, employees or agents in strict confidence. SBS acknowledges that
all such information is confidential and proprietary to PAC. SBS agrees not
to divulge this information without prior written permission of PAC.
Information obtained in the performance of this agreement is to be used only
in connection with providing Services under this agreement. SBS, however,
shall be permitted to disclose said information to its employees and vendors
as reasonably necessary to provide the Services described herein, provided
that SBS takes steps to ensure that its employees and vendors keep said
information confidential. This provision shall survive any termination of
this agreement.
-5-
<PAGE>
Non-exclusive
PAC acknowledges that SBS is in the business of providing information services
and database marketing services to the automotive markets. SBS will continue
to provide said services to its current customers, which include major and
independent oil companies, automobile dealerships and other local and regional
automotive service providers. For the duration of this agreement, SBS will
not provide customer acquisition services as outlined in this agreement to
other direct automotive full-service national competitors of PAC, including
but not limited to WalMart, Montgomery Wards, Target, and Pep Boys, without
prior written approval from PAC. For the duration of this agreement, SBS can
provide customer follow-up services to other direct automotive full-service
national competitors of PAC. Without limiting the nature of SBS's
confidentiality obligations set forth in the immediately preceding paragraph,
in the event of a conflict between this paragraph and the immediately
preceding paragraph, the terms of the immediately preceding paragraph shall
control.
Cancellation
Without Cause: Either party is entitled to terminate this contract by
providing written notice to the other of such termination with at least sixty
(60) days advance notice.
With Cause: The breach of the terms of this contract by either party,
provided such breach is not cured within seven (7) days following notification
(or reasonable action taken to correct such a breach within a reasonable time
period) by the other party, shall entitle such other party to terminate this
contract.
Upon any cancellation of this agreement, SBS agrees return to PAC within
fifteen (15) days of the date of notice of cancellation any and all
information obtained by SBS under the terms of this agreement, including
without limitation the then current database.
Separability
The invalidity or unenforceability of any of the terms, covenants or
conditions contained in this agreement shall not render invalid or
unenforceable any of the other terms, covenants or conditions of this
contract.
If the foregoing is in accordance with your understanding of our agreement,
please sign both copies in the space provided and return one copy to this
office.
Agreed and Accepted Agreed and Accepted
Penske Auto Centers, Inc. Service Business Systems
By: By:
Title: Title:
Date: Date:
-6-
<PAGE>
Penske Target Mail Test Program December, 1996
- ---------------------------------------------------------------------------
Description of Services
General Discussion
------------------
Overview
Service Business Systems (SBS), a subsidiary of Data National Corporation,
shall provide Penske Auto Center (PAC) with the following services:
The parameters of the target mail test program include:
SBS will manage the target mail program for approximately 132 PAC locations
(see attached list) for the period of January 1, 1997 through June 30, 1997.
Actual mail dates are determined by SBS.
The target mail program will consist of an average of 4,500 cards per month
per location. The location-specific count will be determined by the target
population within the identified hot-zones/trade areas.
PAC will supply to SBS a calendar of offers and associated expiration dates
for the service specials offered in the direct mail piece.
SBS will provide creative support with PAC having final approval of the
appearance of the cards. Logos and Product Artwork will be provided by PAC,
Kmart, Goodyear, Mobil, NAPA, Bosch, etc.
Marketing Approach
SBS agrees to provide the following marketing approach in the PAC target mail
test program:
PAC will provide SBS with the complete calendar of offerings and pricing
information for the test program. On a monthly basis, SBS will develop the
appropriate creative executions intended to reach and appeal to each of the
various target segments in an effort to maximize response and revenue per
transaction.
SBS will develop targeted marketing pieces which identify for the
prospective customer, the location and phone number of their nearest Penske
Auto Center. This additional information and customization is intended to
enhance a customer's comfort level with the location and enable them to
call for directions or appointments.
SBS will develop and execute targeted marketing strategies which capitalize
on the awareness of the Penske and Kmart brands. Through careful and
deliberate use of the brand names and logos, SBS intends to build on the
affinity for the brands within specific segments, and address perceptions
of the brands individually and jointly which may support or inhibit
response.
-1-
<PAGE>
SBS will prominently feature the Penske Auto Centers Internet address on all
mailing pieces, encouraging prospects to visit the site for more
information. Inclusion of the Internet address is intended to enhance the
brand image among the target segment and increase the amount of information
available to the customer.
Balanced Scorecard & Key Performance Measures
A joint Balanced Scorecard will be developed by SBS and PAC. The proposed
Balanced Scorecard shall include shared objectives with common measures and
company-specific objectives with shared measures. These objectives and
measures must be linked to the performance evaluations of the appropriate
parties. The success of the program will be determined by a mutually agreed
upon set of Key Performance Measures. SBS is responsible for tracking and
reporting of results. Information will be available for third party audit.
SBS recommends the following KPM's:
Response Rate - The total number of targeted customers who visit any PAC
location who are not PAC customers as of January 1, 1997.
Cost per Respondent - The average cost of attracting each new customer to a
PAC location.
Return on Investment - ROI will be calculated based on the Cost per
Respondent and the Total Sales per Respondent.
Timeliness - The time variance between the proposed mailing date and the
actual mailing date.
Brand Loyalty - The total number of targeted customers who visit any PAC
location more than once who are not PAC customers as of January 1, 1997.
Brand Awareness - The percentage of the targeted population that are
aware of PAC, their programs, etc. This KPM would require market research
not included in the program pricing.
Quality / Accuracy of Data - A detailed breakdown by location of the
percentage of data that cannot be delivered.
Balanced Scorecard weighting factors
KPM Weight
Response Rate 45%
Return on Investment 25%
Cost per Respondent 20%
Timeliness 10%
Brand Loyalty Measured Only
Brand Awareness Research
Quality / Accuracy of Data Measured Only
-2-
<PAGE>
Data
SBS recommends using the following data acquisition strategies and data
processing methods in the PAC target mail test program:
PAC will provide SBS with the complete PAC Customer Database for each of the
locations SBS is responsible for on a monthly basis. This database will be
formatted according to SBS specifications.
SBS will profile the PAC database to determine which customer segments to
target for the prospect PAC target mail program. The profiling will take
six to eight weeks.
Until the customer segments are determined, SBS will use the PAC target
prospect customer; males, 25-54 years old, homeowners, some college
education, income slightly above average.
SBS will acquire the list of names, eliminate any duplications between the
acquired list and existing PAC customers, correct the addresses using USPS
approved software, and presort the data to achieve maximum postal
efficiencies.
SBS will provide a report detailing undeliverable addresses to PAC on a
monthly basis.
Materials
SBS recommends using the following materials and printing methods in the PAC
target mail test program:
SBS is responsible for the design, purchase, and storage of all PAC materials
related to the target mail program.
SBS recommends the following materials:
Flat - 5 1/2" x 8 1/2"
4 color graphic over 1 color text
9 pt Cornwall CIS Cover
Each postcard will be personalized with the nearest PAC location and the
offer provided by PAC. A different graphic design may be used for different
mailings or different target segments.
-3-
<PAGE>
Program Reporting
The SBS Promise Program, which includes monthly communications and quarterly
summit meetings, will ensure that quality products and services are delivered
to Penske Auto Center. SBS will provide additional information as reasonably
required by Penske Auto Center.
SBS will work closely with PAC to track and analyze response, revenue, and
the overall effectiveness of the test program and its components.
SBS will provide a Monthly Performance Report to the PAC beginning in
February, 1997. The Monthly Performance Report will provide information on
the Key Performance Measures.
Since there are three shared markets (Chicago, Detroit, and Los Angeles) in
this test, a code for tracking visits will be added to each piece to
effectively track results generated by the appropriate service provider.
Time Frames
SBS will provide a detailed project schedule to PAC once the promotional
calendar of offers and expiration dates is received by SBS.
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Fee Structure
Target Mail
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Any variation from the description of services required or the projected
volumes may impact the fees.
Price per Piece
The price for the PAC target mail test program is $ per piece. SBS will
endeavor to reduce this price and subsequently increase the number of
delivered pieces per store by negotiating with proposed vendors. The goal is
to reduce the price by $ to $ per piece. While this cannot be
guaranteed, as a strategic partner, SBS will make every attempt to achieve
this goal by year-end. Other than the price per piece of $ , SBS will not
charge PAC any additional amount except as expressly provided under additional
services below, including any corporate overhead charges, postage charges
or otherwise. This price includes postage costs.
The pricing is based on an estimated average volume of 4,500 pieces per month
per location for the period of January, 1997 through June, 1997.
Term
The term of the agreement will be for January 1, 1997 through August 15, 1997
during which cards will be distributed at a minimum of six times for
approximately 132 locations. The number of participating locations may vary
based on the business needs of PAC. SBS will be responsible for program
tracking for the January through June mailings. This agreement may be
extended by PAC upon 60 days prior written notice from the end of any term of
this agreement for one or more additional years and the price per piece will
be mutually agreed upon by SBS and PAC but in no event will exceed $ per
piece plus mutually agreed upon inflation adjustments, subject to equal or
greater volumes. Upon such renewal, if any, SBS will not charge PAC an
additional set-up fee or other similar charges.
Prepaid Postage
SBS will require PAC to provide postage fees prior to the delivery of each
mailing. By mutual agreement, PAC and SBS will investigate alternatives to
prepaid postage including EFT, a dedicated postage account, or a declining
balance program and would utilize the most cost-effective method.
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Elements included in the Target Mail Program
The elements of the Target Mail Program include:
Creative and Marketing Development of the Program
Data Profiling
Data Acquisition
Materials Acquisition and Management
Postage
Program Reporting
Additional Services
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The services to be provided are all-inclusive. Additional services will only
be rendered when approved in advance by Roger S. Penske, Jr., Tim Findlay, or
Peter Klein.
Some aspects of a particular project can not be anticipated. In these cases a
quote will be prepared for any work not covered in the above price schedule.
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<PAGE>
Payment Terms and Conditions
SBS will invoice PAC directly for all Services provided under the terms and
conditions of this agreement. Upon request, SBS will provide verifications
of all completed mailings. This verification will be in the form of receipts
and reports provided by USPS.
Terms of payment are net thirty (30) days from the date of invoice. The date
of invoice is the date that the pieces are dropped with USPS provided that
PAC receives such invoice within fifteen (15) days of such drop and, if not,
then the date of the invoice will be the date falling fifteen (15) days prior
to the date of receipt of such invoice by PAC.Payments not received within 30
days are subject to an interest rate of 1.5% per month. Payments not received
within 60 days constitute a material breach of this agreement.
Price Protection
Pricing will be firm through the term of the contract, with the exception that
SBS will be entitled to increase the pricing in the event of changes initiated
by PAC or postal or paper costs increase at any time during the term of this
agreement. Increases in paper or postage costs would affect PAC pricing on
a direct pass-through basis with no additional charges for corporate overhead
or similar charges.
Conflict of Interest
Each party, in performing its obligations under this agreement, shall
establish and maintain appropriate business standards, procedures and controls
including those necessary to avoid any real or apparent impropriety or adverse
impact on the interest of the other party. Each party shall review with
reasonable frequency during the term of the agreement, such business standards
and procedures including, without limitation, those related to the activities
of its employees and agents in their relations with other party's employees,
agents and representatives, and other third parties.
Governing Law
The validity and interpretation of this agreement and the legal obligation of
the parties to it shall be governed by the laws of the State of Colorado,
unless otherwise agreed in writing by representatives of PAC and SBS at the
time of the order.
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<PAGE>
Notices
All notices pertaining to this Agreement shall be in writing, addressed to
the party for whom intended at the address set forth below or at such other
address as may be furnished by such party in writing and shall be deemed
given on the date of mailing.
The address of PAC is: The address of SBS is:
Penske Auto Center Service Business Systems
Attn:Roger S. Penske, Jr. Attn: Don Warriner
3270 W. Big Beaver Rd. 11415 West I-70 Frontage Road N.
Suite 130 Wheat Ridge, CO 80033
Troy, MI 48084
Indemnity
SBS agrees to indemnify and hold harmless PAC, its officers, employees and
agents with respect to any damages, claims or losses arising out of SBS's
nonperformance or misperformance of its obligations under this agreement.
PAC agrees to indemnify and hold harmless SBS, its officers, employees and
agents with respect to any damages, claims or losses arising out of PAC's
nonperformance or misperformance of its obligations under this agreement and
for any alleged trademark infringement or infringement of any intellectual
property of third parties. PAC also agrees to indemnify SBS against any and
all losses regarding any dispute over the ownership of information contained
in the database between PAC and its employees/contractors.
Confidentiality
SBS shall hold all customer and client information obtained from PAC, its
officers, employees or agents in strict confidence. SBS acknowledges that
all such information is confidential and proprietary to PAC. SBS agrees not
to divulge this information without prior written permission of PAC.
Information obtained in the performance of this agreement is to be used only
in connection with providing Services under this agreement. SBS, however,
shall be permitted to disclose said information to its employees and vendors
as reasonably necessary to provide the Services described herein, provided
that SBS takes steps to ensure that its employees and vendors keep said
information confidential. This provision shall survive any termination of
this agreement.
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<PAGE>
Non-exclusive
PAC acknowledges that SBS is in the business of providing information services
and database marketing services to the automotive markets. SBS will continue
to provide said services to its current customers, which include major and
independent oil companies, automobile dealerships and other local and regional
automotive service providers. For the duration of this agreement, SBS will
not provide the same services as outlined in this agreement to other direct
full-service national competitors of PAC, including but not limited to Sears,
WalMart, Montgomery Wards, Target, and Pep Boys, without prior written
approval from PAC. Without limiting the nature of SBS's confidentiality
obligations set forth in the immediately preceding paragraph, in the event
of a conflict between this paragraph and the immediately preceding paragraph,
the terms of the immediately preceding paragraph shall control.
Cancellation
Without Cause: Either party is entitled to terminate this contract by
providing written notice to the other of such termination with at least sixty
(60) days advance notice.With Cause: The breach of the terms of this contract
by either party, provided such breach is not cured within seven (7) days
following notification (or reasonable action taken to correct such a breach
within a reasonable time period) by the other party, shall entitle such other
party to terminate this contract.
Upon any cancellation of this agreement, SBS agrees return to PAC within
fifteen (15) days of the date of notice of cancellation any and all
information obtained by SBS under the terms of this agreement, including
without limitation the then current database.
Separability
The invalidity or unenforceability of any of the terms, covenants or
conditions contained in this agreement shall not render invalid or
unenforceable any of the other terms, covenants or conditions of this
contract.
If the foregoing is in accordance with your understanding of our agreement,
please sign both copies in the space provided and return one copy to this
office.
Agreed and Accepted Agreed and Accepted
Penske Auto Centers, Inc. Service Business Systems
By: By:
Title: Title:
Date: Date:
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LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), dated as of the 11th day of December,
1997, is made and entered into on the terms and conditions hereinafter set
forth, by and between DATA NATIONAL CORPORATION, a Colorado corporation
("Borrower"), and SIRROM INVESTMENTS, INC., a Tennessee corporation
("Lender").
RECITALS:
WHEREAS, Borrower has requested that Lender make available to Borrower a
term loan in the original principal amount of One Million and Five Hundred
Thousand and No/100ths Dollars ($1,500,000) (the "Loan") on the terms and
conditions hereinafter set forth, and for the purpose(s) hereinafter set
forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrower, Borrower
has made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrower, has agreed to make the Loan upon the terms and conditions
hereinafter set forth.
AGREEMENT:
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Lender hereby agree as follows:
ARTICLE 1
THE LOAN
1.1 Evidence of Loan Indebtedness and Repayment. Subject to the terms
and conditions hereof, Lender shall make the Loan to Borrower by wire transfer
in immediately available funds. The Loan shall be evidenced by a Secured
Promissory Note in the original principal amount of One Million and Five
Hundred Thousand and No/100ths Dollars ($1,500,000), substantially in the form
of Exhibit A attached hereto and incorporated herein by this reference (the
"Note"), dated as of the date hereof, executed by Borrower, in favor of
Lender. The Loan shall be payable in accordance with the terms of the Note.
The Note, this Agreement and any other instruments and documents executed by
Borrower, any guarantor of Borrower, or any shareholder, member, partner,
subsidiary, or affiliate of Borrower, now or hereafter evidencing, securing or
in any way related to the indebtedness evidenced by the Note are herein
individually referred to as a "Loan Document" and collectively referred to as
the "Loan Documents."
1.2 Processing Fee. Borrower shall pay a processing fee of $37,500 to
Lender, $18,750 of which shall be paid prior to closing and $18,750 of which
shall be paid at closing.
1.3 Purpose(s) of Loan and Use of Proceeds. The purposes of the Loan
shall be to (i) provide working capital to Borrower and its Subsidiaries (as
hereinafter defined), (ii) repay certain existing indebtedness to shareholders
up to $121,500, and (iii) pay all costs and expenses incurred by the parties
hereto in connection with the making and documenting of the Loan, including
attorneys' fees and expenses. The proceeds of the Loan shall not be used for
any other purpose.
1.4 Prepayment. Borrower may prepay the indebtedness evidenced by the
Note in whole or in part at any time and from time to time without premium or
penalty.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Borrower's Representations. Borrower hereby represents and
warrants to Lender as follows:
(a) Corporate Status. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of Colorado;
and has the corporate power to own and operate its properties, to carry on its
business as now conducted and to enter into and to perform its obligations
under this Agreement and the other Loan Documents to which it is a party.
Borrower is duly qualified to do business and in good standing in Colorado and
each other state in which a failure to be so qualified and in good standing
would have a material adverse effect on Borrower's financial positions or its
ability to conduct its business in the manner now conducted.
(b) Subsidiaries. Schedule 2.1(b) hereto is a complete list of
each corporation, partnership, joint venture or other business organization
(the "Subsidiary" or, with respect to all such organizations, the
"Subsidiaries") in which Borrower or any Subsidiary owns, directly or
indirectly, any capital stock or other equity interest, or with respect to
which Borrower or any Subsidiary, alone or in combination with others, is in a
control position, which list shows the jurisdiction of incorporation or other
organization and the percentage of stock or other equity interest of each
Subsidiary owned by Borrower. Each Subsidiary which is a corporation is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and is duly qualified to transact business
as a foreign corporation and is in good standing in the jurisdictions listed
in Schedule 2.1(b), which are the only jurisdictions where the properties
owned or leased or the business transacted by it makes such licensing or
qualification to do business as a foreign corporation necessary, and no other
jurisdiction has demanded, requested or otherwise indicated that (or inquired
whether) it is required so to qualify. Each Subsidiary which is not a
corporation is duly organized and validly existing under the laws of the
jurisdiction of its organization. The outstanding capital stock of each
Subsidiary which is a corporation is validly issued, fully paid and
nonassessable. Borrower and the Subsidiaries have good and valid title to the
equity interests in the Subsidiaries shown as owned by each of them on
Schedule 2.1(b), free and clear of all liens, claims, charges, restrictions,
security interests, equities, proxies, pledges or encumbrances of any kind.
Except where otherwise indicated herein, any reference to Borrower in this
Agreement shall include Borrower and all of its Subsidiaries.
(c) Authorization. Borrower has full legal right, power and
authority to conduct its business and affairs. Borrower has full legal right,
power and authority to enter into and perform its obligations under the Loan
Documents, without the consent or approval of any other person, firm,
governmental agency or other legal entity. The execution and delivery of this
Agreement, the borrowing hereunder, the execution and delivery of each Loan
Document to which Borrower is a party, and the performance by Borrower of its
obligations thereunder are within the corporate powers of Borrower and have
been duly authorized by all necessary corporate action properly taken, have
received all necessary governmental approvals, if any were required, and do
not and will not contravene or conflict with any provision of law, any
applicable judgment, ordinance, regulation or order of any court or
governmental agency, the articles of incorporation or bylaws of Borrower, or
any agreement binding upon Borrower, the contravention or conflict with which
would have a material adverse effect on the business or operations of
Borrower. The officer(s) executing this Agreement, the Note and all of the
other Loan Documents to which Borrower is a party are duly authorized to act
on behalf of Borrower.
(d) Validity and Binding Effect. This Agreement and the other
Loan Documents are the legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms, subject to limitations
imposed by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally or the application of general equitable
principles.
(e) Capitalization. As of the date hereof, the authorized
capital stock of Borrower consists solely of 100,000,000 shares of common
stock, $.001 par value per share ("Common Stock"), of which 1,594,950 shares
are issued and outstanding (the "Common Shares") and 371,206 shares of which
shall be reserved for issuance upon exercise of the Stock Purchase Warrant
dated as of the date hereof and issued to Lender (the "Warrant") and
20,000,000 shares of preferred stock, $.01 par value per share ("Preferred
Stock"), of which 0 shares are issued and outstanding (the "Preferred Shares")
(the Common Stock and Preferred Stock are collectively referred to as the
"Stock" and the Common Shares and Preferred Shares are collectively referred
to as the "Shares"); provided, however, that the number of shares reserved for
issuance upon exercise of the Warrant shall be increased from time to time in
accordance with the terms of the Warrant. As of the date hereof, Borrower
shall not have outstanding any stock or securities convertible or exchangeable
for any shares of its Stock or containing any profit participation features,
nor shall it have outstanding any rights or options to subscribe for or to
purchase its Stock or any stock or securities convertible into or exchangeable
for its Stock or any stock appreciation rights or phantom stock plans, except
as set forth on Schedule 2.1(e) and for the Warrant. Schedule 2.1(e)
accurately sets forth the following with respect to all outstanding options
and rights to acquire the Borrower's Stock from Borrower: (i) the total
number of shares issuable upon exercise of all outstanding options, (ii) the
range of exercise prices for all such outstanding options, (iii) the number of
shares issuable, the exercise price and the expiration date for each such
outstanding option and (iv) with respect to all outstanding options, warrants
and rights to acquire Borrower's capital stock other than the Warrant, the
holder, the number of shares covered, the exercise price and the expiration
date. As of the date hereof, Borrower shall not be subject to any obligation
(contingent or otherwise) to repurchase, redeem, retire or otherwise acquire
any shares of its capital stock or any warrants, options or other rights to
acquire its capital stock, except as set forth in the Warrant or on Schedule
2.1(e). As of the date hereof, all of the outstanding shares of Borrower's
capital stock shall be validly issued, fully paid and nonassessable. Except
as set forth on Schedule 2.1(e), there are no statutory or contractual
preemptive rights, rights of first refusal, anti-dilution rights or any
similar rights, held by stockholders or option holders of Borrower, with
respect to the issuance of the Warrant or the issuance of the Stock upon
exercise of the Warrant. All such rights granted in the documents listed on
Schedule 2.1(e) have been effectively waived with regard to the issuance of
the Warrant, the exercise of the Warrant and the issuance of the Stock upon
exercise of the Warrant. Borrower has not violated any applicable federal or
state securities laws in connection with the offer, sale or issuance of any of
its capital stock, and the offer, sale and issuance of the Warrant hereunder
do not require registration under the Securities Act or any applicable state
securities laws. To the best of Borrower's knowledge, there are no agreements
among Borrower's stockholders with respect to any other aspect of Borrower's
affairs, except as set forth on Schedule 2.1(e).
(f) Trademarks, Patents, Etc. Schedule 2.1(f) is an accurate
and complete list of all patents, trademarks, tradenames, trademark
registrations, service names, service marks, copyrights, licenses, formulas
and applications therefor owned by Borrower or used or required by Borrower in
the operation of its business, title to each of which is, except as set forth
in Schedule 2.1(f) hereto, held by Borrower free and clear of all adverse
claims, liens, security agreements, restrictions or other encumbrances. There
is no infringement action, lawsuit, claim or complaint which asserts that
Borrower's operations violate or infringe the rights or the trade names,
trademarks, trademark registration, service name, service mark or copyright of
others with respect to any apparatus or method of Borrower or any adversely
held trademark, trade name, trademark registration, service name, service mark
or copyright, nor is Borrower in any way making use of any confidential
information or trade secrets of any person except with the consent of such
person.
(g) No Conflicts. Consummation of the transactions hereby
contemplated and the performance of the obligations of Borrower under and by
virtue of the Loan Documents will not result in any breach of, or constitute a
default under, any mortgage, security deed or agreement, deed of trust, lease,
bank loan or credit agreement, corporate charter or bylaws, agreement or
certificate of limited partnership, partnership agreement, license, franchise
or any other instrument or agreement to which Borrower is a party or by which
Borrower, or its respective properties may be bound or affected or to which
Borrower has not obtained an effective waiver.
(h) Litigation. There are no actions, suits or proceedings
pending, or, to the knowledge of Borrower, threatened, against or affecting
Borrower or involving the validity or enforceability of any of the Loan
Documents at law or in equity, or before any governmental or administrative
agency; and to Borrower's knowledge, Borrower is not in default with respect
to any order, writ, injunction, decree or demand of any court or any
governmental authority.
(i) Financial Statements. The financial statements of
Borrower, dated September 30, 1997, attached hereto as Schedule 2.1(i)(A), are
true and correct in all material respects have been prepared on the basis of
generally accepted accounting principles ("GAAP") consistently applied, and
fairly present the financial condition of Borrower as of the date(s) thereof.
No material adverse change has occurred in the financial condition of Borrower
since the date(s) thereof, and no additional borrowings have been made by
Borrower since the date(s) thereof other than as set forth on Schedule
2.1(i)(B). Lender acknowledges that there will be a write off of certain
capitalized software costs and other audit adjustments which may be part of
the final audited financial statements.
(j) Other Material Agreements; No Defaults. Other than as set
forth on Schedule 2.1(j), Borrower is not a party to indentures, loan or
credit agreements, leases or other agreements or instruments, or subject to
any articles of incorporation or corporate restrictions that could have a
material adverse effect on the business, properties, assets, operations or
conditions, financial or otherwise, of Borrower, or the ability of Borrower to
carry out its obligations under the Loan Documents to which it is a party.
Borrower is not in default in any respect in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in
any agreement or instrument material to its business to which it is a party,
including but not limited to this Agreement and the other Loan Documents, and
no other default or event has occurred and is continuing that with notice or
the passage of time or both would constitute a default or event of default
under any of same.
(k) Compliance With Law. Borrower has obtained all material
licenses, permits and approvals and authorizations necessary or required in
order to conduct its business and affairs as heretofore conducted and as
hereafter intended to be conducted. To Borrower's knowledge, Borrower is in
compliance with all laws, regulations, decrees and orders applicable to it
(including but not limited to laws, regulations, decrees and orders relating
to environmental, occupational and health standards and controls, antitrust,
monopoly, restraint of trade or unfair competition), except to the extent that
noncompliance, in the aggregate, cannot reasonably be expected to have a
material adverse effect on its business, operations, property or financial
condition and will not materially adversely affect Borrower's ability to
perform its obligations under the Loan Documents.
(l) Debt. Schedule 2.1(l) is a complete and correct list of
all credit agreements, indentures, purchase agreements, promissory notes and
other evidences of indebtedness, guaranties, capital leases and other
instruments, agreements and arrangements presently in effect providing for or
relating to extensions of credit (including agreements and arrangements for
the issuance of letters of credit or for acceptance financing) in respect of
which Borrower, or any of the properties thereof is in any manner directly or
contingently obligated; and the maximum principal or face amounts of the
credit in question that are outstanding and that can be outstanding are
correctly stated, and all liens of any nature given or agreed to be given as
security therefor are correctly described or indicated in such Schedule.
(m) Taxes. Borrower has filed or caused to be filed all tax
returns that to Borrower's knowledge are required to be filed (except for
returns that have been appropriately extended), and has paid, or will pay when
due, all taxes shown to be due and payable on said returns and all other
taxes, impositions, assessments, fees or other charges imposed on them by any
governmental authority, agency or instrumentality, prior to any delinquency
with respect thereto (other than taxes, impositions, assessments, fees and
charges currently being contested in good faith by appropriate proceedings,
for which appropriate amounts have been reserved). No tax liens have been
filed against Borrower, or any of the property thereof.
(n) Small Business Concern. Borrower, together with its
"affiliates" (as that term is defined in Title 13, Code of Federal
Regulations, § 121.103), is a small "business concern" within the meaning
of the Small Business Investment Act of 1958, as amended, and the regulations
promulgated thereunder. The information set forth in the Small Business
Administration Forms 480, 652 and Part A of Form 1031 regarding Borrower upon
delivery, pursuant to Section 4.1 hereof, will be accurate and complete.
Borrower does not presently engage in, and it will not hereafter engage in,
any activities which, and Borrower will not, directly or indirectly, use the
proceeds from the Loan for any purpose for which a Small Business Investment
Company is prohibited from providing funds by the Small Business Investment
Act and the regulations thereunder, including Title 13, Code of Federal
Regulations §107.720.
(o) Certain Transactions. Except as set forth on Schedule
2.1(o) hereto, Borrower is not indebted, directly or indirectly, to any of its
shareholders, officers, or directors or to their respective spouses or
children, in any amount whatsoever; none of said shareholders, officers or
directors or any members of their immediate families, is indebted to Borrower
or have any direct or indirect ownership interest in any firm or corporation
with which Borrower has a business relationship, or any firm or corporation
which competes with Borrower, except that shareholders, officers and/or
directors of Borrower may own no more than 4.9% of outstanding stock of
publicly traded companies which may compete with Borrower. No officer or
director of Borrower or any member of their immediate families, is, directly
or indirectly, interested in any material contract with Borrower. Borrower is
not a guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
(p) Statements Not False or Misleading. No representation or
warranty given as of the date hereof by Borrower contained in this Agreement
or any schedule attached hereto or any statement in any document, certificate
or other instrument furnished or to be furnished by Borrower to Lender
pursuant hereto, taken as a whole, contains or will (as of the time so
furnished) contain any untrue statement of a material fact, or omits or will
(as of the time so furnished) omit to state any material fact which is
necessary in order to make the statements contained therein not misleading in
light of the circumstances under which they are made.
(q) Margin Regulations. Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock.
No proceeds received pursuant to this Agreement will be used by Borrower to
purchase or carry any equity security of a class which is registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended.
(r) Significant Contracts. Schedule 2.1(r) is a complete and
correct list of all contracts, agreements and other documents pursuant to
which Borrower receives revenues in excess of $25,000 per fiscal year. Each
such contract, agreement and other document is in full force and effect as of
the date hereof and to the best of Borrower's knowledge Borrower is not aware
of any reason why such contracts, agreements and other documents would not
remain in full force and effect pursuant to the terms thereof.
(s) Environment. Borrower has duly complied with, and its
business, operations, assets, equipment, property, leaseholds or other
facilities are in compliance with, the provisions of all federal, state and
local environmental, health, and safety laws, codes and ordinances, and all
rules and regulations promulgated thereunder, except to the extent that
failure to do so would not have a material adverse effect on its business.
Borrower has been issued and will maintain all required federal, state and
local permits, licenses, certificates and approvals relating to (1) air
emissions; (2) discharges to surface water or groundwater; (3) noise
emissions; (4) solid or liquid waste disposal; (5) the use, generation,
storage, transportation or disposal of toxic or hazardous substances or wastes
(which shall include any and all such materials listed in any federal, state
or local law, code or ordinance and all rules and regulations promulgated
thereunder as hazardous or potentially hazardous); or (6) other environmental,
health or safety matters, except to the extent that failure to do so would not
have a material adverse effect on its business. Borrower has not received
notice of, or knows of, or suspects facts which might constitute any
violations of any federal, state or local environmental, health or safety
laws, codes or ordinances, and any rules or regulations promulgated thereunder
with respect to its businesses, operations, assets, equipment, property,
leaseholds, or other facilities. Except in accordance with a valid
governmental permit, license, certificate or approval, to the best of
Borrower's knowledge, there has been no emission, spill, release or discharge
into or upon (1) the air; (2) soils, or any improvements located thereon; (3)
surface water or groundwater; or (4) the sewer, septic system or waste
treatment, storage or disposal system servicing the premises, of any toxic or
hazardous substances or wastes at or from the premises; and accordingly the
premises of Borrower are free of all such toxic or hazardous substances or
wastes. There has been no complaint, order, directive, claim, citation or
notice by any governmental authority or any person or entity with respect to
(1) air emissions; (2) spills, releases or discharges to soils or improvements
located thereon, surface water, groundwater or the sewer, septic system or
waste treatment, storage or disposal systems servicing the premises; (3) noise
emissions; (4) solid or liquid waste disposal; (5) the use, generation,
storage, transportation or disposal of toxic or hazardous substances or waste;
or (6) other environmental, health or safety matters affecting Borrower or its
business, operations, assets, equipment, property, leaseholds or other
facilities. Borrower has no indebtedness, obligation or liability (absolute
or contingent, matured or not matured), with respect to the storage,
treatment, cleanup or disposal of any solid wastes, hazardous wastes or other
toxic or hazardous substances (including without limitation any such
indebtedness, obligation, or liability with respect to any current regulation,
law or statute regarding such storage, treatment, cleanup or disposal).
(t) Fees; Commissions. Borrower has not agreed to pay any
finder's fee, commission, origination fee (except for the processing and
commitment fees due pursuant to Section 1.2 and a commission payable to
UniRock Management Corporation in the amount of $105,640.74) or other fee or
charge to any person or entity with respect to the Loan and investment
transactions contemplated hereunder.
(u) ERISA. Borrower is in compliance in all material respects
with all applicable provisions of ERISA (as defined in Section 3.11 hereof).
Neither a reportable event nor a prohibited transaction (as defined in ERISA)
has occurred and is continuing with respect to any Plan (as defined in Section
3.11 hereof); no notice of intent to terminate a Plan has been filed nor has
any Plan been terminated; no circumstances exist which constitute grounds
entitling the Pension Benefit Guaranty Corporation (together with any entity
succeeding to any or all of its functions, the "PBGC") to institute
proceedings to terminate, or appoint a trustee to administer, a Plan, nor has
the PBGC instituted any such proceedings; neither Borrower nor any commonly
controlled entity (as defined in ERISA) has completely or partially withdrawn
from a multiemployer plan (as defined in ERISA); Borrower and each commonly
controlled entity has met its minimum funding requirements under ERISA with
respect to all of its Plans and the present fair market value of all Plan
property exceeds the present value of all vested benefits under each Plan, as
determined on the most recent valuation date of the Plan and in accordance
with the provisions of ERISA and the regulations thereunder for calculating
the potential liability of Borrower or any commonly controlled entity to the
PBGC or the Plan under Title IV of ERISA; and neither Borrower nor any
commonly controlled entity has incurred any liability to the PBGC under ERISA.
(v) Title to Properties. Borrower has good, indefeasible and
insurable title to, or valid leasehold interests in, all its real properties
and good title to its other assets, free and clear of all liens other than
Permitted Liens (as defined in Section 3.15 hereof).
(w) Material Adverse Effect. Since September 30, 1997, no event
has occurred which has resulted or which Borrower reasonably believes could be
expected to result in a material adverse effect on Borrower or Borrower's
ability to perform its obligations under the Loan Documents. No default or
event of default under any other agreement will occur as a result of the
transactions contemplated by this Agreement or by the Warrant.
(x) Financial Solvency. Borrower is not entering into the
arrangements contemplated by this Agreement and the other Loan Documents with
actual intent to hinder, delay or defraud either present or future creditors.
On and as of the date hereof on a pro forma basis after giving effect to the
transactions contemplated by the Loan Documents and to all debts incurred or
to be created in connection herewith:
(i) the present fair salable value of the assets of
Borrower (on a going concern basis) will exceed the probable liability of
Borrower on its debts (including its contingent obligations);
(ii) Borrower has not incurred, nor does it intend to or
believe that it will incur, debts (including contingent obligations) beyond
its ability to pay such debts as such debts mature (taking into account the
timing and amounts of cash to be received from any source, and of amounts to
be payable on or in respect of debts); and the amount of cash available to
Borrower after taking into account all other anticipated uses of funds is
anticipated to be sufficient to pay all such amounts on or in respect of
debts, when such amounts are required to be paid; and
(iii) Borrower will have sufficient capital with which to
conduct its present and proposed business and the property of Borrower does
not constitute unreasonably small capital with which to conduct its current
business at present levels of operations.
For purposes of this Section 2.1(x) "debt" means any liability on a (i)
right to payment whether or not such a right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured; or (ii) right to an
equitable remedy for breach of performance if such breach gives rise to a
payment, whether or not such a right to an equitable remedy is reduced to
judgment, fixed, contingent, unmatured, disputed, undisputed, secured, or
unsecured.
(y) Offering of Note and Warrant. Neither Borrower nor anyone
acting on its behalf has offered the Note, the Warrant or any similar
securities for sale to, or solicited any offer to buy any of the same from, or
otherwise approached or negotiated in respect thereof, with, any person other
than Lender and not more than 35 other investors. Neither Borrower nor anyone
acting on its behalf has taken, or will take, any action which would subject
the issuance or sale of the Note and Warrant to Section 5 of the Securities
Act of 1933, as amended, or the registration or qualification provisions of
the blue sky laws of any state.
(z) Registration Rights. Except as described in the Warrant,
Borrower is not under any obligation to register under the Securities Act of
1933, as amended, or the Trust Indenture Act of 1939, as amended, any of its
presently outstanding securities or any of its securities that may
subsequently be issued.
(aa) Employees. Borrower has no current labor problems or
disputes which have resulted or Borrower reasonably believes could be expected
to have a material adverse effect on the business or operations of Borrower.
(bb) Issuance Taxes. All taxes imposed on Borrower in connection
with the issuance, sale and delivery of the Note, the Warrant and the capital
stock issuable upon exercise of the Warrant have been or will be fully paid,
and all laws imposing such taxes have been or will be fully satisfied by
Borrower.
(cc) List of Deposit Institutions. Schedule 2.1(ac) hereto sets
forth a true and complete list of all deposit institutions at which Borrower
has or maintains an account or deposits of any kind.
(dd) Locations and Names. Except as set forth on Section
2.1(ad), Borrower has not, during the five years preceding the date of this
Agreement, been known as or used any other corporate, trade or fictitious
name, nor acquired all or substantially all of the assets, capital stock or
operating units of any person. Borrower has not, during the five years
preceding the date of this Agreement, had a business location at any address
other than addresses set forth on Schedule 2.1(ad).
ARTICLE 3
COVENANTS AND AGREEMENTS
Borrower covenants and agrees that during the term of this Agreement:
3.1 Payment of Obligations. Borrower shall pay the indebtedness
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other obligations of Borrower to
Lender, direct or contingent, however evidenced or denominated, and however
and whenever incurred, including but not limited to indebtedness incurred
pursuant to any present or future commitment of Lender to Borrower, together
with interest thereon, and any extensions, modifications, consolidations
and/or renewals thereof and any notes given in payment thereof.
3.2 Financial Statements and Reports. Borrower shall furnish to
Lender (i) as soon as practicable and in any event within one hundred twenty
(120) days after the end of each fiscal year of Borrower, an audited balance
sheet of Borrower as of the close of such fiscal year, an audited statement of
earnings and retained earnings of Borrower as of the close of such fiscal year
and an audited statement of cash flows for Borrower for such fiscal year,
prepared in accordance with GAAP consistently applied and accompanied by an
unqualified audit report prepared by an independent certified public
accountant acceptable to Lender showing the financial condition of Borrower at
the close of such year and the results of its operations during such year and
accompanied by a certificate of the President of Borrower, stating that to the
best of the knowledge of such officer, Borrower has kept, observed, performed
and fulfilled each covenant, term and condition of this Agreement and the
other Loan Documents during the preceding fiscal year and that no Event of
Default has occurred and is continuing (or if an Event of Default has occurred
and is continuing, specifying the nature of same, the period of existence of
same and the action Borrower proposes to take in connection therewith), (ii)
within thirty (30) days of the end of each calendar month, a status report
indicating the financial performance of Borrower during such month and the
financial position of Borrower as of the end of such month in the format
required by Lender (which format will be delivered to Borrower on a diskette),
(iii) within forty-five (45) days of the end of each quarter, a balance sheet
of Borrower as of the close of such quarter and a statement of earnings and
retained earnings of Borrower as of the close of such quarter, all in
reasonable detail, and prepared substantially in accordance with GAAP
consistently applied (except for the absence of footnotes and subject to
year-end adjustments), and (iv) with reasonable promptness, such other
financial data as Lender may reasonably request.
3.3 Maintenance of Books and Records; Inspection. Borrower shall
maintain its books, accounts and records in accordance with GAAP consistently
applied, and after reasonable notice from Lender, shall permit Lender, its
officers, employees and any professionals designated by Lender in writing, at
Borrower's reasonable expense, to visit, inspect and/or audit any of its
properties, books and financial records, and to discuss its accounts, affairs
and finances with Borrower or the principal officers of Borrower during
reasonable business hours, all at such times as Lender may reasonably request;
provided that no such visit, inspection and/or audit shall materially
interfere with the conduct of Borrower's business.
3.4 Insurance. Without limiting any of the requirements of any of
the other Loan Documents, Borrower shall maintain in amounts customary for
entities engaged in comparable business activity (a) to the extent required by
applicable law, worker's compensation insurance (or maintain a legally
sufficient amount of self insurance against worker's compensation liabilities,
with adequate reserves, under a plan approved by Lender, such approval not to
be unreasonably withheld or delayed) and (b) fire and "all risk" casualty
insurance on its properties against such hazards and in at least such amounts
as are customary in Borrower's business. Borrower will make reasonable
efforts to obtain and maintain public liability insurance in an amount, and at
a cost, deemed reasonable to the Borrower's Board of Directors. At the
request of Lender, Borrower will deliver forthwith a certificate specifying
the details of such insurance in effect.
3.5 Taxes and Assessments. Borrower shall (a) file all tax returns
and appropriate schedules thereto that are required to be filed under
applicable law, prior to the date of delinquency, (b) pay and discharge all
taxes, assessments and governmental charges or levies imposed upon Borrower
upon its income and profits or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and (c) pay all taxes, assessments
and governmental charges or levies that, if unpaid, might become a lien or
charge upon any of its properties; provided, however, that Borrower in good
faith may contest any such tax, assessment, governmental charge or levy
described in the foregoing clauses (b) and (c) so long as appropriate reserves
are maintained with respect thereto.
3.6 Corporate Existence. Borrower shall maintain its corporate
existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each jurisdiction
in which such qualification is necessary pursuant to applicable law.
3.7 Compliance with Law and Other Agreements. Except where the
failure to do so would not materially adversely affect Borrower's operations
or its ability to fulfill its obligations under the Loan Documents, Borrower
shall maintain its business, operations and property owned or used in
connection therewith in compliance with (a) all applicable federal, state and
local laws, regulations and ordinances governing such business operations and
the use and ownership of such property, and (b) all agreements, licenses,
franchises, indentures and mortgages to which Borrower is a party or by which
Borrower or any of its properties is bound. Without limiting the foregoing,
Borrower shall pay all of its indebtedness promptly in accordance with the
terms thereof.
3.8 Notice of Default. Borrower shall give written notice to Lender
of the occurrence of any default, event of default or Event of Default under
this Agreement or any other Loan Document promptly upon the occurrence
thereof.
3.9 Notice of Litigation. Borrower shall give notice, in writing, to
Lender of (a) any actions, suits or proceedings instituted by any persons
whomsoever against Borrower, or affecting any of the assets of Borrower,
wherein the amount at issue is in excess of Twenty-Five Thousand and No/100ths
Dollars ($25,000.00), and (b) any dispute, not resolved within sixty (60) days
of the commencement thereof, between Borrower on the one hand and any
governmental regulatory body on the other hand, which dispute might materially
interfere with the normal operations of Borrower.
3.10 Conduct of Business, Name and Location of Business. Borrower will
continue to engage in a business of the same general type and manner as
conducted by it on the date of this Agreement. Without ten (10) days' prior
written notice to Lender, Borrower shall not change its name or its
location(s) of doing business. In the event Borrower makes a change of its
name or location of business, Borrower shall promptly execute any and all
financing statements, and amendments or continuations thereof and any other
documents that Lender may reasonably request to evidence, continue, and/or
perfect any security interest in or pledge of collateral securing the Loan.
3.11 ERISA Plan. If Borrower has in effect, or hereafter institutes, a
pension plan that is subject to the requirements of Title IV of the Employee
Retirement Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974,
88 Stat. 829, 29 U.S.C.A. Section 1001 et seq. (1975), as amended from time to
time ("ERISA"), then the following warranty and covenants shall be applicable
during such period as any such plan (the "Plan") shall be in effect: (a)
Borrower hereby warrants that no fact that might constitute grounds for the
involuntary termination of the Plan, or for the appointment by the appropriate
United States District Court of a trustee to administer the Plan, exists at
the time of execution of this Agreement, (b) Borrower hereby covenants that
throughout the existence of the Plan, Borrower's contributions under the Plan
will meet the minimum funding standards required by ERISA and Borrower will
not institute a distress termination of the Plan, and (c) Borrower covenants
that it will send to Lender a copy of any notice of a reportable event (as
defined in ERISA) required by ERISA to be filed with the Labor Department or
the Pension Benefit Guaranty Corporation, at the time that such notice is so
filed.
3.12 Dividends, Distributions, Stock Rights, etc. Borrower shall
not declare or pay any dividend of any kind (other than stock dividends
payable to all holders of any class of capital stock), in cash or in property,
on any class of the capital stock of Borrower, or purchase, redeem, retire or
otherwise acquire for value any shares of such stock, nor make any
distribution of any kind in cash or property in respect thereof, nor make any
return of capital of shareholders, nor make any payments in cash or property
in respect of any stock options, stock bonus or similar plan (except as
required or permitted hereunder), nor grant any preemptive rights with respect
to the capital stock of Borrower, without the prior written consent of Lender.
3.13 Guaranties; Loans; Payment of Debt. Without Lender's prior
express written consent, Borrower shall not guarantee nor be liable in any
manner, whether directly or indirectly, or become contingently liable after
the date of this Agreement in connection with the obligations or indebtedness
of any person or entity whatsoever, except for the endorsement of negotiable
instruments payable to Borrower for deposit or collection in the ordinary
course of business. Without Lender's prior express written consent, Borrower
shall not (a) make any loan, advance or extension of credit to any person
other than in the normal course of its business, or (b) make any payment on
any subordinated debt.
3.14 Debt. Without the express prior written consent of Lender,
Borrower shall not create, incur, assume or suffer to exist indebtedness of
any description whatsoever, excluding:
(a) the indebtedness evidenced by the Note;
(b) the endorsement of negotiable instruments payable to
Borrower for deposit or collection in the ordinary course of business;
(c) unsecured debts incurred to trade creditors in the ordinary
course of business (each of which, individually, does not exceed $250,000);
and
(d) the indebtedness listed on Schedule 2.1(l) hereto.
3.15 No Liens. Borrower shall not create, incur, assume or suffer
to exist any lien, security interest, security title, mortgage, deed of trust
or other encumbrance upon or with respect to any of its properties, now owned
or hereafter acquired, except the following permitted liens (the "Permitted
Liens"):
(a) liens in favor of Lender;
(b) liens for taxes or assessments or other governmental charges
or levies if not yet due and payable;
(c) liens in connection with the leasing of equipment in favor
of the lessor of such equipment; and
(d) liens described on Schedule 2.1(l) hereto.
3.16 Mergers, Consolidations, Acquisitions; Sales. Without the
prior written consent of Lender, Borrower shall not (a) be a party to any
merger, consolidation or corporate reorganization, nor (b) purchase or
otherwise acquire all or substantially all of the assets or stock of, or any
partnership or joint venture interest in, any other person, firm or entity,
nor (c) sell, transfer, convey, grant a security interest in or lease all or
any substantial part of its assets, nor (d) create any Subsidiaries nor convey
any of its assets to any Subsidiary.
3.17 Transactions With Affiliates. Other than with respect to
Subsidiaries of Borrower in which Lender has a security interest in the assets
thereof, and of which Lender has a pledge of Borrower's stock therein,
Borrower shall not enter into any transaction, including, without limitation,
the purchase, sale or exchange of property or the rendering of any service,
with any affiliate, except in the ordinary course of and pursuant to the
reasonable requirements of Borrower's business and upon fair and reasonable
terms no less favorable to Borrower than Borrower would obtain in a comparable
arm's length transaction with a person not an affiliate. For the purposes of
this Section 3.17, "affiliate" shall mean a person, corporation, partnership
or other entity controlling, controlled by or under common control with
Borrower.
3.18 Environment. Borrower shall be and remain in compliance with the
provisions of all federal, state and local environmental, health, and safety
laws, codes and ordinances, and all rules and regulations issued thereunder;
notify Lender immediately of any notice of a hazardous discharge or
environmental complaint received from any governmental agency or any other
party; notify Lender immediately of any hazardous discharge from or affecting
Borrower's premises; immediately contain and remove the same, in compliance
with all applicable laws; promptly pay any fine or penalty assessed in
connection therewith; permit Lender to inspect the premises, to conduct tests
thereon, and to inspect all books, correspondence, and records pertaining
thereto; and at Lender's request, and at Borrower's expense, provide a report
of a qualified environmental engineer, satisfactory in scope, form, and
content to Lender, and such other and further assurances reasonably
satisfactory to Lender that the condition has been corrected.
ARTICLE 4
CONDITIONS TO CLOSING
4.1 Closing of the Loan. The obligation of Lender to fund the Loan
on the date hereof (the "Closing Date") is subject to the fulfillment, on or
prior to the Closing Date, of each of the following conditions:
(a) Borrower shall have performed and complied in all material
respects with all of the covenants, agreements, obligations and conditions
required by this Agreement.
(b) Lender shall have received an opinion of the Borrower's
counsel, Krys, Boyle, Freedman & Sawyer, dated the Closing Date, in form and
substance satisfactory to Lender's counsel, Chambliss, Bahner & Stophel, P.C.
(c) Borrower shall have delivered to Lender the Note executed by
Borrower.
(d) Borrower shall have delivered to Lender a Stock Purchase
Warrant together with a Warrant Valuation Letter, both executed by Borrower,
in form acceptable to Lender.
(e) Borrower shall have delivered to Lender a Pledge and
Security Agreement (in form acceptable to Lender) and related stock proxy,
stock power, and stock certificate (all in a form acceptable to Lender)
executed by Borrower and related stock pledge letter (in a form acceptable to
Lender) executed by DNI Corporation.
(f) Borrower shall have delivered a Security Agreement and
Collateral Assignment of Membership Interest (in a form acceptable to Lender)
executed by Borrower and related Membership Assignment Letter (in a form
acceptable to Lender) executed by Digital Data, LLC.
(g) Borrower shall have delivered to Lender a Security Agreement
executed by each Subsidiary of Borrower (in a form acceptable to Lender) and
related UCC-1 Financing Statement(s) (in form acceptable to Lender) executed
by each Subsidiary of Borrower.
(h) Borrower shall have delivered to Lender Trademark and Patent
Security Agreements (in form acceptable to Lender) and related UCC-1 Financing
Statement(s) (in form acceptable to Lender) executed by National COM-LINK
Systems, Inc. and Service Business Systems, Inc.
(i) Borrower shall have delivered to Lender a Security Agreement
executed by Borrower (in form acceptable to Lender) and related UCC-1
Financing Statement(s) (in form acceptable to Lender) executed by Borrower.
(j) Borrower shall have delivered to Lender Pledge and Security
Agreements (all in a form acceptable to Lender) and related stock proxies,
stock powers, and stock certificates (all in form acceptable to Lender),
executed by Donald V. Warriner, Simms Family Partnership, J. Scott Fowler, Ray
E. Dillon, III and Richard S. Simms, respectively, and related stock pledge
letters (all in form acceptable to Lender) executed by Borrower.
(k) Borrower shall have delivered to Lender the Small Business
Administration Forms 480, 652 and 1031 (Parts A and B) completed by Borrower.
(l) Borrower shall have delivered to Lender a Small Business
Administration Economic Impact Assessment completed by Borrower, in a form
acceptable to Lender.
(m) Borrower shall have delivered to Lender a Landlord's Consent
and Subordination of Lien, executed by Borrower's landlord, in a form
acceptable to Lender.
(n) Lender shall have received copies of the articles of
incorporation and other publicly filed organizational documents of Borrower
and each Subsidiary, certified by the Secretary of State or other appropriate
public official in the jurisdiction(s) in which Borrower and each Subsidiary
are incorporated.
(o) Lender shall have received certified (as of the date of this
Agreement) copies of all corporate action taken by Borrower and each
Subsidiary, including resolutions of their Board of Directors, authorizing the
execution, delivery and performance of the Loan Documents.
(p) Lender shall have received a certificate as to the legal
existence and good standing of Borrower and each Subsidiary, issued by the
Secretary of State or other appropriate public official in the jurisdiction(s)
in which Borrower and each Subsidiary are incorporated.
(q) Lender shall have received certificates of the Secretaries
of State or other appropriate public officials as to Borrower's and each
Subsidiary's qualification to do business and good standing in each
jurisdiction in which a failure to be so qualified would have a material
adverse effect on their financial positions or their ability to conduct their
business in the manner now conducted and as hereafter intended to be
conducted.
(r) Borrower shall have delivered to Lender copies of the
articles of organization and the operating agreement of Digital Data, LLC.
(s) Borrower shall have delivered to Lender an Authorization
Agreement for Pre-Authorized Payments (Debit) executed by Borrower, in form
acceptable to Lender.
(t) Lender shall have received an Intercreditor Agreement
executed by Norwest Business Credit, Inc. in a form acceptable to Lender.
(u) Lender shall have received an Intercreditor Agreement
executed by Ray E. Dillon, Jr., Ray E. Dillon, III, and Richard S. Simms
Retirement/Profit Sharing Plan in a form acceptable to Lender.
(v) Borrower shall have delivered to Lender a Pledge and
Security Agreement (in a form acceptable to Lender) and related stock proxies,
stock powers, and stock certificates (all in a form acceptable to Lender)
executed by DNI Corporation and related stock pledge letters executed by
National COM-LINK Services, Inc. and Service Business Systems, Inc.
ARTICLE 5
DEFAULT AND REMEDIES
5.1 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Default by Borrower in the payment of the principal of or
interest on the indebtedness evidenced by the Note in accordance with the
terms of the Note, which default is not cured within five (5) days;
(b) Any misrepresentation by Borrower, any guarantor of
Borrower, or any shareholder, member, partner, subsidiary, or affiliate of
Borrower as to any material matter hereunder or under any of the other Loan
Documents, or delivery by Borrower of any schedule, statement, resolution,
report, certificate, notice or writing to Lender that is untrue in any
material respect on the date as of which the facts set forth therein are
stated or certified;
(c) Failure of Borrower, any guarantor of Borrower, or any
shareholder, member, partner, subsidiary, or affiliate of Borrower to perform
any of its obligations, covenants or agreements under this Agreement, the Note
or any of the other Loan Documents;
(d) Borrower (i) shall generally not pay or shall be unable to
pay its debts as such debts become due; or (ii) shall make an assignment for
the benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or a substantial part
of its assets; or (iii) shall commence any proceeding under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or
(iv) shall have had any such petition or application filed or any such
proceeding commenced against it in which an order for relief is entered or an
adjudication or appointment is made; or (v) shall indicate, by any act or
intentional and purposeful omission, its consent to, approval of or
acquiescence in any such petition, application, proceeding or order for relief
or the appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (vi) shall suffer any such custodianship, receivership
or trusteeship to continue undischarged for a period of sixty (60) days or
more;
(e) Borrower shall be liquidated, dissolved, partitioned or
terminated, or the charter thereof shall expire or be revoked;
(f) A default or event of default shall occur under any of the
other Loan Documents and, if subject to a cure right, such default or event of
default shall not be cured within the applicable cure period;
(g) Borrower shall default in the timely payment or performance
of any obligation now or hereafter owed to Lender in connection with any other
indebtedness of Borrower now or hereafter owed to Lender;
(h) Borrower shall have defaulted and continue to be in default
in the timely payment or performance of any other secured indebtedness or
secured obligation, which in the aggregate exceeds Twenty-Five Thousand and
No/100ths Dollars ($25,000.00) or materially adversely affects Borrower's
financial condition;
(i) Borrower shall have defaulted and continue to be in default
in the timely payment or performance of any unsecured indebtedness or
unsecured obligation which in the aggregate exceeds Two Hundred Fifty Thousand
and No/100ths Dollars ($250,000.00) or which in the aggregate exceeds
Twenty-Five Thousand and No/100ths Dollars ($25,000.00) but is less than Two
Hundred Fifty Thousand and No/100ths Dollars ($250,000.00) which is not being
contested in good faith and for which no reasonable and adequate reserves are
established;
(j) Either Donald V. Warriner or J. Scott Fowler shall no longer
be significantly involved in the management and/or daily operations of
Borrower.
With respect to any Event of Default described above that is capable of
being cured and that does not already provide its own cure procedure (a
"Curable Default"), the occurrence of such Curable Default shall not
constitute an Event of Default hereunder if such Curable Default is fully
cured and/or corrected within thirty (30) days (ten (10) days, if such Curable
Default may be cured by payment of a sum of money) of notice thereof to
Borrower given in accordance with the provisions hereof; provided, however,
that this provision shall not require notice to Borrower and an opportunity to
cure any Curable Default of which Borrower has had actual knowledge for the
requisite number of days set forth.
5.2 Acceleration of Maturity; Remedies. Upon the occurrence of any
Event of Default described in subsection 5.1(d), the indebtedness evidenced by
the Note as well as any and all other indebtedness of Borrower to Lender shall
be immediately due and payable in full; and upon the occurrence of any other
Event of Default described above, Lender at any time thereafter may at its
option accelerate the maturity of the indebtedness evidenced by the Note as
well as any and all other indebtedness of Borrower to Lender; all without
notice of any kind. Upon the occurrence of any <PAGE>such Event of Default
and the acceleration of the maturity of the indebtedness evidenced by the
Note:
(a) Lender shall be immediately entitled to exercise any and all
rights and remedies possessed by Lender pursuant to the terms of the Note and
all of the other Loan Documents; and
(b) Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
5.3 Remedies Cumulative; No Waiver. No right, power or remedy
conferred upon or reserved to Lender by this Agreement or any of the other
Loan Documents is intended to be exclusive of any other right, power or
remedy, but each and every such right, power and remedy shall be cumulative
and concurrent and shall be in addition to any other right, power and remedy
given hereunder, under any of the other Loan Documents or now or hereafter
existing at law, in equity or by statute. No delay or omission by Lender to
exercise any right, power or remedy accruing upon the occurrence of any Event
of Default shall exhaust or impair any such right, power or remedy or shall be
construed to be a waiver of any such Event of Default or an acquiescence
therein, and every right, power and remedy given by this Agreement and the
other Loan Documents to Lender may be exercised from time to time and as often
as may be deemed expedient by Lender.
5.4 Proceeds of Remedies. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including, without limitation,
reasonable attorney's fees incurred by Lender in connection with the exercise
of its remedies;
Second, to the expenses of curing the default that has occurred,
in the event that Lender elects, in its sole discretion, to cure the default
that has occurred;
Third, to the payment of the obligations of Borrower under the
Loan Documents (the "Obligations"), including but not limited to the payment
of the principal of and interest on the indebtedness evidenced by the Note, in
such order of priority as Lender shall determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
ARTICLE 6
TERMINATION
6.1 Termination of this Agreement. This Agreement shall remain in
full force and effect until the later of (a) the Maturity Date (as defined in
the Note), or (b) the payment by Borrower of all amounts owed to Lender, at
which time Lender shall cancel the Note and deliver it to Borrower; provided,
however, that if at any time Borrower has satisfied all obligations to Lender,
Borrower may terminate this Agreement by providing written notice to Lender.
ARTICLE 7
MISCELLANEOUS
7.1 Performance By Lender. If Borrower shall default in the payment,
performance or observance of any covenant, term or condition of this
Agreement, which default is not cured within the applicable cure period, then
Lender may, at its option, pay, perform or observe the same, and all payments
made or costs or expenses incurred by Lender in connection therewith
(including but not limited to reasonable attorney's fees), with interest
thereon at the highest default rate provided in the Note (if none, then at the
maximum rate from time to time allowed by applicable law), shall be
immediately repaid to Lender by Borrower and shall constitute a part of the
Obligations. Lender shall be the sole judge of the necessity for any such
actions and of the amounts to be paid.
7.2 Successors and Assigns Included in Parties. Whenever in this
Agreement one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this
Agreement by or on behalf of Borrower or by or on behalf of Lender shall bind
and inure to the benefit of their respective heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
7.3 Costs and Expenses. Borrower agrees to pay all reasonable costs
and expenses incurred by Lender in connection with the making of the Loan,
including but not limited to filing fees, recording taxes, indebtedness taxes,
and reasonable attorneys' fees, promptly upon demand of Lender. Borrower
further agrees to pay all premiums for insurance required to be maintained by
Borrower pursuant to the terms of the Loan Documents and all of the
out-of-pocket costs and expenses incurred by Lender in connection with the
collection of the Loan, amendment to the Loan Documents, or prepayment of the
Loan, including but not limited to reasonable attorneys' fees, promptly upon
demand of Lender.
7.4 Assignment. The Note, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lender,
and any such holder and/or assignee of the same shall succeed to and be
possessed of the rights and powers of Lender under all of the same to the
extent transferred and assigned. Lender may grant participations in all or
any portion of its interest in the indebtedness evidenced by the Note, and in
such event Borrower shall continue to make payments due under the Loan
Documents to Lender and Lender shall have the sole responsibility of
allocating and forwarding such payments in the appropriate manner and amounts,
provided, however, that neither Lender nor anyone acting on its behalf has
taken, or will take, any action which would subject the issuance or sale of
the Note and Warrant (and/or the granting of any participations in the Note
and Warrant) to Section 5 of the Securities Act of 1933, as amended, or to the
registration or qualification provisions of the blue sky laws of any state.
Borrower shall not assign any of its rights nor delegate any of its duties
hereunder or under any of the other Loan Documents without the prior express
written consent of Lender.
7.5 Time of the Essence. Time is of the essence with respect to each
and every covenant, agreement and obligation of Borrower hereunder and under
all of the other Loan Documents.
7.6 Severability. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by
law.
7.7 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Note or any of the other Loan Documents to the
contrary notwithstanding, in no event whatsoever, whether by reason of
advancement of proceeds of the Loan, acceleration of the maturity of the
unpaid balance of the Loan or otherwise, shall the interest and loan charges
agreed to be paid to Lender for the use of the money advanced or to be
advanced hereunder exceed the maximum amounts collectible under applicable
laws in effect from time to time. It is understood and agreed by the parties
that, if for any reason whatsoever the interest or loan charges paid or
contracted to be paid by Borrower in respect of the indebtedness evidenced by
the Note shall exceed the maximum amounts collectible under applicable laws in
effect from time to time, then ipso facto, the obligation to pay such interest
and/or loan charges shall be reduced to the maximum amounts collectible under
applicable laws in effect from time to time, and any amounts collected by
Lender that exceed such maximum amounts shall be applied to the reduction of
the principal balance of the indebtedness evidenced by the Note and/or
refunded to Borrower so that at no time shall the interest or loan charges
paid or payable in respect of the indebtedness evidenced by the Note exceed
the maximum amounts permitted from time to time by applicable law.
7.8 Article and Section Headings; Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
7.9 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement or any of the Loan Documents shall be
in writing, signed by the party giving such notice, election or demand and
shall be delivered personally, telecopied, or sent by certified mail or
overnight via nationally recognized courier service (such as Federal Express),
to the other party at the address set forth below, or at such other address as
may be supplied in writing and of which receipt has been acknowledged in
writing. The date of personal delivery, telecopy or telex or two (2) business
days after the date of mailing (or the next business day after delivery to
such courier service), as the case may be, shall be the date of such notice,
election or demand. For the purposes of this Agreement:
The Address of Lender is: Sirrom Investments, Inc.
Suite 200
500 Church Street
Nashville, TN 37219
Attention: Robert Roden
Telecopy: 615/726-1208
with a copy to: Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building
Two Union Square
Chattanooga, TN 37402
Attention: J. Patrick Murphy, Esq.
Telecopy: 423/265-9574
The Address of Borrower is: Data National Corporation
11415 West I-70 Frontage Rd., North
Wheat Ridge, CO 80033
Attention: Donald V. Warriner
Telecopy: 303/431-5668
with a copy to: Krys, Boyle, Freedman & Sawyer
South Tower, Suite 2700
600 17th Street
Denver, CO 80202
Attention: Stanley Frank Freedman
Telecopy: 303/893-2300
7.10 Entire Agreement. This Agreement and the other written agreements
between Borrower and Lender represent the entire agreement between the parties
concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein; provided, if there is a conflict between this
Agreement and any other document executed contemporaneously herewith with
respect to the Obligations, the provisions of this Agreement shall control.
The execution and delivery of this Agreement and the other Loan Documents by
the Borrower were not based upon any fact or material provided by Lender, nor
was the Borrower induced or influenced to enter into this Agreement or the
other Loan Documents by any representation, statement, analysis or promise by
Lender.
7.11 Governing Law and Amendments. This Agreement and all of the Loan
Documents shall be construed and enforced under the laws of the State of
Tennessee applicable to contracts to be wholly performed in such State except
to the extent certain rights and privileges may be granted Lender under
applicable federal laws in which event federal law shall control. No
amendment or modification hereof shall be effective except in a writing
executed by each of the parties hereto.
7.12 Survival of Representations and Warranties. All covenants,
representations and warranties contained herein or in any of the Loan
Documents, or made by or furnished on behalf of the Borrower in connection
herewith or any of the Loan Documents, shall survive the execution and
delivery of this Agreement and all other Loan Documents and shall continue in
full force and effect so long as the Obligations are unpaid.
7.13 Jurisdiction and Venue. Borrower hereby consents to the
jurisdiction of the courts of the State of Tennessee and the United States
District Court for the Middle District of Tennessee, as well as to the
jurisdiction of all courts from which an appeal may be taken from such courts,
for the purpose of any suit, action or other proceeding arising out of any of
its obligations arising under this Agreement or any other Loan Documents or
with respect to the transactions contemplated hereby, and expressly waives any
and all objections it may have as to venue in any of such courts.
7.14 Waiver of Trial by Jury. LENDER AND BORROWER HEREBY WAIVE TRIAL
BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS,
WHETHER IN
CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY
RELATING
TO THIS AGREEMENT OR THE LOAN DOCUMENTS.
7.15 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
7.16 Construction and Interpretation. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that
the terms hereof shall be more strictly construed against one party by reason
of the rule of construction that a document is to be more strictly construed
against the party that itself or through its agent prepared the same, it being
agreed that the Borrower, Lender and their respective agents have participated
in the preparation hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers,
as of the day and year first above written.
LENDER:
SIRROM INVESTMENTS, INC., a Tennessee
By:-------------------------------
Title:----------------------------
BORROWER:
DATA NATIONAL CORPORATION, a Colorado
corporation
By: /s/ Donald Warriner
Title: President and CEO
The undersigned Subsidiaries join in the execution of this Agreement for
the purpose of making the representations and warranties set forth herein and
acknowledging and agreeing to be bound by the covenants and agreements set
forth herein.
NATIONAL COM-LINK SYSTEMS, INC., a
Colorado corporation
By: /s/ Donald Warriner
Title: President and CEO
SERVICE BUSINESS SYSTEMS, INC., a
Colorado corporation
By: /s/ Donald Warriner
Title: President and CEO
DNI CORPORATION, a Colorado corporation
By: /s/ Donald Warriner
Title: President and CEO<PAGE>
<PAGE>
Index of Schedules and Attachments
Exhibit A - Form of Note
Schedule 2.1(b) - Subsidiaries
Schedule 2.1(e) - Options, Warrants, Stock Rights, Etc.
Schedule 2.1(f) - Trademarks, Patents, Etc.
Schedule 2.1(i)(A) and (B) - Financial Statements
Schedule 2.1(l) - Debt and Liens
Schedule 2.1(o) - Shareholder Loans
Schedule 2.1(r) - Significant Contracts
Schedule 2.1(ac) - Deposit Institutions
Schedule 2.1(ad) - Names and Locations<PAGE>
<PAGE>
SECURED PROMISSORY NOTE
$1,500,000 December 11, 1997
FOR VALUE RECEIVED, the undersigned, DATA NATIONAL CORPORATION, a
Colorado corporation ("Maker"), promises to pay to the order of SIRROM
INVESTMENTS, INC., a Tennessee corporation ("Payee"; Payee and any subsequent
holder[s] thereof are hereinafter referred to collectively as "Holder"), at
the office of Payee at P. O. Box 30443, Nashville, Tennessee 37241-0443, or at
such other place as Holder may designate to Maker in writing from time to
time, the principal sum of ONE MILLION FIVE HUNDRED THOUSAND AND NO/100THS
DOLLARS ($1,500,000), together with interest on the outstanding principal
balance hereof from the date hereof at the rate of thirteen and three quarters
percent (13.75%) per annum (computed on the basis of a 360-day year);
provided, however, that Holder may charge and receive interest upon any
renewal or extension hereof at the greater of (i) the rate set out above, or
(ii) any rate agreed to by the undersigned that is not in excess of the
maximum rate of interest allowed to be charged under applicable law (the
"Maximum Rate") at the time of such renewal or extension.
Interest only on the outstanding principal balance hereof shall be due
and payable monthly, in arrears, with the first installment being payable on
the first (1st) day of February, 1998, and subsequent installments being
payable on the first (1st) day of each succeeding month thereafter until
December ___, 2002 (the "Maturity Date"), at which time the entire outstanding
principal balance, together with all accrued and unpaid interest, shall be
immediately due and payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part, at
any time and from time to time, without penalty. Any such prepayments shall
be credited first to any accrued and unpaid interest and then to the
outstanding principal balance hereof.
Time is of the essence of this Note. It is hereby expressly agreed that
in the event that any default be made in the payment of principal or interest
as stipulated above, which default is not cured within five (5) days; or in
the event that any default or event of default shall occur under that certain
Loan Agreement of even date herewith, between Maker and Payee (as may be
amended from time to time, the "Loan Agreement"), which default or event of
default is not cured following the giving of any applicable notice and within
any applicable cure period set forth in said Loan Agreement; or should any
default by Maker be made in the performance or observance of any covenants or
conditions contained in any other instrument or document now or hereafter
evidencing, securing or otherwise relating to the indebtedness evidenced
hereby (subject to any applicable notice and cure period provisions that may
be set forth therein); then, and in such event, the entire outstanding
principal balance of the indebtedness evidenced hereby, together with any
other sums advanced hereunder, under the Loan Agreement and/or under any other
instrument or document now or hereafter evidencing, securing or in any way
relating to the indebtedness evidenced hereby, together with all unpaid
interest accrued thereon, shall, at the option of Holder and without notice to
Maker, at once become due and payable and may be collected forthwith,
regardless of the stipulated date of maturity. Upon the occurrence of any
default as set forth herein, at the option of Holder and without notice to
Maker, all accrued and unpaid interest, if any, shall be added to the
outstanding principal balance hereof, and the entire outstanding principal
balance, as so adjusted, shall bear interest thereafter until paid at an
annual rate (the "Default Rate") equal to the lesser of (i) the rate that is
seven percentage points (7.0%) in excess of the above-specified interest rate,
or (ii) the Maximum Rate in effect from time to time, regardless of whether or
not there has been an acceleration of the payment of principal as set forth
herein. All such interest shall be paid at the time of and as a condition
precedent to the curing of any such default.
In the event this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, Maker and any indorsers hereof agree to pay to
Holder an amount equal to all such costs, including without limitation all
actual reasonable attorney's fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest
and nonpayment are hereby waived by Maker and all other parties hereto. No
failure to accelerate the indebtedness evidenced hereby by reason of default
hereunder, acceptance of a past-due installment or other indulgences granted
from time to time, shall be construed as a novation of this Note or as a
waiver of such right of acceleration or of the right of Holder thereafter to
insist upon strict compliance with the terms of this Note or to prevent the
exercise of such right of acceleration or any other right granted hereunder or
by applicable laws. No extension of the time for payment of the indebtedness
evidenced hereby or any installment due hereunder, made by agreement with any
person now or hereafter liable for payment of the indebtedness evidenced
hereby, shall operate to release, discharge, modify, change or affect the
original liability of Maker hereunder or that of any other person now or
hereafter liable for payment of the indebtedness evidenced hereby, either in
whole or in part, unless Holder agrees otherwise in writing. This Note may
not be changed orally, but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought.
The indebtedness and other obligations evidenced by this Note are
further evidenced by (i) the Loan Agreement and (ii) certain other instruments
and documents, as may be required to protect and preserve the rights of Maker
and Payee as more specifically described in the Loan Agreement.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration
of maturity of the unpaid balance hereof or otherwise, shall the amount paid
or agreed to be paid to Holder for the use of the money advanced or to be
advanced hereunder exceed the Maximum Rate. If, from any circumstances
whatsoever, the fulfillment of any provision of this Note or any other
agreement or instrument now or hereafter evidencing, securing or in any way
relating to the indebtedness evidenced hereby shall involve the payment of
interest in excess of the Maximum Rate, then, ipso facto, the obligation to
pay interest hereunder shall be reduced to the Maximum Rate; and if from any
circumstance whatsoever, Holder shall ever receive interest, the amount of
which would exceed the amount collectible at the Maximum Rate, such amount as
would be excessive interest shall be applied to the reduction of the principal
balance remaining unpaid hereunder and not to the payment of interest. This
provision shall control every other provision in any and all other agreements
and instruments existing or hereafter arising between Maker and Holder with
respect to the indebtedness evidenced hereby.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the State of Tennessee, except to
the extent that federal law may be applicable to the determination of the
Maximum Rate.
As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective successors, legal representatives and assigns,
whether by voluntary action of the parties or by operation of law.
MAKER:
DATA NATIONAL CORPORATION, a Colorado
corporation
By: /s/ Donald Warriner
Title: President and CEO<PAGE>
<PAGE>
STOCK PURCHASE WARRANT
This Warrant is issued this 11th day of December, 1997, by DATA NATIONAL
CORPORATION, a Colorado corporation (the "Company"), to SIRROM INVESTMENTS,
INC., a Tennessee corporation (SIRROM INVESTMENTS, INC. and any subsequent
assignee or transferee hereof are hereinafter referred to collectively as
"Holder" or "Holders").
AGREEMENT:
1. Issuance of Warrant; Term.
(a) For and in consideration of SIRROM INVESTMENTS, INC. making
a loan to the Company in an amount of One Million and Five Hundred Thousand
and no/100ths Dollars ($1,500,000) pursuant to the terms of a secured
promissory note of even date herewith (the "Note") and related loan agreement
of even date herewith (the "Loan Agreement"), and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company hereby grants to Holder the right to purchase 275,682 shares of
the Company's common stock (the "Common Stock"), which the Company represents
equals 13% of the capital stock of the Company on the date hereof, calculated
on a fully diluted basis after exercise ("Base Amount"), provided that in the
event that the indebtedness evidenced by the Note is outstanding on the
following dates, the Base Amount shall be increased to the corresponding
number set forth below (the "Outstanding Debt Rachets"):
Date Base Amount
- ----------------- --------------------------------
December 11, 2000 306,595 shares of Common
Stock, which the Company
represents equals 14.25% of the
capital stock of the Company on
the date hereof calculated on a
fully diluted basis after
exercise.
December 11, 2001 338,423 shares of Common
Stock, which the Company
represents equals 15.50% of the
capital stock of the Company on
the date hereof calculated on a
fully diluted basis after
exercise.
December 11, 2002 371,206 shares of Common Stock,
which the Company represents equals
16.75% of the capital stock of the
Company on the date hereof
calculated on a fully diluted basis
after exercise.
and further provided that the initial Base Amount shall be increased to the
corresponding number set forth below if the Company's total revenues, as
determined in accordance with generally accepted accounting principles,
consistently applied ("GAAP"), or EBITDA for the fiscal year ending September
30, 1998 are equal to or less than the amounts listed below:
Actual Revenue for Actual EBITDA for
Fiscal Year Ending Fiscal Year Ending
September 30, 1998 September 30, 1998 Base Amount
- ------------------ ------------------ ---------------------------
$7,360,000 $740,000 18% of the capital
stock of the Company on
the date hereof
calculated on a fully
diluted basis after
exercise.
$7,450,000 $750,000 17% of the capital
stock of the Company on
the date hereof
calculated on a fully
diluted basis after
exercise.
$7,540,000 $760,000 16% of the capital
stock of the Company on
the date hereof
calculated on a fully
diluted basis after
exercise.
$7,640,000 $770,000 15% of the capital
stock of the Company on
the date hereof
calculated on a fully
diluted basis after
exercise.
$7,730,000 $780,000 14% of the capital
stock of the Company on
the date hereof
calculated on a fully
diluted basis after
exercise.
(b) If the initial Base Amount is increased because the
Company's revenues or EBITDA are equal to or less than the amounts set forth
above, the Outstanding Debt Rachets shall be adjusted to increase the adjusted
initial Base Amount by 1% for each year the Note remains outstanding beyond
December ___, 2000. (By way of illustration, if the initial Base Amount is
adjusted to 18% because the Company's EBITDA for 1998 was $740,000 or less or
because the Company's revenues for 1998 were $7,360,000 or less, the
Outstanding Debt Rachets for 2000, 2001, and 2002 shall 19.25%, 20.50% and
21.75% of the capital stock of the Company on the date hereof, calculated on a
fully diluted basis after exercise, respectively).
(c) For purposes of this Agreement, the term "EBITDA" shall mean
net income plus interest expense plus income taxes plus depreciation expenses
plus amortization expenses plus any non-cash expense or amortization incurred
in connection with this Warrant, all determined in accordance with GAAP.
(d) The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Shares." This Warrant shall be
exercisable at any time and from time to time from the date hereof until
January 31, 2003. For purposes of this Warrant the term "fully diluted basis"
shall be determined in accordance with GAAP as of the date hereof.
2. Exercise Price. The exercise price (the "Exercise Price") per
share for which all or any of the Shares may be purchased pursuant to the
terms of this Warrant shall be One Cent ($.01).
3. Exercise. This Warrant may be exercised by the Holder hereof (but
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to
the Company at the following address: 11415 West I-70 Frontage Road, North,
Wheat Ridge, CO 80033, or such other address as the Company shall designate in
a written notice to the Holder hereof, together with this Warrant and payment
to the Company of the aggregate Exercise Price of the Shares so purchased.
The Exercise Price shall be payable, at the option of the Holder, (i) by
certified or bank check, (ii) by the surrender of the Note or portion thereof
having an outstanding principal balance equal to the aggregate Exercise Price
or (iii) by the surrender of a portion of this Warrant having a fair market
value equal to the aggregate Exercise Price. Upon exercise of this Warrant as
aforesaid, the Company shall as promptly as practicable, and in any event
within fifteen (15) days thereafter, execute and deliver to the Holder of this
Warrant a certificate or certificates for the total number of whole Shares for
which this Warrant is being exercised in such names and denominations as are
requested by such Holder. If this Warrant shall be exercised with respect to
less than all of the Shares, the Holder shall be entitled to receive a new
Warrant covering the number of Shares in respect of which this Warrant shall
not have been exercised, which new Warrant shall in all other respects be
identical to this Warrant. The Company covenants and agrees that it will pay
when due any and all state and federal issue taxes which may be payable in
respect of the issuance of this Warrant or the issuance of any Shares upon
exercise of this Warrant.
4. Covenants and Conditions. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). Holder is an "Accredited Investor" as
defined in Regulation D of the Securities Act and has had access to sufficient
information about the Company to make an investment decision. This Warrant has
been acquired for investment purposes and not with a view to distribution or
resale and may not be pledged, hypothecated, sold, made subject to a security
interest, or otherwise transferred without (i) an effective registration
statement for such Warrant under the Securities Act and such applicable Blue
Sky Laws, or (ii) an opinion of counsel, which opinion and counsel shall be
reasonably satisfactory to the Company and its counsel, that registration is
not required under the Securities Act or under any applicable Blue Sky Laws
(the Company hereby acknowledges that Bass, Berry & Sims is acceptable
counsel). Transfer of the shares issued upon the exercise of this Warrant
shall be restricted in the same manner and to the same extent as the Warrant
and the certificates representing such Shares shall bear substantially the
following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE
ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE
BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
REGISTRATION UNDER SUCH SECURITIES ACTS OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED
IN CONNECTION WITH SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect
the compliance of the issuance of this Warrant and any shares of Common Stock
issued upon exercise hereof with applicable federal and state securities laws.
(b) The Company covenants and agrees that all Shares which may
be issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights, if
any, with respect thereto or to the issuance thereof. The Company shall at
all times reserve and keep available for issuance upon the exercise of this
Warrant such number of authorized but unissued shares of Common Stock as will
be sufficient to permit the exercise in full of this Warrant.
(c) Exclusive of any shares (not to exceed 250,000 shares)
issued pursuant to the Company's 1997 incentive stock option plan provided
such options were incentive stock options, the Company covenants and agrees
that it shall not sell or issue any shares of the Company's capital stock at a
price below the fair market value (as determined pursuant to Section 9 hereof)
of such shares, without the prior written consent of the Holder hereof. In
the event that the Company sells shares of the Company's capital stock in
violation of this Section 4(c), the number of shares issuable upon exercise of
this Warrant shall be equal to the product obtained by multiplying the number
of shares issuable pursuant to this Warrant prior to such sale by the quotient
obtained by dividing (i) the fair market value of the shares issued in
violation of this Section 4(c) by (ii) the price at which such shares were
sold.
5. Transfer of Warrant. Subject to the provisions of Section 4
hereof, this Warrant may be transferred, in whole or in part, to any person or
business entity, by presentation of the Warrant to the Company with written
instructions for such transfer. Upon such presentation for transfer, the
Company shall promptly execute and deliver a new Warrant or Warrants in the
form hereof in the name of the assignee or assignees and in the denominations
specified in such instructions. The Holder shall pay all expenses incurred by
it in connection with the preparation, issuance and delivery of Warrants under
this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive
Rights; Preference Rights. Except as otherwise provided herein, this Warrant
does not confer upon the Holder, as such, any right whatsoever as a
shareholder of the Company. Notwithstanding the foregoing, if the Company
should offer to all of the Company's shareholders the right to purchase any
securities of the Company, then all shares of Common Stock that are subject to
this Warrant shall be deemed to be outstanding and owned by the Holder and the
Holder shall be entitled to participate in such rights offering. The Company
shall not grant any preemptive rights with respect to any of its capital stock
without the prior written consent of the Holder. The Company shall not issue
any securities which entitle the holder thereof to obtain any preference over
holders of Common Stock upon the dissolution, liquidation, winding-up, sale,
merger, or reorganization of the Company without the prior written consent of
the Holder.
7. Observation Rights. The Holder of this Warrant shall (a) receive
notice of and be entitled to attend or may send a representative to attend all
meetings of the Company's Board of Directors in a non-voting observation
capacity, (b) receive copies of all notices, packages and documents provided
to members of the Company's Board of Directors for each board of directors
meeting, and (c) receive copies of all actions taken by written consent by the
Company's Board of Directors, from the date hereof until such time as the
indebtedness evidenced by the Note has been paid in full.
8. Adjustment Upon Changes in Stock.
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization, combination
of shares of the Company, or other similar event, occurring after the date
hereof, then the Holder exercising this Warrant shall receive, for the
aggregate price paid upon such exercise, the aggregate number and class of
shares which such Holder would have received if this Warrant had been
exercised immediately prior to such stock split, stock dividend,
recapitalization, combination of shares, or other similar event. If any
adjustment under this Section 8(a) would create a fractional share of Common
Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares subject to this
Warrant shall be the next higher number of shares, rounding all fractions
upward. Whenever there shall be an adjustment pursuant to this Section 8(a),
the Company shall forthwith notify the Holder or Holders of this Warrant of
such adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event,
occurring after the date hereof, as a result of which shares of Common Stock
shall be changed into the same or a different number of shares of the same or
another class or classes of securities of the Company or another entity, then
the Holder exercising this Warrant shall receive, for the aggregate price paid
upon such exercise, the aggregate number and class of shares which such Holder
would have received if this Warrant had been exercised immediately prior to
such merger, consolidation, exchange of shares, separation, reorganization or
liquidation, or other similar event. If any adjustment under this Section
8(b) would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded
and the number of shares subject to this Warrant shall be the next higher
number of shares, rounding all fractions upward. Whenever there shall be an
adjustment pursuant to this Section 8(b), the Company shall forthwith notify
the Holder or Holders of this Warrant of such adjustment, setting forth in
reasonable detail the event requiring the adjustment and the method by which
such adjustment was calculated.
9. Put Agreement.
(a) The Company hereby irrevocably grants and issues to Holder
the right and option to sell to the Company (the "Put") this Warrant for a
period of 30 days immediately prior to the expiration thereof, at a purchase
price (the "Purchase Price") equal to the Fair Market Value (as hereinafter
defined) of the shares of Common Stock issuable to Holder upon exercise of
this Warrant.
(b) The Company shall pay to the Holder, in cash or certified or
cashier's check, the Purchase Price in exchange for the delivery to the
Company of this Warrant within thirty (30) days of the receipt of written
notice, addressed as set forth in Section 3 hereto, from the Holder of its
intention to exercise the Put.
(c) The Fair Market Value of the shares of Common Stock of the
Company issuable pursuant to this Warrant shall be determined as follows:
(i) The Company and the Holder shall each appoint an
independent, experienced appraiser who is a member of a recognized
professional association of business appraisers. The two appraisers shall
determine the value of the shares of Common Stock which would be issued upon
the exercise of the Warrant, taking into consideration that such shares would
constitute a minority interest, and would lack liquidity, and further assuming
that the sale would be between a willing buyer and a willing seller, both of
whom have full knowledge of the financial and other affairs of the Company,
and neither of whom is under any compulsion to sell or to buy.
(ii) If the highest of the two appraisals is not more than
10% more than the lowest of the appraisals, the Fair Market Value shall be the
average of the two appraisals. If the highest of the two appraisals is 10% or
more than the lowest of the two appraisals, then a third appraiser shall be
appointed by the two appraisers, and if they cannot agree on a third
appraiser, the American Arbitration Association shall appoint the third
appraiser. The third appraiser, regardless of who appoints him or her, shall
have the same qualifications as the first two appraisers.
(iii) The Fair Market Value after the appointment of the
third appraiser shall be the average of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid
one-half by the Company and one-half by the Holder.
10. Registration.
(a) The Company and the holders of the Shares agree that if at any
time after the date hereof the Company shall propose to file a registration
statement with respect to any of its Common Stock on a form suitable for a
secondary offering, it will give notice in writing to such effect to the
registered holder(s) of the Shares at least thirty (30) days prior to such
filing, and, at the written request of any such registered holder, made within
ten (10) days after the receipt of such notice, will include therein at the
Company's cost and expense (including the fees and expenses of counsel to such
holder(s), but excluding underwriting discounts, commissions and filing fees
attributable to the Shares included therein) such of the Shares as such
holder(s) shall request; provided, however, that if the offering being
registered by the Company is underwritten and if the representative of the
underwriters certifies in writing that the inclusion therein of the Shares
would materially and adversely affect the sale of the securities to be sold by
the Company thereunder, then the Company shall be required to include in the
offering only that number of securities, including the Shares, which the
underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro rata
among all selling shareholders according to the total amount of securities
entitled to be included therein owned by each selling shareholder, but in no
event shall the total number of Shares included in the offering be less than
the number of securities included in the offering by any other single selling
shareholder).
(b) Whenever the Company undertakes to effect the registration of
any of the Shares, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement covering such Shares
and use its best efforts to cause such registration statement to be declared
effective by the Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date when all Shares
covered by the registration statement have been sold or (B) two hundred
seventy (270) days from the effective date of the registration statement;
provided, that not less than 10 days before filing a registration statement or
prospectus or any amendment or supplements thereto, the Company will furnish
to each Holder of Shares covered by such registration statement and the
underwriters, if any, copies of all such documents proposed to be filed
(excluding exhibits, unless any such person shall specifically request
exhibits), which documents will be subject to the review of such Holders and
underwriters, and the Company will not file such registration statement or any
amendment thereto or any prospectus or any supplement thereto (including any
documents incorporated by reference therein) with the Commission if, prior to
filing the registration statement, (A) the underwriters, if any, shall
reasonably object to such filing or (B) if information in such registration
statement or prospectus concerning a particular selling Holder has changed and
such Holder or the underwriters, if any, shall reasonably object.
(ii) Prepare and file with the Commission such amendments
and post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the period
referred to in Section 10(b)(i) and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement, and cause the prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be filed with
the Commission pursuant to Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such numbers of
copies of such registration statement, each amendment thereto, the prospectus
included in such registration statement (including each preliminary
prospectus), each supplement thereto and such other documents as they may
reasonably request in order to facilitate the disposition of the Shares owned
by them.
(iv) Use commercially reasonable efforts to register and
qualify under such other securities laws of such jurisdictions as shall be
reasonably requested by any selling Holder and do any and all other acts and
things which may be reasonably necessary or advisable to enable such selling
Holder to consummate the disposition of the Shares owned by such Holder, in
such jurisdictions; provided, however, that the Company shall not be required
in connection therewith or as a condition thereto to qualify to transact
business or to file a general consent to service of process in any such states
or jurisdictions.
(v) Promptly notify each selling Holder of the happening of
any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading and, at the request of
any such Holder, the Company will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such Shares,
such prospectus will not contain an untrue statement of a material fact or
omit to state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such
Shares not later than the effective date of such registration statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary offering) and take all
such other actions as the underwriters, if any, reasonably request in order to
expedite or facilitate the disposition of such Shares (including, without
limitation, effecting a stock split or a combination of shares).
(viii)Make available for inspection by any selling Holder or
any underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other agent retained by any such
selling Holder or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the officers,
directors, employees and independent accountants of the Company to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement.
(ix) Promptly notify the selling Holder(s) and the
underwriters, if any, of the following events and (if requested by any such
person) confirm such notification in writing: (A) the filing of the
prospectus or any prospectus supplement and the registration statement and any
amendment or post-effective amendment thereto and, with respect to the
registration statement or any post-effective amendment thereto, the
declaration of the effectiveness of such documents, (B) any requests by the
Commission for amendments or supplements to the registration statement or the
prospectus or for additional information, (C) the issuance or threat of
issuance by the Commission of any stop order suspending the effectiveness of
the registration statement or the initiation of any proceedings for that
purpose, and (D) the receipt by the Company of any notification with respect
to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any proceeding for
such purposes.
(x) Make every reasonable effort to prevent the entry of
any order suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such order, if
entered.
(xi) Cooperate with the selling Holder(s) and the
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing the Shares to be sold and not bearing any
restrictive legends, and enable such Shares to be in such lots and registered
in such names as the underwriters may request at least two (2) business days
prior to any delivery of the Shares to the underwriters.
(xii) Provide a CUSIP number for all the Shares not later
than the effective date of the registration statement.
(xiii)Prior to the effectiveness of the registration
statement and any post-effective amendment thereto and at each closing of an
underwritten offering, (A) make such representations and warranties to the
selling Holder(s) and the underwriters, if any, with respect to the Shares and
the registration statement as are customarily made by issuers in primary
underwritten offerings; (B) use commercially reasonable efforts to obtain
"cold comfort" letters and updates thereof from the Company's independent
certified public accountants addressed to the selling Holders and the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with primary underwritten offerings; (C) deliver
such documents and certificates as may be reasonably requested (1) by the
holders of a majority of the Shares being sold, and (2) by the underwriters,
if any, to evidence compliance with clause (A) above and with any customary
conditions contained in the underwriting agreement or other similar agreement
entered into by the Company; and (D) obtain opinions of counsel to the Company
and updates thereof (which counsel and which opinions shall be reasonably
satisfactory to the underwriters, if any), covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by the selling Holders and underwriters or
their counsel. Such counsel shall also state that no facts have come to the
attention of such counsel which cause them to believe that such registration
statement, the prospectus contained therein, or any amendment or supplement
thereto, as of their respective effective or issue dates, contains any untrue
statement of any material fact or omits to state any material fact necessary
to make the statements therein not misleading (except that no statement need
be made with respect to any financial statements, notes thereto or other
financial data or other expertized material contained therein). If for any
reason the Company's counsel is unable to give such opinion, the Company shall
so notify the Holders of the Shares and shall use its best efforts to remove
expeditiously all impediments to the rendering of such opinion.
(xiv)Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than forty-five
(45) days after the end of any twelve-month period (or ninety (90) days, if
such period is a fiscal year) (A) commencing at the end of any fiscal quarter
in which the Shares are sold to underwriters in a firm or best efforts
underwritten offering, or (B) if not sold to underwriters in such an offering,
beginning with the first month of the first fiscal quarter of the Company
commencing after the effective date of the registration statement, which
statements shall cover such twelve-month periods.
(c) After the date hereof, the Company shall not grant to any
holder of securities of the Company any registration rights which have a
priority greater than or equal to those granted to Holders pursuant to this
Warrant without the prior written consent of the Holder(s).
(d) The Company's obligations under Section 10(a) above with
respect to each holder of Shares are expressly conditioned upon such holder's
furnishing to the Company in writing such information concerning such holder
and the terms of such holder's proposed offering as the Company shall
reasonably request for inclusion in the registration statement. If any
registration statement including any of the Shares is filed, then the Company
shall indemnify each holder thereof (and each underwriter for such holder and
each person, if any, who controls such underwriter within the meaning of the
Securities Act) from any loss, claim, damage or liability arising out of,
based upon or in any way relating to any untrue statement of a material fact
contained in such registration statement or any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except for any such statement or omission
based on information furnished in writing by such holder of the Shares
expressly for use in connection with such registration statement; and such
holder shall indemnify the Company (and each of its officers and directors who
has signed such registration statement, each director, each person, if any,
who controls the Company within the meaning of the Securities Act, each
underwriter for the Company and each person, if any, who controls such
underwriter within the meaning of the Securities Act) and each other such
holder against any loss, claim, damage or liability arising from any such
statement or omission which was made in reliance upon information furnished in
writing to the Company by such holder of the Shares expressly for use in
connection with such registration statement.
(e) For purposes of this Section 10, all of the Shares shall be
deemed to be issued and outstanding.
11. Certain Notices. In case at any time the Company shall propose
to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock
or make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common
Stock any additional shares of stock in any class or other rights (exclusive
of any options or shares offered to employees or directors of the Company
pursuant to the Company's 1997 Stock Option Plan);
(d) reorganize, or reclassify the capital stock of the Company,
or consolidate, merge or otherwise combine with, or sell all or substantially
all of its assets to, another corporation; or
(e) voluntarily or involuntarily dissolve, liquidate or wind up
the affairs of the Company;
then, in any one or more of said cases, the Company shall give to the Holder
of the Warrant, by certified or registered mail, (i) at least twenty (20)
days' prior written notice of the date on which the books of the Company shall
close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, and (ii) in the case of such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least twenty (20) days' prior written notice of the date when
the same shall take place. Any notice required by clause (i) shall also
specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be entitled
thereto, and any notice required by clause (ii) shall specify the date on
which the holders of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
12. Rights of Co-Sale.
(a) Co-Sale Right. Neither Donald V. Warriner, Simms Family
Partnership, J. Scott Fowler, Ray E. Dillon, III, nor Richard S. Simms
(individually a "Selling Shareholder" and collectively the "Selling
Shareholders") shall enter into any transaction that would result in the sale
by it of any Common Stock now or hereafter owned by it, unless prior to such
sale the Selling Shareholder shall give notice to Holder of its intention to
effect such sale in order that Holder may exercise its rights under this
Section 12 as hereinafter described. Such notice shall set forth (i) the
number of shares to be sold by the Selling Shareholder, (ii) the principal
terms of the sale, including the price at which the shares are intended to be
sold, and (iii) an offer by the Selling Shareholder to use its best efforts to
cause to be included with the shares to be sold by it in the sale, on a
share-by-share basis and on the same terms and conditions, the Shares issuable
or issued to Holder pursuant this Warrant.
(b) Rejection of Co-Sale Offer. If Holder has not accepted such
offer in writing within a period of ten (10) days from the date of receipt of
the notice, then the Selling Shareholder shall thereafter be free for a period
of ninety (90) days to sell the number of shares specified in such notice, at
a price no greater than the price set forth in such notice and on otherwise no
more favorable terms to the Selling Shareholder than as set forth in such
notice, without any further obligation to Holder in connection with such sale.
In the event that the Selling Shareholder fails to consummate such sale within
such ninety-day period, the shares specified in such notice shall continue to
be subject to this Section.
(c) Acceptance of Co-Sale Offer. If Holder accepts such offer in
writing within ten (10) day period, such acceptance shall be irrevocable
unless the Selling Shareholder shall be unable to cause to be included in his
sale the number of Shares of stock held by Holder and set forth in the written
acceptance. In that event, the Selling Shareholder and Holder shall
participate in the sale pro rata, with the Selling Shareholder and Holder each
selling half the total number of such shares to be sold in the sale.
13. Equity Participation. This Warrant is issued in connection with
the Loan Agreement. Holder is a Small Business Investment Company pursuant to
13 CFR Section 107 and this Warrant is being issued in connection with the
Loan Agreement pursuant to 13 CFR Section 107.815. It is intended that this
Warrant constitute an equity participation under and pursuant to T.C.A.
Section 47-24-101, et seq. and that such equity participation be permitted
under said statutes and not constitute interest on the Note. If under any
circumstances whatsoever, fulfillment of any obligation of this Warrant, the
Loan Agreement, or any other agreement or document executed in connection with
the Loan Agreement, shall violate the lawful limit of any applicable usury
statute or any other applicable law with regard to obligations of like
character and amount, then the obligation to be fulfilled shall be reduced to
such lawful limit, such that in no event shall there occur, under this
Warrant, the Loan Agreement, or any other document or instrument executed in
connection with the Loan Agreement, any violation of such lawful limit, but
such obligation shall be fulfilled to the lawful limit. If any sum is
collected in excess of the lawful limit, such excess shall be applied to
reduce the principal amount of the Note.
14. Governing Law. This warrant shall be governed by the laws of the
state of Tennessee applicable to agreements made entirely within the State.
15. Severability. If any provision(s) of this Warrant or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Warrant and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
16. Counterparts. This Warrant may be executed in any number of
counterparts and be different parties to this Warrant in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Warrant.
17. Jurisdiction and Venue. The Company hereby consents to the
jurisdiction of the courts of the State of Tennessee and the United States
District Court for the Middle District of Tennessee, as well as to the
jurisdiction of all courts from which an appeal may be taken from such courts,
for the purpose of any suit, action or other proceeding arising out of any of
its
obligations arising under this Agreement or with respect to the transactions
contemplated hereby, and expressly waives any and all objections it may have
as to venue in any such courts.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
DATA NATIONAL CORPORATION, a Colorado
corporation
By: Donald V. Wariner
Title: President and CEO
SIRROM INVESTMENTS, INC., a Tennessee
corporation
By:----------------------------------
Title:-------------------------------
The undersigned Shareholders join in the execution of this Warrant for the
purposes of acknowledging and agreeing to be bound by Section 12 hereof.
/s/ Donald V. Warriner
____________________________________
Donald V. Warriner
SIMMS FAMILY PARTNERSHIP
By: /s/ Richard S. Simms
Title: General Partner
/s/ J. Scott Fowler
____________________________________
J. Scott Fowler
____________________________________
Ray E. Dillon, III
/s/ Richard S. Simms
____________________________________
Richard S. Simms
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement"), dated as of the 11th day of
December, 1997, is made and entered into by and between DATA NATIONAL
CORPORATION, a Colorado corporation ("Borrower"), and SIRROM INVESTMENTS,
INC., a Tennessee corporation ("Lender").
WITNESSETH:
WHEREAS, Lender is making a loan (the "Loan") in the amount of $1,500,000
to Borrower, pursuant to that certain Loan Agreement of even date herewith by
and between Borrower and Lender (the "Loan Agreement"); and
WHEREAS, in connection with the making of the Loan, Lender desires to
obtain from Borrower and Borrower desires to grant to Lender a security
interest in certain collateral more particularly described below.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. Borrower hereby grants to Lender a
security interest in the following described property and any and all proceeds
(although proceeds are covered, Lender does not authorize the sale of any of
the following, except to the extent permitted under Sections 10 and 11 hereof)
and products thereof and accessions thereto (collectively the "Collateral"):
(a) Equipment. All equipment and other tangible personal property
of Borrower of any kind and description, whether now owned or hereafter
acquired and wherever located, together with all parts, accessories and
attachments and all replacements thereof and additions thereto;
(b) Inventory, Accounts, Contract Rights, Chattel Paper, Documents,
Instruments and General Intangibles. All of Borrower's inventory and any
agreements for lease of same and rentals therefrom, and all of Borrower's
accounts, accounts receivable, contract rights, chattel paper, software,
documents, instruments and general intangibles (including but not limited to
goodwill, patents and trademarks and all rights of Borrower in the Genesis
database) and the proceeds therefrom, whether now in existence or owned or
hereafter arising or acquired, entered into or created, and wherever located;
and whether held for lease or sale, or furnished or to be furnished under
contracts of service;
(c) Trademarks, Etc. All trademarks, trade names, and service
marks now held or hereafter acquired by Borrower, both those that are
registered with the United States Patent and Trademark Office and any
unregistered marks used by Borrower in the United States, and trade dress,
including logos and designs, in connection with which any such marks are used,
together with all registrations regarding such marks and the rights to
renewals thereof, and the goodwill of the business of Borrower symbolized by
such marks, and all patents, licenses, technology and other intangible
property of Borrower, whether now owned or hereafter acquired;
(d) Copyrights. All copyrights now held or hereafter acquired by
Borrower and any applications for U.S. copyrights hereafter made by Borrower;
and
(e) Proprietary Information, Computer Data, Etc. All proprietary
information and trade secrets of Borrower with respect to Borrower's business,
whether now owned or hereafter acquired, and all of Borrower's computer
programs and the information contained therein and all intellectual property
rights with respect thereto, whether now owned or hereafter acquired.
2. Secured Indebtedness. The obligations secured hereby shall include
(a) loans to be made concurrently or in connection with this Agreement or the
Loan Agreement as evidenced by one or more promissory notes payable to the
order of Lender that shall be due and payable as set forth in such promissory
notes, and any renewals or extensions thereof, (b) the full and prompt payment
and performance of any and all other indebtednesses and other obligations of
Borrower to Lender, direct or contingent (including but not limited to
obligations incurred as indorser, guarantor or surety), however evidenced or
denominated, and however and whenever incurred, including but not limited to
indebtednesses incurred pursuant to any present or future commitment of Lender
to Borrower and any and all future advances regardless of the class of such
future advances, and (c) all future advances made by Lender for taxes, levies,
insurance and preservation of the Collateral and all attorney's fees, court
costs and expenses of whatever kind incident to the collection of any of said
indebtedness or other obligations and the enforcement and protection of the
security interest created hereby.
3. Representations, Warranties and Agreements of Borrower. Borrower
represents, warrants and agrees as follows:
(a) Borrower will promptly notify Lender, in writing, of any change
in Borrower's place or places of business if the Collateral is used in
business, or of any change in Borrower's residence if the Collateral is not
used in business, and regardless of use, of any change in the location of the
Collateral or any records pertaining thereto.
(b) Except as set forth on Schedule 2.1(l) of the Loan Agreement,
Borrower is the owner of the Collateral free and clear of any liens, security
interests, claims and encumbrances, contingent or otherwise. Borrower will
defend the Collateral against the claims and demands of all persons.
(c) Borrower will pay to Lender all amounts secured hereby as and
when the same shall be due and payable, whether at maturity, by acceleration
or otherwise, and will promptly perform all terms of said indebtedness and
this or any other security or loan agreement between Borrower and Lender, and
will promptly discharge all said liabilities.
(d) Borrower will at all times keep the Collateral insured against
all insurable hazards in amounts equal to the full cash value of the
Collateral. Such insurance shall be obtained from such companies as may be
reasonably acceptable to Lender, with provisions reasonably satisfactory to
Lender for payment of all losses thereunder to Lender as its interests may
appear. If required by Lender, Borrower shall deposit the policies with
Lender. If an Event of Default (as defined in the Loan Agreement) has
occurred and is continuing, any money received by Lender under said policies
may be applied to the payment of any indebtedness secured hereby, whether or
not due and payable, otherwise said money shall be delivered by Lender to
Borrower for the purpose of repairing or restoring the Collateral. Borrower
assigns to Lender all right to receive proceeds of insurance not exceeding the
amounts secured hereby, directs any insurer to pay all proceeds directly to
Lender, and appoints Lender Borrower's attorney in fact to endorse any draft
or check made payable to Borrower in order to collect the benefits of such
insurance. If Borrower fails to keep the Collateral insured as required by
Lender, Lender shall have the right to obtain such insurance at Borrower's
expense and add the cost thereof to the other amounts secured hereby.
(e) Borrower will pay all costs of filing of financing,
continuation and termination statements with respect to the security interests
created hereby, and Lender is authorized to do all things that it deems
reasonably necessary to perfect and continue perfection of the security
interests created hereby and to protect the Collateral.
(f) The address set forth after Borrower's signature on this
Agreement is Borrower's principal place of business and the location where the
records concerning all intangible Collateral are kept and/or maintained. The
addresses set forth on Schedule 2.1(ad) of the Loan Agreement are all of the
locations where Borrower does business and the locations of all tangible
Collateral.
4. Default. Borrower shall be in default upon failure to observe or
perform any of Borrower's agreements herein contained, or upon the occurrence
of a default or Event of Default under the Loan Agreement or any other Loan
Document (as defined in the Loan Agreement) that has not been cured during the
applicable grace period, or if any warranty or statement by Borrower set forth
herein or furnished in connection herewith is false or misleading.
5. Remedies Upon Default. Upon the occurrence of an Event of Default
(as defined in the Loan Agreement), all sums secured hereby shall immediately
become due and payable at Lender's option without notice to Borrower, and
Lender may proceed to enforce payment of same and to exercise any and all
rights and remedies provided by the Uniform Commercial Code (Tennessee) or
other applicable law, as well as all other rights and remedies possessed by
Lender, all of which shall be cumulative. Whenever Borrower is in default
hereunder, and upon demand by Lender, Borrower shall assemble the Collateral
and make it available to Lender at a place reasonably convenient to Lender and
Borrower. Any notice of sale, lease or other intended disposition of the
Collateral by Lender sent to Borrower at the address hereinafter set forth, or
at such other address of Borrower as may be shown on Lender's records, at
least five (5) days prior to such action, shall constitute reasonable notice
to Borrower.
Lender may waive any default before or after the same has been declared
without impairing its right to declare a subsequent default hereunder, this
right being a continuing one.
6. Severability. If any provision of this Agreement is held invalid,
such invalidity shall not affect the validity or enforceability of the
remaining provisions of this Agreement.
7. Binding Effect. This Agreement shall inure to the benefit of
Lender's successors and assigns and shall bind Borrower's heirs,
representatives, successors and assigns. If Borrower is composed of more than
one person, firm and/or entity, their obligations hereunder shall be joint and
several.
8. Termination Statement. Borrower agrees that, upon the payment in
full of all indebtedness secured hereby and if there is no outstanding
obligation of Lender to make future advances, Lender shall be required to
terminate any financing statement filed to perfect Lender's security
interest(s) in any of the Collateral. Lender may at its option, in lieu of
sending a termination statement to Borrower, cause said termination statement
to be filed with the appropriate filing officer(s).
9. Protection of Collateral. Without the prior written consent of
Lender, Borrower will not permit any liens or security interests other than
those created by this Agreement to attach to any of the Collateral, nor permit
any of the Collateral to be levied upon under any legal process, nor permit
anything to be done that may impair the security intended to be afforded by
this Agreement, nor permit any tangible Collateral to become attached to or
commingled with other goods.
10. Special Agreements With Respect to Certain Tangible Collateral.
Borrower additionally agrees and warrants as follows:
(a) Borrower will not permit any of the Collateral to be removed
from the location specified herein, except for temporary periods in the normal
and customary use thereof, without the prior written consent of Lender, and
will permit Lender to inspect the Collateral at any time.
(b) If any of the Collateral is equipment or goods of a type
normally used in more than one state (whether or not actually so used),
Borrower will contemporaneously herewith furnish Lender a list of the states
wherein such equipment or goods are or will be used, and hereafter will notify
Lender in writing (i) of any other states in which such equipment or goods are
so used, and (ii) of any change in the location of Borrower's principal place
of business.
(c) Borrower will not sell, exchange, lease or otherwise dispose
of any of the Collateral or any interest therein without the prior written
consent of Lender.
(d) Borrower will keep the Collateral in good condition and repair
and will pay and discharge all taxes, levies and other impositions levied
thereon as well as the cost of repairs to or maintenance of same, and will not
permit anything to be done that may impair the value of any of the Collateral.
If Borrower fails to pay such sums, Lender may do so for Borrower's account
and add the amount thereof to the other amounts secured hereby.
(e) Until default in any of the terms hereof, or the terms of any
indebtedness secured hereby, Borrower shall be entitled to possession of the
Collateral and to use the same in any lawful manner, provided that such use
does not cause excessive wear and tear to the Collateral, cause it to decline
in value at an excessive rate, or violate the terms of any policy of insurance
thereon.
(f) Borrower will not allow the Collateral to be attached to real
estate in such manner as to become a fixture or a part of any real estate.
11. Special Agreements With Respect to Intangible and Certain Tangible
Collateral. Borrower additionally warrants and agrees as follows:
(a) So long as Borrower is not in default hereunder, Borrower shall
have the right to process and sell Borrower's inventory in the regular course
of business. Lender's security interest hereunder shall attach to all
proceeds of all sales or other dispositions of the Collateral. If at any time
any such proceeds shall be represented by any instruments, chattel paper or
documents of title, then such instruments, chattel paper or documents of title
shall be promptly delivered to Lender and shall be subject to the security
interest granted hereby. If at any time any of Borrower's inventory is
represented by any document of title, such document of title will be delivered
promptly to Lender and shall be subject to the security interest granted
hereby.
(b) By the execution of this Agreement, Lender shall not be
obligated to do or perform any of the acts or things provided in any contracts
covered hereby that are to be done or performed by Borrower, but if there is a
default by Borrower in the payment of any amount due in respect of any
indebtedness secured hereby, then Lender may, at its election, perform some or
all of the obligations provided in said contracts to be performed by Borrower,
and if Lender incurs any liability or expenses by reason thereof, the same
shall be payable by Borrower upon demand and shall also be secured by this
Agreement.
(c) At any time after Borrower is in default hereunder or under the
Loan Agreement and such default has not been remedied within the applicable
cure period, Lender shall have the right to notify the account debtors
obligated on any or all of Borrower's accounts receivable to make payment
thereof directly to Lender, and to take control of all proceeds of any such
accounts receivable. Until such time as Lender elects to exercise such right
by mailing to Borrower written notice thereof, Borrower is authorized, as
agent of the Lender, to collect and enforce said accounts receivable.
12. Power of Attorney. Borrower hereby constitutes the Lender or its
designee, as Borrower's attorney-in-fact with power, upon the occurrence and
during the continuance of an Event of Default which has not been remedied
during the applicable cure period, to endorse Borrower's name upon any notes,
acceptances, checks, drafts, money orders, or other evidences of payment or
Collateral that may come into either its or the Lender's possession; to sign
the name of Borrower on any invoice or bill of lading relating to any of the
accounts receivable, drafts against customers, assignments and verifications
of accounts receivable and notices to customers; to send verifications of
accounts receivable; to notify the Post Office authorities to change the
address for delivery of mail addressed to Borrower to such address as the
Lender may designate; to execute any of the documents referred to in Section
3(e) hereof in order to perfect and/or maintain the security interests and
liens granted herein by Borrower to the Lender; and to do all other acts and
things necessary to carry out this Security Agreement. All acts of said
attorney or designee are hereby ratified and approved, and said attorney or
designee shall not be liable for any acts of commission or omission (other
than acts of gross negligence or willful misconduct), nor for any error of
judgment or mistake of fact or law; this power being coupled with an interest
is irrevocable until all of the obligations secured hereby are paid in full
and any and all promissory notes executed in connection therewith are
terminated and satisfied.
13. Governing Law and Amendments. This Agreement and all of the Loan
Documents shall be construed and enforced under the laws of the State of
Tennessee applicable to contracts to be wholly performed in such State. No
amendment or modification hereof shall be effective except in a writing
executed by each of the parties hereto.
14. Survival of Representations and Warranties. All representations and
warranties contained herein or made by or furnished on behalf of the Borrowers
in connection herewith shall survive the execution and delivery of this
Agreement.
15. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
16. Construction and Interpretation. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that
the terms hereof shall be more strictly construed against one party by reason
of the rule of construction that a document is to be more strictly construed
against the party that itself or through its agent prepared the same, it being
agreed that the Borrower, Lender and their respective agents have participated
in the preparation hereof.
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or
have caused this Agreement to be executed as of the date first above written.
BORROWER:
DATA NATIONAL CORPORATION
By: /s/ Donald V. Warriner
Title: President and CEO
Address: 11415 West I-70 Frontage Road, North
Wheat Ridge, CO 80033
LENDER:
SIRROM INVESTMENTS, INC.
By:------------------------------------
Title:---------------------------------<PAGE>
<PAGE>
PLEDGE AND SECURITY AGREEMENT
(Borrower)
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated December 11,
1997, by and between DATA NATIONAL CORPORATION, a Colorado corporation
("Borrower") and SIRROM INVESTMENTS, INC., a Tennessee corporation, with its
principal office and place of business in Nashville, Tennessee ("Lender");
WITNESSETH:
WHEREAS, pursuant to a Loan Agreement of even date herewith, by and
between Borrower and Lender (the "Loan Agreement"), Lender has made a loan to
Borrower in the original principal amount of $1,500,000 (the "Loan"). The
Loan is evidenced by a Secured Promissory Note of even date herewith, in the
Loan amount, made and executed by Borrower, payable to the order of Lender
(herein referred to, together with any extensions, modifications, renewals
and/or replacements thereof, as the "Note").
WHEREAS, it is a condition of Lender's agreement to make the Loan to
Borrower that Borrower execute and deliver this Agreement to Lender.
AGREEMENT:
NOW THEREFORE, in consideration of the foregoing, and to enable Borrower
to obtain loans and other extensions of credit from Lender and to induce
Lender to have transactions with Borrower, Borrower agrees as follows:
1. Pledge. As collateral security for the payment and performance in
full of the Obligations (as hereinafter defined), Borrower hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto Lender, and
hereby grants to Lender a security interest in, the collateral described in
Schedule A hereto, together with the proceeds thereof and all cash, additional
securities or other property at any time and from time to time receivable or
otherwise distributable in respect of, in exchange for, or in substitution for
any and all such pledged securities (all such pledged securities, the proceeds
thereof, cash, dividends, additional securities and other property now or
hereafter pledged hereunder are hereinafter collectively called the "Pledged
Securities");
TO HAVE AND TO HOLD the Pledged Securities, together with all rights,
titles, interests, powers, privileges and preferences pertaining or incidental
thereto, unto Lender, its successors and assigns; subject, however, to the
terms, covenants and conditions hereinafter set forth.
Upon delivery to Lender, the Pledged Securities shall be accompanied by
executed stock powers in blank and by such other instruments or documents as
Lender or its counsel may reasonably request. Each delivery of certificates
for such Pledged Securities shall be accompanied by a schedule showing the
number of shares and the numbers of the certificates theretofore and then
pledged hereunder, which schedule shall be attached hereto as Schedule A and
made a part hereof. Each schedule so delivered shall supersede any prior
schedule so delivered.
2. Obligations Secured. This Agreement is made, and the security
interest created hereby is granted to Lender, to secure full payment and
performance of any and all indebtedness and other obligations of Borrower to
Lender, direct or contingent, however evidenced or denominated, and however or
whenever incurred, including without limitation indebtedness incurred pursuant
to any past, present or future commitment of Lender to Borrower (regardless of
the class of such future advance), including, without limitation, the
indebtedness evidenced by the Note (collectively the "Obligations").
3. Representations and Warranties. Borrower hereby represents and
warrants to Lender (a) that Borrower is the legal and equitable owner of the
Pledged Securities, that Borrower has the complete and unconditional authority
to pledge the Pledged Securities being pledged by it, and holds the same free
and clear of all liens, charges, encumbrances and security interests of every
kind and nature; and (b) that no consent or approval of any governmental body
or regulatory authority, or of any other party, which was or is necessary to
the validity of this pledge, has not been obtained. Borrower further
represents and warrants that no part of the Obligations will be used to
purchase or carry any "margin stock", as defined in Regulation U of the Board
of Governors of the Federal Reserve System, 12 CFR 221.1 et seq.
4. Registration in Nominee Name; Denominations. Lender shall have
the right (in its sole and absolute discretion) to hold the certificates
representing the Pledged Securities in its own name or in the name of the
Borrower, endorsed or assigned in blank or in favor of Lender. Borrower shall
deliver to Lender all certificates representing the Pledged Securities
promptly upon receipt by Borrower. Upon request and delivery of certificates
representing the Pledged Securities to the issuer of the Pledged Securities,
Lender may have such Pledged Securities registered in the name of Lender or
any nominee or nominees of Lender. Lender shall at all times have the right
to exchange the certificates representing Pledged Securities for certificates
of smaller or larger denominations for any purpose consistent with this
Agreement.
5. Remedies Upon Default. Upon the occurrence of a default or Event
of Default under the Loan Agreement, or in the event that any representation
or warranty herein shall prove to have been untrue when made, then, and in any
such event, Lender shall have all of the rights, privileges and remedies of a
secured party under the Uniform Commercial Code as in effect in the State of
Tennessee, and without limiting the foregoing, Lender may (a) collect any and
all amounts payable in respect of the Pledged Securities and exercise any and
all rights, privileges, options and remedies of the holder and owner thereof,
and (b) sell, transfer and/or negotiate the Pledged Securities, or any part
thereof, at public or private sale, for cash, upon credit or for future
delivery as Lender shall deem appropriate, including without limitation, at
Lender's option, the purchase of all or any part of said securities at any
public sale by Lender. Upon consummation of any sale, Lender shall have the
right to assign, transfer and deliver to the purchaser or purchasers thereof
the Pledged Securities so sold. Each such purchaser at any such sale shall
hold the property sold absolutely, free from any claim or right on the part of
the Borrower, and the Borrower hereby waives (to the extent permitted by law)
all rights of redemption, stay or appraisal that Borrower now has or may at
any time in the future have under any rule of law or statute now existing or
hereinafter enacted. Borrower hereby expressly waives notice to redeem and
notice of the time, place and manner of such sale.
6. Application of Proceeds. The proceeds of the sale of Pledged
Securities sold pursuant to Section 5 hereof, and the proceeds of the exercise
of any of Lender's other remedies hereunder, shall be applied by Lender as
follows:
First: To the payment of all costs and expenses incurred by Lender in
connection with any such sale, including, but not limited to, all court costs
and the reasonable fees and expenses of counsel for Lender in connection
therewith, and
Second: To the payment in full of the Obligations, first to accrued
interest and thereafter to the unpaid principal amount thereof, to the extent
not previously paid by Borrower, and
Third: The excess, if any, shall be paid to Borrower or any other
person lawfully thereunto entitled.
7. Reimbursement of Lender. Borrower agrees to reimburse Lender,
upon demand, for all expenses, including without limitation reasonable
attorney's fees, incurred by it in connection with the administration and
enforcement of this Agreement, and agrees to indemnify Lender and hold it
harmless from and against any and all liability incurred by it hereunder or in
connection herewith, unless such liability shall be due to willful misconduct
or gross negligence on the part of Lender.
8. No Waiver. No failure on the part of Lender to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by Lender preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. All remedies are cumulative
and are not exclusive of any other remedies provided by law.
9. Limitation of Lender Liability. Except in the case of their
intentional malfeasance or gross negligence, neither Lender nor its partners,
employees, agents, representatives, or nominees shall be liable for any loss
incurred by Borrower arising out of any act or omission of Lender, its
partners, employees, agents, representatives or nominees, with respect to the
care, custody or preservation of the Pledged Securities.
10. Binding Agreement. This Agreement and the terms, covenants and
conditions hereof shall be binding upon and inure to the benefit of the
parties hereto and to all holders of indebtedness secured hereby and their
respective successors and assigns.
11. Governing Law; Amendments. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
Tennessee applicable to contracts to be wholly performed in such state. This
Agreement may not be amended or modified, nor may any of the Pledged
Securities be released except in a writing signed by the party to be charged
therewith. Time is of the essence with respect to the obligations of Borrower
pursuant to this Agreement.
12. Further Assurances. Borrower agrees to do such further acts and
things, and to execute and deliver such additional conveyances, assignments,
agreements and instruments, as Lender may at any time request in connection
with the administration and enforcement of this Agreement or relative to the
Pledged Securities or any part thereof or in order to better assure and
confirm unto Lender its rights and remedies hereunder.
13. Headings. Section numbers and headings used herein are for
convenience only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement, or
have caused this Agreement to be duly executed by a duly authorized officer,
all as of the day first above written.
BORROWER:
DATA NATIONAL CORPORATION, a Colorado
corporation
By: /s/ Donald V. Warriner
Title: President and CEO
LENDER:
SIRROM INVESTMENTS, INC., a Tennessee
corporation
By:_______________________________
Title:____________________________<PAGE>
<PAGE>
SCHEDULE A
Pledged Securities
No. Of Certificate
Issuer Shares Class Nos.
- ------------------------ ------------- ----------- ----------------
1. DNI Corporation 1,271,200 Common 55<PAGE>
<PAGE>
STOCK POWER
FOR VALUE RECEIVED and subject to that certain Pledge and Security
Agreement dated December 11, 1997, among the undersigned, and Sirrom
Investments, Inc., a Tennessee corporation ("Pledgee"), the terms and
conditions of which are incorporated by reference herein, the undersigned does
hereby assign and transfer unto Pledgee ________________________ (_______)
shares of stock of DNI Corporation, a Colorado corporation (the "Company")
standing in the name of the undersigned on the books of the Company and
represented in the articles of incorporation filed with the office of the
Colorado Secretary of State, and all other shares of stock of the Company of
any class or category now or hereafter owned by the undersigned and does
hereby irrevocably constitute and appoint Pledgee as attorney-in-fact for the
undersigned to transfer said stock on the books of the Company with full power
of substitution in the premises.
Dated this 11th day of December, 1997.
DATA NATIONAL CORPORATION
By: /s/ Donald V. Warriner
Title: President and CEO<PAGE>
<PAGE>
STOCK PLEDGE LETTER
December 11, 1997
Sirrom Investments, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Gentlemen:
Reference is made to that certain Pledge and Security Agreement (the
"Pledge Agreement"), of even date herewith, between Data National Corporation
(the "Shareholder") and you pursuant to which Shareholder has pledged to you
__________ shares (the "Shares") of the undersigned as security for
obligations of the Shareholder to you under that certain Loan Agreement, of
even date herewith, between the Shareholder and you (the "Loan Agreement").
Defined terms used herein which are not otherwise defined shall have the
meaning set forth in the Pledge Agreement.
The undersigned hereby acknowledges and confirms that the
necessary changes and registrations on the books of the undersigned have been
made to reflect the pledge of the Shares under the Pledge Agreement. In
particular, the undersigned acknowledges and confirms that you have been
designated as the only registered pledgee of the Shares.
This letter shall continue in full force and effect until all
Obligations have been paid and/or satisfied.
DNI Corporation
By: /s/ Donald V. Warriner
Title: President and CEO<PAGE>
<PAGE>
IRREVOCABLE PROXY
December 11, 1997
Sirrom Investments, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Gentlemen:
Reference is made to that certain Pledge and Security Agreement (the
"Pledge Agreement"), of even date herewith, between the undersigned and you
pursuant to which the undersigned has pledged to you _______ shares (the
"Shares") of common stock of DNI Corporation (the "Company") as security for
obligations of the undersigned to you under that certain Loan Agreement, of
even date herewith, between the undersigned and you (the "Loan Agreement").
Defined terms used herein which are not otherwise defined shall have the
meaning set forth in the Pledge Agreement.
The undersigned hereby irrevocably appoints you as attorney and proxy,
with full power of substitution, after a default under the Loan Agreement,
which default has not been remedied during the applicable cure period, to vote
or express written consent or dissent in such manner as such attorney and
proxy, or its substitute, shall, in its sole discretion, deem proper and
otherwise act (including pursuant to any corporate action in writing without a
meeting) with respect to all of the Shares which the undersigned is entitled
to vote at any meeting of shareholders (whether annual or special and whether
or not an adjourned meeting) of the Company, or pursuant to written action
taken in lieu of any such meeting or otherwise.
This Proxy is irrevocable, is coupled with an interest sufficient in law
to support an irrevocable proxy, and is granted in consideration of and as an
inducement to cause you to enter into the transactions contemplated by the
Pledge Agreement and the Loan Agreement. This proxy shall revoke any other
proxy granted by the undersigned at any time with respect to the Shares and no
subsequent proxies will be given with respect thereto by the undersigned. In
addition, if subsequent to the date hereof and after a default under the Loan
Agreement, the undersigned is entitled to vote the Shares for any purpose,
then the undersigned shall take all actions necessary to vote the Shares
pursuant to instructions received from you.
This irrevocable proxy shall continue in full force and effect until all
Obligations have been paid and/or satisfied.
DATA NATIONAL CORPORATION
By: /s/ Donald V. Warriner
Title: President and CEO<PAGE>
<PAGE>
SECURITY AGREEMENT AND
COLLATERAL ASSIGNMENT OF MEMBERSHIP INTEREST
THIS SECURITY AGREEMENT AND COLLATERAL ASSIGNMENT OF MEMBERSHIP
INTEREST
("Assignment"), made as of the 11th day of December, 1997, by and between DATA
NATIONAL CORPORATION, a Colorado corporation ("Assignor") and SIRROM
INVESTMENTS, INC., a Tennessee corporation, with its principal office and
place of business in Nashville, Tennessee ("Assignee").
W I T N E S S E T H:
WHEREAS, Assignor is a member of Digital Data, LLC, a Colorado limited
liability company (the "Company"), and as such member has the right to govern
and receive certain profits, income and distributions from the Company; and
WHEREAS, pursuant to that certain Loan Agreement of even date herewith
by and between Assignee and Assignor (as amended from time to time, the "Loan
Agreement"), Assignee has made a loan (the "Loan") to Assignor evidenced by a
promissory note of even date herewith, in the original principal amount of
$1,500,000, made and executed by Assignor, payable to the order of Assignee
(the "Note"); and
WHEREAS, Assignor and Assignee desire to secure payment of the Note and
the performance of all of the other obligations of the Company and/or Assignor
to Assignee, by an assignment of all Assignor's rights in the Company,
including without limitation Assignor's rights to govern and receive profits,
income and distributions from the Company, together with certain other
interests as hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
hereinafter contained and the making of the Loan, the parties hereto agree as
follows:
1. Grant of Security Interest and Assignment. Assignor hereby grants
a security interest in, assigns, transfers, conveys and sets over to Assignee,
all of Assignor's estate, title and interest in and to the Company, including
without limitation Assignor's estate, title and interest in and to the
management rights, the profits and income of, and distributions from, the
Company, whether under the articles of organization of the Company and/or that
certain Operating Agreement dated September 16, 1996, by and among the members
of the Company, as the same may be amended from time to time (collectively the
"Operating Agreement"), or otherwise, together with any and all proceeds
thereof (the entirety of such estate, title and interest, and all rights,
powers, privileges, options and other benefits of Assignor pursuant thereto,
including the proceeds thereof, are hereinafter referred to collectively as
the "Assignor's Interests"). The assignment of, and grant of a security
interest in, Assignor's Interests shall be absolute and unconditional, and
shall be effective upon the execution of this Assignment.
2. Collateral Security. The grant of the security interest,
assignment, transfer and conveyance effected by Section 1 hereof is made by
Assignor for the following purposes:
(a) To secure the payment of the indebtedness for borrowed money
evidenced by the Note, together with interest thereon, and any extensions,
modifications and/or renewals thereof and any notes given in payment of any
such principal and/or interest;
(b) To secure the payment of all court costs, expenses and costs
of whatever kind incident to the collection of any indebtedness or enforcement
of any obligations secured hereby and the enforcement or protection of the
lien and/or security interest of this instrument, including reasonable
attorney's fees; and
(c) To secure the payment of any and all other indebtednesses of
the Company and/or Assignor to Assignee, however evidenced or denominated, and
however and whenever incurred, including without limitation indebtednesses
incurred pursuant to any previous, present or future commitment of Assignee to
the Company and/or Assignor.
The execution and delivery of this Assignment shall not in any way impair or
diminish any obligations of Assignor under the Operating Agreement, nor shall
any such obligations be imposed upon Assignee. Upon the payment of the
principal of, and all interest on, and all of the other sums payable in
respect of, the indebtedness evidenced by the Note and all other sums and
obligations secured by this Assignment, and the performance and observance of
the provisions of any and all documents relating to the Note, the grant of the
security interest, assignment, transfer and conveyance effected by Section 1
hereof and all rights herein assigned to Assignee shall cease and terminate
and all the estate, right and title of Assignor to the Assignor's Interests
shall revert to Assignor and this Assignment shall be of no further force and
effect.
3. Representations, Warranties and Covenants of Assignor. Subject to
Section 3(b) hereof, Assignor represents and warrants to, and covenants with,
Assignee as follows:
(a) Assignor is a member of the Company, and as such member owns
interests in the Company equal to 50% of the total ownership interests in the
Company. Assignor's Interests in the Company entitle Assignor to 50% of the
governance rights of the Company and to collect and receive 50% of the
profits, income and distributions from the Company when and as distributed in
accordance with the provisions of the Operating Agreement.
(b) Assignor has full right, power and authority to assign and
transfer to Assignee the Assignor's Interests, free and clear of all liens,
claims or encumbrances of any kind whatever, and this Assignment is effective
to do so. The execution and delivery of this Assignment and the performance
and observance of the obligations of Assignor hereunder will not violate the
provisions of the articles of organization of the Company, the Operating
Agreement or any other agreement of any kind to which Assignor is a party or
by the terms of which Assignor is bound.
(c) Neither the consent of the other members of the Company nor
that of any other person or entity is required to effect the assignment of the
Assignor's Interests as herein provided.
(d) Assignor has delivered to Assignee true and correct copies
of the articles of organization of the Company and the Operating Agreement, as
amended to the date hereof.
(e) So long as this Assignment remains in effect and so long as
any indebtedness or other obligations secured hereby remain unpaid, Assignor
will not, without Assignee's prior written consent, terminate, sell, assign,
convey or otherwise transfer to any other person, firm or entity any interest
in the Company presently owned by Assignor.
(f) So long as this Assignment remains in effect and so long as
any indebtedness or other obligations secured hereby remain unpaid, Assignor
will cause the Company to continue to be a limited liability company.
(g) There are currently no contribution obligations of Assignor
to the Company.
(h) Assignor will deliver to Assignee copies of all notices of
any meetings of members, along with any proxy statements or other associated
correspondence given to Assignor by the Company.
(i) Assignor will give Assignee at least fifteen (15) days'
prior written notice of any proposed amendment to the Operating Agreement, and
Assignor will not, without the prior written consent of Assignee, consent to
any such amendment if such amendment could have an adverse effect on the
Assignor's Interests or Assignee's security interest therein.
4. Default and Remedy. Prior to the occurrence of an Event of
Default (as hereafter defined), the Company shall be entitled to make
distributions in respect of the Assignor's Interests directly to Assignors.
If Assignor defaults in the timely repayment of any indebtedness hereby
secured or the timely performance of any of its obligations to Assignee hereby
secured, or if Assignor breaches any of the representations, warranties or
covenants herein contained, or if a default or event of default shall occur
under the terms of any instrument or document now or hereafter evidencing,
securing or in any way related to the Loan or the indebtedness evidenced by
the Note, or if Assignor shall make an assignment for the benefit of
creditors, be adjudged bankrupt or have filed in its behalf or against it any
type of bankruptcy or insolvency proceeding, or if a trustee or receiver shall
be appointed for Assignor or any of its property, then, and in any such event,
Assignee shall have the right (a) to declare the indebtedness evidenced by the
Note and any and all other indebtedness of the Company and/or Assignor to
Assignee to be immediately due and payable, subject to Section 3(b) hereof but
otherwise without notice or demand, and (b) to exercise all of the rights and
remedies of a secured party under the Tennessee Uniform Commercial Code.
Without limiting the foregoing, upon the occurrence of any of the aforesaid
events of default (individually an "Event of Default" and collectively the
"Events of Default"), Assignee shall also have the right to declare, by notice
to the Company and to Assignor, that all distributions made in respect of the
Assignor's Interests from and after the date of said notice shall be made
directly to Assignee in accordance with the assignment evidenced hereby.
Assignor hereby irrevocably appoints Assignee as attorney and proxy, with full
power of substitution, after an Event of Default, to vote or express written
consent or dissent in such manner as such attorney or proxy, or its
substitute, shall, in its sole discretion, deem proper and otherwise act
(including pursuant to any action in writing without a meeting) with regard to
the Assignor's Interest which Assignor is entitled to vote at any meeting of
the members of the Company or pursuant to written action taken in lieu of any
such meeting or otherwise. Until the Company receives the aforesaid notice of
default from Assignee, the Company shall have no liability for distributions
made to Assignor; after receipt of such notice, the Company shall make all
distributions otherwise payable to Assignor to Assignee.
5. Non-inclusive Remedy. Upon the occurrence of any Event of
Default, Assignee may at its election proceed directly and personally against
Assignor to collect the indebtedness and enforce the obligations secured
hereby without first proceeding to realize upon the security afforded by this
Assignment or any other collateral held by Assignee to secure the obligations
of Assignor to Assignee. It is specifically agreed that as to any security,
either by way of collateral or personal endorsement, Assignee may enforce
collection thereof as it may deem for its best interest, or as it may agree
with the Company, and to this end Assignee may compromise or compound such
liability in such way as it may deem best and as may be permitted by law or by
this Assignment.
6. Application of Proceeds of Remedies. Any and all proceeds
received by Assignee in respect of the Assignor's Interests upon the exercise
of any of Assignee's remedies hereunder shall be applied as follows:
First - to all costs and expenses, including reasonable attorney fees,
incurred by Assignee in enforcing its remedies hereunder or under any
other instrument or document evidencing, securing or in any way related
to any indebtedness secured hereby, or in enforcing or protecting the
lien(s) and/or security interests hereof or thereof;
Second - to pay any sums, with interest, advanced by Assignee to or for
the account of Assignor or the Company pursuant to the terms of the Note
or this Assignment;
Third - to pay all indebtedness secured hereby, interest and principal,
in such order as Assignee may elect, or any balance thereof remaining
unpaid; and
Fourth - the balance, if any, to be paid to Assignor or such other
person(s) as may be lawfully entitled thereto.
7. Waiver of Certain Laws. Assignor agrees, to the full extent
permitted by law, that upon the occurrence of any Event of Default, neither
Assignor nor anyone claiming by or under Assignor shall or will set up, claim
or seek to take advantage of any appraisement, evaluation, stay, extension,
homestead, redemption or exemption laws now or hereafter in force in order to
prevent or hinder the enforcement of this Assignment, or the final and
absolute realization of Assignee upon the assignment, transfer and conveyance
herein made, and Assignor, for Assignor and all who may at any time claim
through or under Assignor, hereby expressly waive to the full extent that
Assignor may lawfully do so, the benefit of all such laws, and any and all
right to have the assets comprising the security intended to be created hereby
marshalled upon any exercise of the remedies provided herein.
8. Recording and Filing. A counterpart of this Assignment and/or one
or more UCC-1 financing statements may be recorded or filed, at the option of
Assignee, in such offices as may be provided by law or as Assignee may deem
appropriate. Assignor agrees to execute and deliver to Assignee any financing
statements required under the Uniform Commercial Code as enacted in any state
in which such recordation and filing would be appropriate. The costs of all
such recordings and filings shall be borne by Assignor.
9. Notices. Each notice required or permitted hereunder shall be
deemed to have been properly given or served by the deposit of same in the
United States Mail, designated as registered or certified mail, return receipt
requested, bearing adequate postage, and addressed as hereinafter provided:
If to Assignor, to
Data National Corporation
11415 West I-70 Frontage Road North
Wheat Ridge, Colorado 80033
Attention: Donald V. Warriner
If to the Company, to
Digital Data, LLC
11415 West I-70 Frontage Road North
Wheat Ridge, Colorado 80033
Attention: Donald V. Warriner
If to Assignee, to
Sirrom Investments, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Attention: Robert Roden
Each notice shall be effective upon being deposited as aforesaid, and
rejection or other refusal to accept or the inability to deliver because of
changed address of which no notice was given shall be deemed to be receipt of
the notice sent.
10. Assignment Irrevocable; Supplemental Instruments. Assignor agrees
that the assignment, transfer and conveyance made hereby is irrevocable, and
that Assignor will not, while this Assignment is in effect, take any action
that is inconsistent with this Assignment, or make any other assignment or
conveyance of Assignor's Interests (other than to Assignee) without Assignee's
prior written consent, and that any such assignment or conveyance without such
consent shall be void and of no effect. Assignor will from time to time, upon
request of Assignee, execute all instruments of further assurance and all
supplemental instruments necessary to effect the transactions contemplated
hereby as Assignee may specify.
11. Notices and Statements from Company. Assignor agrees to furnish
to Assignee immediately upon receipt thereof, copies of all notices, demands,
statements of account, financial statements, schedules and other information
concerning the Company or the Assignor's Interests, including without
limitation income tax returns and supporting schedules.
12. Amendment. This Assignment may be amended or modified only in a
writing specifically referring to this Assignment and executed by each of the
parties hereto.
13. Governing Law. This Assignment shall be construed and interpreted
according to the laws of the State of Tennessee.
14. Counterparts. This Assignment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. Miscellaneous. The section and paragraph headings contained in
this Assignment are inserted for convenience only and shall not affect in any
way the meaning or interpretation of this Assignment. When used herein, the
singular shall include the plural, and vice versa, and the use of the
masculine, feminine or neuter gender shall include all other genders, as the
context may require.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment or
have caused this Assignment to be duly executed as of the date first above
written.
ASSIGNOR:
DATA NATIONAL CORPORATION
By: /s/ Donald V. Wariner
Title: President and CEO
ASSIGNEE:
SIRROM INVESTMENTS, INC.
By:______________________________
Title:___________________________<PAGE>
<PAGE>
MEMBERSHIP ASSIGNMENT LETTER
December 11, 1997
Sirrom Investments, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Gentlemen:
Reference is made to that certain Security Agreement and Collateral
Assignment of Membership Interest (the "Assignment Agreement"), of even date
herewith, between Data National Corporation, a Colorado corporation
("Assignor") and you pursuant to which Assignor assigned to you all of its
membership interest ("Membership Interest") in the undersigned as security for
obligations of Assignor to you under that certain Loan Agreement, of even date
herewith, between Assignor and you. Defined terms used herein which are not
otherwise defined shall have the meaning set forth in the Assignment
Agreement.
The undersigned hereby acknowledges and confirms that the necessary
changes and registrations on the books of the undersigned have been made to
reflect the assignment of the Membership Interest under the Assignment
Agreement. In particular, the undersigned acknowledges and confirms that you
have been designated as the only registered assignee of the Membership
Interest.
This letter shall continue in full force and effect until all
indebtedness and obligations described in the Assignment Agreement have been
paid and/or satisfied.
Digital Data, LLC
By: /s/ Donald V. Warriner
Title: President and CEO<PAGE>
<PAGE>
SECURITY AGREEMENT
(Subsidiaries)
THIS SECURITY AGREEMENT ("Agreement"), dated as of the 11th day of
December, 1997, is made and entered into by and among the parties listed on
the signature page(s) hereof as Subsidiaries (collectively "Subsidiary") and
SIRROM INVESTMENTS, INC., a Tennessee corporation ("Lender").
WITNESSETH:
WHEREAS, Lender is making a loan (the "Loan") in the amount of
$1,500,000 to Data National Corporation, a Colorado corporation and parent
corporation of Subsidiary ("Parent"), pursuant to that certain Loan Agreement
of even date herewith by and between Parent and Lender (the "Loan Agreement");
and
WHEREAS, in connection with the making of the Loan, Lender desires to
obtain from Subsidiary and Subsidiary desires to grant to Lender a security
interest in certain collateral more particularly described below.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. Subsidiary hereby grants to Lender a
security interest in the following described property and any and all proceeds
(although proceeds are covered, Lender does not authorize the sale of any of
the following, except to the extent permitted under Sections 10 and 11 hereof)
and products thereof and accessions thereto (collectively the "Collateral"):
(a) Equipment. All equipment and other tangible personal
property of Subsidiary of any kind and description, whether now owned or
hereafter acquired and wherever located, together with all parts, accessories
and attachments and all replacements thereof and additions thereto;
(b) Inventory, Accounts, Contract Rights, Chattel Paper,
Documents, Instruments and General Intangibles. All of Subsidiary's inventory
and any agreements for lease of same and rentals therefrom, and all of
Subsidiary's accounts, accounts receivable, contract rights, chattel paper,
software, documents, instruments and general intangibles (including but not
limited to goodwill, patents and trademarks and all rights of Subsidiary in
the Genesis database) and the proceeds therefrom, whether now in existence or
owned or hereafter arising or acquired, entered into or created, and wherever
located; and whether held for lease or sale, or furnished or to be furnished
under contracts of service;
(c) Trademarks, Etc. All trademarks, trade names, and service
marks now held or hereafter acquired by Subsidiary, both those that are
registered with the United States Patent and Trademark Office and any
unregistered marks used by Subsidiary in the United States, and trade dress,
including logos and designs, in connection with which any such marks are used,
together with all registrations regarding such marks and the rights to
renewals thereof, and the goodwill of the business of Subsidiary symbolized by
such marks, and all patents, licenses, technology and other intangible
property of Subsidiary, whether now owned or hereafter acquired;
(d) Copyrights. All copyrights now held or hereafter acquired
by Subsidiary and any applications for U.S. copyrights hereafter made by
Subsidiary; and
(e) Proprietary Information, Computer Data, Etc. All
proprietary information and trade secrets of Subsidiary with respect to
Subsidiary's business, whether now owned or hereafter acquired, and all of
Subsidiary's computer programs and the information contained therein and all
intellectual property rights with respect thereto, whether now owned or
hereafter acquired.
2. Secured Indebtedness. The obligations secured hereby shall
include (a) loans to be made concurrently or in connection with this Agreement
or the Loan Agreement as evidenced by one or more promissory notes payable to
the order of Lender that shall be due and payable as set forth in such
promissory notes, and any renewals or extensions thereof, (b) the full and
prompt payment and performance of any and all other indebtednesses and other
obligations of Parent and/or Subsidiary to Lender, direct or contingent
(including but not limited to obligations incurred as indorser, guarantor or
surety), however evidenced or denominated, and however and whenever incurred,
including but not limited to indebtednesses incurred pursuant to any present
or future commitment of Lender to Parent and/or Subsidiary and any and all
future advances regardless of the class of such future advances, and (c) all
future advances made by Lender for taxes, levies, insurance and preservation
of the Collateral and all attorney's fees, court costs and expenses of
whatever kind incident to the collection of any of said indebtedness or other
obligations and the enforcement and protection of the security interest
created hereby.
3. Representations, Warranties and Agreements of Subsidiary.
Subsidiary represents, warrants and agrees as follows:
(a) Subsidiary will promptly notify Lender, in writing, of any
change in Subsidiary's place or places of business if the Collateral is used
in business, or of any change in Subsidiary's residence if the Collateral is
not used in business, and regardless of use, of any change in the location of
the Collateral or any records pertaining thereto.
(b) Except as set forth on Schedule 2.1(l) of the Loan
Agreement, Subsidiary is the owner of the Collateral free and clear of any
liens, security interests, claims and encumbrances, contingent or otherwise.
Subsidiary will defend the Collateral against the claims and demands of all
persons.
(c) Subsidiary will pay to Lender all amounts secured hereby as
and when the same shall be due and payable, whether at maturity, by
acceleration or otherwise, and will promptly perform all terms of said
indebtedness and this or any other security or loan agreement between
Subsidiary and Lender, and will promptly discharge all said liabilities.
(d) Subsidiary will at all times keep the Collateral insured
against all insurable hazards in amounts equal to the full cash value of the
Collateral. Such insurance shall be obtained from such companies as may be
reasonably acceptable to Lender, with provisions reasonably satisfactory to
Lender for payment of all losses thereunder to Lender as its interests may
appear. If required by Lender, Subsidiary shall deposit the policies with
Lender. If an Event of Default (as defined in the Loan Agreement) has
occurred and is continuing, any money received by Lender under said policies
may be applied to the payment of any indebtedness secured hereby, whether or
not due and payable, otherwise said money shall be delivered by Lender to
Subsidiary for the purpose of repairing or restoring the Collateral.
Subsidiary assigns to Lender all right to receive proceeds of insurance not
exceeding the amounts secured hereby, directs any insurer to pay all proceeds
directly to Lender, and appoints Lender Subsidiary's attorney in fact to
endorse any draft or check made payable to Subsidiary in order to collect the
benefits of such insurance. If Subsidiary fails to keep the Collateral
insured as required by Lender, Lender shall have the right to obtain such
insurance at Subsidiary's expense and add the cost thereof to the other
amounts secured hereby.
(e) Subsidiary will pay all costs of filing of financing,
continuation and termination statements with respect to the security interests
created hereby, and Lender is authorized to do all things that it deems
reasonably necessary to perfect and continue perfection of the security
interests created hereby and to protect the Collateral.
(f) The address set forth after Subsidiary's signature on this
Agreement is Subsidiary's principal place of business and the location where
the records concerning all intangible Collateral are kept and/or maintained.
The addresses set forth on Schedule 2.1(ad) of the Loan Agreement are all of
the locations where Subsidiary does business and the locations of all tangible
Collateral.
4. Default. Subsidiary shall be in default upon failure to observe
or perform any of Subsidiary's agreements herein contained, or upon the
occurrence of a default or Event of Default under the Loan Agreement or any
other Loan Document (as defined in the Loan Agreement) that has not been cured
during the applicable grace period, or if any warranty or statement by
Subsidiary set forth herein or furnished in connection herewith is false or
misleading.
5. Remedies Upon Default. Upon the occurrence of an Event of Default
(as defined in the Loan Agreement), all sums secured hereby shall immediately
become due and payable at Lender's option without notice to Subsidiary, and
Lender may proceed to enforce payment of same and to exercise any and all
rights and remedies provided by the Uniform Commercial Code (Tennessee) or
other applicable law, as well as all other rights and remedies possessed by
Lender, all of which shall be cumulative. Whenever Subsidiary is in default
hereunder, and upon demand by Lender, Subsidiary shall assemble the Collateral
and make it available to Lender at a place reasonably convenient to Lender and
Subsidiary. Any notice of sale, lease or other intended disposition of the
Collateral by Lender sent to Subsidiary at the address hereinafter set forth,
or at such other address of Subsidiary as may be shown on Lender's records, at
least five (5) days prior to such action, shall constitute reasonable notice
to Subsidiary.
Lender may waive any default before or after the same has been declared
without impairing its right to declare a subsequent default hereunder, this
right being a continuing one.
6. Severability. If any provision of this Agreement is held invalid,
such invalidity shall not affect the validity or enforceability of the
remaining provisions of this Agreement.
7. Binding Effect. This Agreement shall inure to the benefit of
Lender's successors and assigns and shall bind Subsidiary's heirs,
representatives, successors and assigns. If Subsidiary is composed of more
than one person, firm and/or entity, their obligations hereunder shall be
joint and several.
8. Termination Statement. Subsidiary agrees that upon the payment in
full of all indebtedness secured hereby if there is no outstanding obligation
of Lender to make future advances, Lender shall be required to terminate any
financing statement filed to perfect Lender's security interest(s) in any of
the Collateral. Lender may at its option, in lieu of sending a termination
statement to Subsidiary, cause said termination statement to be filed with the
appropriate filing officer(s).
9. Protection of Collateral. Without the prior written consent of
Lender, Subsidiary will not permit any liens or security interests other than
those created by this Agreement to attach to any of the Collateral, nor permit
any of the Collateral to be levied upon under any legal process, nor permit
anything to be done that may impair the security intended to be afforded by
this Agreement, nor permit any tangible Collateral to become attached to or
commingled with other goods.
10. Special Agreements With Respect to Certain Tangible Collateral.
Subsidiary additionally agrees and warrants as follows:
(a) Subsidiary will not permit any of the Collateral to be
removed from the location specified herein, except for temporary periods in
the normal and customary use thereof, without the prior written consent of
Lender, and will permit Lender to inspect the Collateral at any time.
(b) If any of the Collateral is equipment or goods of a type
normally used in more than one state (whether or not actually so used),
Subsidiary will contemporaneously herewith furnish Lender a list of the states
wherein such equipment or goods are or will be used, and hereafter will notify
Lender in writing (i) of any other states in which such equipment or goods are
so used, and (ii) of any change in the location of Subsidiary's principal
place of business.
(c) Subsidiary will not sell, exchange, lease or otherwise
dispose of any of the Collateral or any interest therein without the prior
written consent of Lender.
(d) Subsidiary will keep the Collateral in good condition and
repair and will pay and discharge all taxes, levies and other impositions
levied thereon as well as the cost of repairs to or maintenance of same, and
will not permit anything to be done that may impair the value of any of the
Collateral. If Subsidiary fails to pay such sums, Lender may do so for
Subsidiary's account and add the amount thereof to the other amounts secured
hereby.
(e) Until default in any of the terms hereof, or the terms of
any indebtedness secured hereby, Subsidiary shall be entitled to possession of
the Collateral and to use the same in any lawful manner, provided that such
use does not cause excessive wear and tear to the Collateral, cause it to
decline in value at an excessive rate, or violate the terms of any policy of
insurance thereon.
(f) Subsidiary will not allow the Collateral to be attached to
real estate in such manner as to become a fixture or a part of any real
estate.
11. Special Agreements With Respect to Intangible and Certain Tangible
Collateral. Subsidiary additionally warrants and agrees as follows:
(a) So long as Subsidiary is not in default hereunder,
Subsidiary shall have the right to process and sell Subsidiary's inventory in
the regular course of business. Lender's security interest hereunder shall
attach to all proceeds of all sales or other dispositions of the Collateral.
If at any time any such proceeds shall be represented by any instruments,
chattel paper or documents of title, then such instruments, chattel paper or
documents of title shall be promptly delivered to Lender and shall be subject
to the security interest granted hereby. If at any time any of Subsidiary's
inventory is represented by any document of title, such document of title will
be delivered promptly to Lender and shall be subject to the security interest
granted hereby.
(b) By the execution of this Agreement, Lender shall not be
obligated to do or perform any of the acts or things provided in any contracts
covered hereby that are to be done or performed by Subsidiary, but if there is
a default by Subsidiary in the payment of any amount due in respect of any
indebtedness secured hereby, then Lender may, at its election, perform some or
all of the obligations provided in said contracts to be performed by
Subsidiary, and if Lender incurs any liability or expenses by reason thereof,
the same shall be payable by Subsidiary upon demand and shall also be secured
by this Agreement.
(c) At any time after Subsidiary is in default hereunder or
under the Loan Agreement and such default has not been remedied within the
applicable cure period, Lender shall have the right to notify the account
debtors obligated on any or all of Subsidiary's accounts receivable to make
payment thereof directly to Lender, and to take control of all proceeds of any
such accounts receivable. Until such time as Lender elects to exercise such
right by mailing to Subsidiary written notice thereof, Subsidiary is
authorized, as agent of the Lender, to collect and enforce said accounts
receivable.
12. Power of Attorney. Subsidiary hereby constitutes the Lender or
its designee, as Subsidiary's attorney-in-fact with power, upon the occurrence
and during the continuance of an Event of Default which has not been remedied
during the applicable cure period, to endorse Subsidiary's name upon any
notes, acceptances, checks, drafts, money orders, or other evidences of
payment or Collateral that may come into either its or the Lender's
possession; to sign the name of Subsidiary on any invoice or bill of lading
relating to any of the accounts receivable, drafts against customers,
assignments and verifications of accounts receivable and notices to customers;
to send verifications of accounts receivable; to notify the Post Office
authorities to change the address for delivery of mail addressed to Subsidiary
to such address as the Lender may designate; to execute any of the documents
referred to in Section 3(e) hereof in order to perfect and/or maintain the
security interests and liens granted herein by Subsidiary to the Lender; and
to do all other acts and things necessary to carry out this Security
Agreement. All acts of said attorney or designee are hereby ratified and
approved, and said attorney or designee shall not be liable for any acts of
commission or omission (other than acts of gross negligence or willful
misconduct), nor for any error of judgment or mistake of fact or law; this
power being coupled with an interest is irrevocable until all of the
obligations secured hereby are paid in full and any and all promissory notes
executed in connection therewith are terminated and satisfied.
13. Governing Law and Amendments. This Agreement and all of the Loan
Documents shall be construed and enforced under the laws of the State of
Tennessee applicable to contracts to be wholly performed in such State. No
amendment or modification hereof shall be effective except in a writing
executed by each of the parties hereto.
14. Survival of Representations and Warranties. All representations
and warranties contained herein or made by or furnished on behalf of the
Subsidiary in connection herewith shall survive the execution and delivery of
this Agreement.
15. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
16. Construction and Interpretation. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that
the terms hereof shall be more strictly construed against one party by reason
of the rule of construction that a document is to be more strictly construed
against the party that itself or through its agent prepared the same, it being
agreed that the Subsidiary, Lender and their respective agents have
participated in the preparation hereof.
IN WITNESS WHEREOF, Subsidiary and Lender have executed this Agreement,
or have caused this Agreement to be executed as of the date first above
written.
SUBSIDIARY:
NATIONAL COM-LINK SYSTEMS, INC.
By: /s/ Donald V. Warriner
Title: President and CEO
Address: 11415 West I-70 Frontage Road North
Wheat Ridge, CO 80033
SERVICE BUSINESS SYSTEMS, INC.
By: /s/ Donald V. Warriner
Title: President and CEO
Address: 11415 West I-70 Frontage Road North
Wheat Ridge, CO 80033
DNI CORPORATION
By: /s/ Donald V. Warriner
Title: President and CEO
Address: 11415 West I-70 Frontage Road North
Wheat Ridge, CO 80033
LENDER:
SIRROM INVESTMENTS, INC.
By:---------------------------------
Title:------------------------------<PAGE>
<PAGE>
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated December 11,
1997, by and between DNI CORPORATION, a Colorado corporation ("Pledgor") and
SIRROM INVESTMENTS, INC., a Tennessee corporation, with its principal office
and place of business in Nashville, Tennessee ("Lender");
WITNESSETH:
WHEREAS, pursuant to a Loan Agreement of even date herewith, by and
between Data National Corporation, a Colorado corporation ("Borrower") and
Lender (the "Loan Agreement"), Lender has made a loan to Borrower in the
original principal amount of $1,500,000 (the "Loan"). The Loan is evidenced
by a Secured Promissory Note of even date herewith, in the Loan amount, made
and executed by Borrower, payable to the order of Lender (herein referred to,
together with any extensions, modifications, renewals and/or replacements
thereof, as the "Note").
WHEREAS, it is a condition of Lender's agreement to make the Loan to
Borrower that Pledgor execute and deliver this Agreement to Lender.
AGREEMENT:
NOW THEREFORE, in consideration of the foregoing, and to enable Borrower
to obtain loans and other extensions of credit from Lender and to induce
Lender to have transactions with Borrower, Pledgor agrees as follows:
1. Pledge. As collateral security for the payment and performance in
full of the Obligations (as hereinafter defined), Pledgor hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto Lender, and
hereby grants to Lender a security interest in, the collateral described in
Schedule A hereto, together with the proceeds thereof and all cash, additional
securities or other property at any time and from time to time receivable or
otherwise distributable in respect of, in exchange for, or in substitution for
any and all such pledged securities (all such pledged securities, the proceeds
thereof, cash, dividends, additional securities and other property now or
hereafter pledged hereunder are hereinafter collectively called the "Pledged
Securities");
TO HAVE AND TO HOLD the Pledged Securities, together with all rights,
titles, interests, powers, privileges and preferences pertaining or incidental
thereto, unto Lender, its successors and assigns; subject, however, to the
terms, covenants and conditions hereinafter set forth.
Upon delivery to Lender, the Pledged Securities shall be accompanied by
executed stock powers in blank and by such other instruments or documents as
Lender or its counsel may reasonably request. Each delivery of certificates
for such Pledged Securities shall be accompanied by a schedule showing the
number of shares and the numbers of the certificates theretofore and then
pledged hereunder, which schedule shall be attached hereto as Schedule A and
made a part hereof. Each schedule so delivered shall supersede any prior
schedule so delivered.
2. Obligations Secured. This Agreement is made, and the security
interest created hereby is granted to Lender, to secure full payment and
performance of any and all indebtedness and other obligations of Borrower
and/or Pledgor to Lender, direct or contingent, however evidenced or
denominated, and however or whenever incurred, including without limitation
indebtedness incurred pursuant to any past, present or future commitment of
Lender to Borrower and/or Pledgor (regardless of the class of such future
advance), including, without limitation, the indebtedness evidenced by the
Note (collectively the "Obligations").
3. Representations and Warranties. Pledgor hereby represents and
warrants to Lender (a) that Pledgor is the legal and equitable owner of the
Pledged Securities, that Pledgor has the complete and unconditional authority
to pledge the Pledged Securities being pledged by it, and holds the same free
and clear of all liens, charges, encumbrances and security interests of every
kind and nature; and (b) that no consent or approval of any governmental body
or regulatory authority, or of any other party, which was or is necessary to
the validity of this pledge, has not been obtained. Pledgor further
represents and warrants that no part of the Obligations will be used to
purchase or carry any "margin stock", as defined in Regulation U of the Board
of Governors of the Federal Reserve System, 12 CFR Section 221.1 et seq.
4. Registration in Nominee Name; Denominations. Lender shall have
the right (in its sole and absolute discretion) to hold the certificates
representing the Pledged Securities in its own name or in the name of the
Pledgor endorsed or assigned in blank or in favor of Lender. Pledgor shall
deliver to Lender all certificates representing the Pledged Securities
promptly upon receipt by Pledgor. Upon request and delivery of certificates
representing the Pledged Securities to the issuer of the Pledged Securities,
Lender may have such Pledged Securities registered in the name of Lender or
any nominee or nominees of Lender. Lender shall at all times have the right
to exchange the certificates representing Pledged Securities for certificates
of smaller or larger denominations for any purpose consistent with this
Agreement.
5. Remedies Upon Default. Upon the occurrence of a default or Event
of Default under the Loan Agreement, or in the event that any representation
or warranty herein shall prove to have been untrue when made, then, and in any
such event, Lender shall have all of the rights, privileges and remedies of a
secured party under the Uniform Commercial Code as in effect in the State of
Tennessee, and without limiting the foregoing, Lender may (a) collect any and
all amounts payable in respect of the Pledged Securities and exercise any and
all rights, privileges, options and remedies of the holder and owner thereof,
and (b) sell, transfer and/or negotiate the Pledged Securities, or any part
thereof, at public or private sale, for cash, upon credit or for future
delivery as Lender shall deem appropriate, including without limitation, at
Lender's option, the purchase of all or any part of said securities at any
public sale by Lender. Upon consummation of any sale, Lender shall have the
right to assign, transfer and deliver to the purchaser or purchasers thereof
the Pledged Securities so sold. Each such purchaser at any such sale shall
hold the property sold absolutely, free from any claim or right on the part of
the Pledgor, and the Pledgor hereby waives (to the extent permitted by law)
all rights of redemption, stay or appraisal that Pledgor now has or may at any
time in the future have under any rule of law or statute now existing or
hereinafter enacted. Pledgor hereby expressly waives notice to redeem and
notice of the time, place and manner of such sale.
6. Application of Proceeds. The proceeds of the sale of Pledged
Securities sold pursuant to Section 5 hereof, and the proceeds of the exercise
of any of Lender's other remedies hereunder, shall be applied by Lender as
follows:
First: To the payment of all costs and expenses incurred by Lender in
connection with any such sale, including, but not limited to, all court costs
and the reasonable fees and expenses of counsel for Lender in connection
therewith, and
Second: To the payment in full of the Obligations, first to accrued
interest and thereafter to the unpaid principal amount thereof, to the extent
not previously paid by Pledgor, and
Third: The excess, if any, shall be paid to Pledgor or any other person
lawfully thereunto entitled.
7. Reimbursement of Lender. Pledgor agrees to reimburse Lender, upon
demand, for all expenses, including without limitation reasonable attorney's
fees, incurred by it in connection with the administration and enforcement of
this Agreement, and agrees to indemnify Lender and hold it harmless from and
against any and all liability incurred by it hereunder or in connection
herewith, unless such liability shall be due to willful misconduct or gross
negligence on the part of Lender.
8. No Waiver. No failure on the part of Lender to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by Lender preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. All remedies are cumulative
and are not exclusive of any other remedies provided by law.
9. Limitation of Lender Liability. Except in the case of their
intentional malfeasance or gross negligence, neither Lender nor its partners,
employees, agents, representatives, or nominees shall be liable for any loss
incurred by Pledgor arising out of any act or omission of Lender, its
partners, employees, agents, representatives or nominees, with respect to the
care, custody or preservation of the Pledged Securities.
10. Binding Agreement. This Agreement and the terms, covenants and
conditions hereof shall be binding upon and inure to the benefit of the
parties hereto and to all holders of indebtedness secured hereby and their
respective successors and assigns.
11. Governing Law; Amendments. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
Tennessee applicable to contracts to be wholly performed in such state. This
Agreement may not be amended or modified, nor may any of the Pledged
Securities be released except in a writing signed by the party to be charged
therewith. Time is of the essence with respect to the obligations of Pledgor
pursuant to this Agreement.
12. Further Assurances. Pledgor agrees to do such further acts and
things, and to execute and deliver such additional conveyances, assignments,
agreements and instruments, as Lender may at any time request in connection
with the administration and enforcement of this Agreement or relative to the
Pledged Securities or any part thereof or in order to better assure and
confirm unto Lender its rights and remedies hereunder.
13. Headings. Section numbers and headings used herein are for
convenience only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
IN WITNESS WHEREOF, Pledgor and Lender have executed this Agreement, or
have caused this Agreement to be duly executed by a duly authorized officer,
all as of the day first above written.
PLEDGOR:
DNI CORPORATION, a Colorado corporation
By: /s/ Donald V. Warriner
Title: President and CEO
LENDER:
SIRROM INVESTMENTS, INC., a Tennessee
corporation
By:_______________________________
Title:____________________________<PAGE>
<PAGE>
SCHEDULE A
Pledged Securities
No. of Certificate
Issuer Shares Class Nos.
1.National COM-LINK Systems, Inc. 450,200 Common 60
2.Service Business Systems, Inc. 1,000 Common 4<PAGE>
<PAGE>
STOCK POWER
FOR VALUE RECEIVED and subject to that certain Pledge and Security
Agreement dated December 11, 1997, among the undersigned, and Sirrom
Investments, Inc., a Tennessee corporation ("Pledgee"), the terms and
conditions of which are incorporated by reference herein, the undersigned does
hereby assign and transfer unto Pledgee ________________________ (_______)
shares of stock of National COM-LINK Systems, Inc., a Colorado corporation
(the "Company") standing in the name of the undersigned on the books of the
Company and represented in the articles of incorporation filed with the office
of the Colorado Secretary of State, and all other shares of stock of the
Company of any class or category now or hereafter owned by the undersigned and
does hereby irrevocably constitute and appoint Pledgee as attorney-in-fact for
the undersigned to transfer said stock on the books of the Company with full
power of substitution in the premises.
Dated this 11th day of December, 1997.
DNI CORPORATION
By: /s/ Donald V. Warriner
Title: President and CEO<PAGE>
<PAGE>
STOCK PLEDGE LETTER
December 11, 1997
Sirrom Investments, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Gentlemen:
Reference is made to that certain Pledge and Security Agreement
(the "Pledge Agreement"), of even date herewith, between DNI Corporation (the
"Shareholder") and you pursuant to which Shareholder has pledged to you
__________ shares (the "Shares") of the undersigned as security for
obligations of Data National Corporation to you under that certain Loan
Agreement, of even date herewith, between Data National Corporation and you
(the "Loan Agreement"). Defined terms used herein which are not otherwise
defined shall have the meaning set forth in the Pledge Agreement.
The undersigned hereby acknowledges and confirms that the
necessary changes and registrations on the books of the undersigned have been
made to reflect the pledge of the Shares under the Pledge Agreement. In
particular, the undersigned acknowledges and confirms that you have been
designated as the only registered pledgee of the Shares.
This letter shall continue in full force and effect until all
Obligations have been paid and/or satisfied.
National COM-LINK Systems, Inc.
By: /s/ Donald V. Warriner
Title: President and CEO<PAGE>
<PAGE>
IRREVOCABLE PROXY
December 11, 1997
Sirrom Investments, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Gentlemen:
Reference is made to that certain Pledge and Security Agreement (the
"Pledge Agreement"), of even date herewith, between the undersigned and you
pursuant to which the undersigned has pledged to you _______ shares (the
"Shares") of common stock of National COM-LINK Systems, Inc. (the "Company")
as security for obligations of Data National Corporation to you under that
certain Loan Agreement, of even date herewith, between Data National
Corporation and you (the "Loan Agreement"). Defined terms used herein which
are not otherwise defined shall have the meaning set forth in the Pledge
Agreement.
The undersigned hereby irrevocably appoints you as attorney and proxy,
with full power of substitution, after a default under the Loan Agreement,
which default has not been remedied during the applicable cure period, to vote
or express written consent or dissent in such manner as such attorney and
proxy, or its substitute, shall, in its sole discretion, deem proper and
otherwise act (including pursuant to any corporate action in writing without a
meeting) with respect to all of the Shares which the undersigned is entitled
to vote at any meeting of shareholders (whether annual or special and whether
or not an adjourned meeting) of the Company, or pursuant to written action
taken in lieu of any such meeting or otherwise.
This Proxy is irrevocable, is coupled with an interest sufficient in law
to support an irrevocable proxy, and is granted in consideration of and as an
inducement to cause you to enter into the transactions contemplated by the
Pledge Agreement and the Loan Agreement. This proxy shall revoke any other
proxy granted by the undersigned at any time with respect to the Shares and no
subsequent proxies will be given with respect thereto by the undersigned. In
addition, if subsequent to the date hereof and after a default under the Loan
Agreement, the undersigned is entitled to vote the Shares for any purpose,
then the undersigned shall take all actions necessary to vote the Shares
pursuant to instructions received from you.
This irrevocable proxy shall continue in full force and effect until all
Obligations have been paid and/or satisfied.
DNI CORPORATION
By: /s/ Donald V. Warriner
Title: President and CEO
<PAGE>
PROFESSIONAL SERVICES CONTRACT
Authorized by: C.Boney
Requested by: Date: 12/12/96
Project Number/Facility Number Approved By:
Information regarding
this contract
can be supplied by: Telephone Number One-Time Contract
P.A. Lyons 215 977-6942 X On-Going Services Contract
Release Against On-Going
Services Contract
Account or Appropriation Number: Contract Number CMMK00376
Supplement 3
To Contractor: Invoice to:
Service Business Systems Sun Company, Inc. (R&M)
Attn: Don Warriner Attn: C. Boney
11415 W I-70 Frontage Road North 1801 Market Street
Wheat Ridge, CO 80033 Philadelphia, PA 19103
This CONTRACT, effective 1/1/97, between Sun Company, Inc. (R&M) hereinafter
called "Owner", having an office at 1801 Market Street, Philadelphia, PA
19103 and the "Contractor" shown above.
WITNESS in consideration of the mutual promises herein made, Owner and
Contractor agree as follows:
ARTICLE 1 - THE WORK: The Work shall consist of: Contractor will provide Sun
with customer follow-up services (hereinafter called "Services") as may be
required by Sun during the period of this agreement and under the terms and
condition set forth in Scope of Work, attached and made part of this
contract, and shall be performed at the site location of contractor or
designated locations.
CONTRACTOR shall perform all work hereunder in accordance with the terms and
conditions of this Contract and the following as noted:
Exhibit A: Scope of Work Exhibit B: Govt. Compliance Certificate
SUPPLEMENT #3, ISSUED 12/12/96, TO EXTEND THE TERMS OF THIS CONTRACT
AND
MODIFY PRICING, AS DETAILED ON EXHIBIT C, ATTACHED
AND MADE PART OF THIS CONTRACT. ALL OTHER ITEMS REMAIN UNCHANGED.
Contractor shall furnish any and all personnel and all other things necessary
for the performance and completion of all work authorized hereunder. This
agreement, including General Terms and Conditions and all attachments and
Exhibits appended hereto or referenced herein shall constitute the Contract
between the parties.
ARTICLE 2 - ITEMS PROVIDED BY OWNER: Items noted to be specifically supplied
by Owner are as follows:
Information about USC dealers as needed for Contractor to provide required
Services. Logo/approved art work as required for printing requirements.
ARTICLE 3 - COMPENSATION: For satisfactory performance of the Work hereunder,
Owner agreed to pay Contractor in the manner and at times specified in
Article 4, and Contractor agrees to accept full and complete payment for
providing such Work, compensation as follows: supplement #3, pricing
schedule effective 1/1/97 thru 6/30/97.
As detailed in Scope of Work, attached and made part of this document.
ARTICLE 4 - TERMS OF PAYMENT: Net 30 days
Prior to final payment hereunder, and as a condition thereto Contractor shall
satisfy the requirements of General Terms and Conditions, paragraph 15.
ARTICLE 5 - TERM: Work under this Contract shall commence on or about
SUPPLEMENT #3, 1/1/97. All work shall be completed on or before 6/30/97.
IF THIS CONTRACT IS EXTENDED PAST THIS DATE, BOTH PARTIES MUST AGREE IN
WRITING TO THE TERMS OF THE EXENSION.
ARTICLE 6 - CHANGES, ADDITIONS AND/OR DELETIONS: Owner reserves the
continuing right to make changes, additions and/or deletions to the Work as
it may deem necessary. All changes, additions, or deletions shall be made in
writing and accepted by both parties before Contractor proceeds with such
Work. Contractor shall make no changes, additions or deletions to the Work
without Owner's prior written instructions. The cost of such changes,
additions or deletions shall be determined as follows:
The party requesting the changes shall be responsible for any additional
charges.
Contractor shall make no changes in any performance schedule(s) provided for
in Article 1 or in any other term of this contract without the prior written
approval of Owner.
ARTICLE 7 - INSURANCE: Contractor shall take out, carry and maintain in
insurance company or companies, and in policies of insurance acceptable to
Owner, the insurance with limits not less than indicated for the respective
items, as specified in General Terms and Conditions, Paragraph 25, or as
amended below:
No changes in insurance requirements will be permitted.
ARTICLE 8 - Governing Law: This Contract shall be governed by the laws of
the States wherein the work is performed unless stated otherwise:
EXHIBIT 10.19
<PAGE>
Contract instructions: The term "State" wherever used in this contract
Sun Company, Inc. (R&M) shall be deemed to include the Commonwealth of
Attn: P.M. Lyons Puerto Rico.In witness whereof, the parties
Ten Penn Center have executed this Contract. This contract is
1801 Market Street subject to the terms and conditions shown on
Philadelphia, PA the reverse side hereof or attached hereto
19103-1699 and which are incorporated herein.
Owner: Date: 12/19/96 Contractor: Date: 12/24/96
Contractor shall sign and return one fully executed
copy of this contract and all future contract notices
to the address shown above. If no address is
shown above, copy shall be returned to the "Invoice
To" address at the top.
BY(Signature) /s/Peggy Lyon /s/Don Warriner
(Name and Title) Title: Title:President and CEO
Distribution: Contractor Owner Accounts Payable Materials Management
<PAGE>
PROFESSIONAL SERVICES CONTRACT
Authorized by: R. Towson
Requested by: Date: 10/09/97
Project Number/Facility Number Approved By:
Information regarding
this contract
can be supplied by: Telephone Number One-Time Contract
P.A. Lyons 215 977-6942 X On-Going Services Contract
Release Against On-Going
Services Contract
Account or Appropriation Number: Contract Number CMMK00376
Supplement 4
To Contractor: Invoice to:
Service Business Systems Sun Company, Inc. (R&M)
Attn: Don Warriner Attn: Ron Towson
11415 W I-70 Frontage Road North 1801 Market Street
Wheat Ridge, CO 80033 Philadelphia, PA 19103
This CONTRACT, effective 1/1/97, between Sun Company, Inc. (R&M) hereinafter
called "Owner", having an office at 1801 Market Street, Philadelphia, PA
19103 and the "Contractor" shown above.
WITNESS in consideration of the mutual promises herein made, Owner and
Contractor agree as follows:
ARTICLE 1 - THE WORK: The Work shall consist of: Contractor will provide Sun
with customer follow-up services (hereinafter called "Services") as may be
required by Sun during the period of this agreement and under the terms and
condition set forth in Scope of Work, attached and made part of this
contract, and shall be performed at the site location of contractor or
designated locations.
CONTRACTOR shall perform all work hereunder in accordance with the terms and
conditions of this Contract and the following as noted:
Exhibit A: Scope of Work Exhibit B: Govt. Compliance Certificate
SUPPLEMENT #3, ISSUED 12/12/96, TO EXTEND THE TERMS OF THIS CONTRACT AND
MODIFY PRICING, AS DETAILED ON EXHIBIT C, ATTACHED
AND MADE PART OF THIS CONTRACT. ALL OTHER ITEMS REMAIN UNCHANGED.
SUPPLEMENT #4, IS ISSUED 9/1/97 TO AUTHORIZE THE 1997 HOLIDAY CARD
PRICING AT $__ PER CARD, REGARDLESS OF QUANTITY LEVEL.
DEALERS WILL BE RESPONSIBLE FOR PLACEMENT OF ORDERS AND PAYMENT OR THE
HOLIDAY CARDS. THIS AGREEMENT WILL CONTINUE ON A 60-DAY WRITTEN NOTICE
UNTIL TERMINATED BY EITHER PARTY.
Contractor shall furnish any and all personnel and all other things necessary
for the performance and completion of all work authorized hereunder. This
agreement, including General Terms and Conditions and all attachments and
Exhibits appended hereto or referenced herein shall constitute the Contract
between the parties.
ARTICLE 2 - ITEMS PROVIDED BY OWNER: Items noted to be specifically supplied
by Owner are as follows:
Information about USC dealers as needed for Contractor to provide required
Services. Logo/approved art work as required for printing requirements.
ARTICLE 3 - COMPENSATION: For satisfactory performance of the Work hereunder,
Owner agreed to pay Contractor in the manner and at times specified in
Article 4, and Contractor agrees to accept full and complete payment for
providing such Work, compensation as follows: supplement #3, pricing
schedule effective 1/1/97 thru 6/30/97.
As detailed in Scope of Work, attached and made part of this document.
ARTICLE 4 - TERMS OF PAYMENT: Net 30 days
Prior to final payment hereunder, and as a condition thereto Contractor shall
satisfy the requirements of General Terms and Conditions, paragraph 15.
ARTICLE 5 - TERM: Work under this Contract shall commence on or about
SUPPLEMENT #3, 1/1/97. All work shall be completed on or before 6/30/97.
IF THIS CONTRACT IS EXTENDED PAST THIS DATE, BOTH PARTIES MUST AGREE IN
WRITING TO THE TERMS OF THE EXENSION.
ARTICLE 6 - CHANGES, ADDITIONS AND/OR DELETIONS: Owner reserves the
continuing right to make changes, additions and/or deletions to the Work as
it may deem necessary. All changes, additions, or deletions shall be made in
writing and accepted by both parties before Contractor proceeds with such
Work. Contractor shall make no changes, additions or deletions to the Work
without Owner's prior written instructions. The cost of such changes,
additions or deletions shall be determined as follows:
The party requesting the changes shall be responsible for any additional
charges.
Contractor shall make no changes in any performance schedule(s) provided for
in Article 1 or in any other term of this contract without the prior written
approval of Owner.
ARTICLE 7 - INSURANCE: Contractor shall take out, carry and maintain in
insurance company or companies, and in policies of insurance acceptable to
Owner, the insurance with limits not less than indicated for the respective
items, as specified in General Terms and Conditions, Paragraph 25, or as
amended below:
No changes in insurance requirements will be permitted.
ARTICLE 8 - Governing Law: This Contract shall be governed by the laws of
the States wherein the work is performed unless stated otherwise:
EXHIBIT 10.20
<PAGE>
Contract instructions: The term "State" wherever used in this contract
Sun Company, Inc. (R&M) shall be deemed to include the Commonwealth of
Attn: P.M. Lyons Puerto Rico.In witness whereof, the parties
Ten Penn Center have executed this Contract. This contract is
1801 Market Street subject to the terms and conditions shown on
Philadelphia, PA the reverse side hereof or attached hereto
19103-1699 and which are incorporated herein.
Owner: Date: 10/9/97 Contractor: Date: 10/17/97
Contractor shall sign and return one fully executed
copy of this contract and all future contract notices
to the address shown above. If no address is
shown above, copy shall be returned to the "Invoice
To" address at the top.
BY(Signature) /s/Peggy Lyon /s/Don Warriner
(Name and Title) Title: Title:President and CEO
Distribution: Contractor Owner Accounts Payable Materials Management
<PAGE>
Exhibit 21.1
Subsidiaries of the registrant:
Subsidiary State of Incorporation
---------- ----------------------
Data National, Inc. Colorado
Service Business Systems, Inc. Colorado
National COM-LINK System, Inc. Colorado
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,792
<SECURITIES> 0
<RECEIVABLES> 325,597
<ALLOWANCES> 5,077
<INVENTORY> 53,781
<CURRENT-ASSETS> 497,266
<PP&E> 884,807
<DEPRECIATION> 466,654
<TOTAL-ASSETS> 1,155,873
<CURRENT-LIABILITIES> 843,373
<BONDS> 0
0
0
<COMMON> 1,582,165
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,155,873
<SALES> 3,897,350
<TOTAL-REVENUES> 3,897,350
<CGS> 2,509,492
<TOTAL-COSTS> 4,102,849
<OTHER-EXPENSES> 15,322
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,875
<INCOME-PRETAX> (354,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (354,879)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
