SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 FOR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-20771
DATAMARK HOLDING, INC.
(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
488 E. Winchester Street, Suite 100
Salt Lake City, Utah 84107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(801) 268-1001
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 10, 1996 7,870,907 of the Registrant's Common Shares were
outstanding. As of October 10, 1996, the aggregate market value of voting stock
held by non-affiliates of the Registrant was approximately $33,924,215 based on
the average of the closing bid and asked prices for the Registrant's Common
Shares as quoted by the OTC Bulletin Board in the over-the-counter market.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
The Company was organized as Exchequer, Inc. as a Delaware corporation. On
January 11, 1995, the Company consummated an Agreement and Plan of
Reorganization (the "Agreement") with DataMark Systems, Inc., a Nevada
corporation ("DataMark Systems") pursuant to which DataMark Systems became a
wholly owned subsidiary of the Company. As a result of the Agreement, the former
shareholders of DataMark Systems have become controlling stockholders of the
Company and the officers and directors of DataMark Systems have become the
officers and directors of the Company. As a condition to consummation of the
Agreement, the Company effected a 1 for 3 reverse stock split and changed its
name to its current name, DataMark Holding, Inc.
Overview - Targeted Advertising
Management believes that $250 billion was spent on media advertising in the
United States in 1995. Of that amount approximately $40 billion was spent on
targeted direct mail advertising.
Advertisers seek to increase the effectiveness of their advertising by
directing the advertising to the types of persons they believe are most likely
to be purchasers of the product or service advertised. For general circulation
media, such as television, radio and newspapers, the advertisers' ability to
direct its message to a specific type of potential purchaser is limited. In the
case of television, the advertiser can only select the type of programming his
potential purchaser should be interested in, and hope that the purchaser will be
watching.
Through an online service directed to targeted households, the online
advertising messages can be delivered to those households with the highest
propensity to purchase. Management therefore believes that online advertising
will hold great appeal to advertisers.
With direct mail, the advertising can be delivered directly in the homes of
persons identified as likely purchasers. Although the cost per piece of
advertising may be higher than generally distributed media, the purchase rate,
and therefore the cost per purchase, of properly targeted direct mail can be
dramatically lower than other media. For these reasons, Direct Marketing
Magazine (July 1995) has stated that direct mail will be the fastest growing
established advertising media.
Strategy
DataMark provides highly targeted business to consumer advertising for its
clients. The medium for such targeted advertising has been direct mail and is
being expanded to include an advertiser funded online network, ValuOne Online.
DataMark also intends to offer a value-added Internet service, code-named
V-Network, which will receive advertising fees and end-user fees. The Company
utilizes sophisticated consumer profiling techniques to target advertising to
the persons most likely to purchase the specific product or service being
marketed. The Company's advertising programs provide highly predictable and
measurable advertising campaigns.
Some of the features that make the Company's services unique include:
Analysis - The DataMark direct advertising strategy includes an
exhaustive analysis of the defining lifestyle characteristics of the
client's existing customer base. The Company specifically identifies
who is most likely to respond to the client's offer.
Identification - DataMark uses the results of the marketing research
and analysis and performs a computerized database compilation. From
this, DataMark creates a list of cluster groups or profiled individuals
which match the demographic, socio-economic, lifestyle and behavior
characteristics, and who have the highest propensity to buy the
clients' product.
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Implementation - DataMark implements a strategically designed program
of systematic advertising to the targeted potential customers on the
customized database list.
Measurement - DataMark conducts a thorough analysis after each
advertising campaign to understand exactly what has been accomplished
and where the results are leading. This critical information allows the
targeting of the marketing program to be consistently fine tuned.
Systematized feedback allows accurate adjustments and targeting
refinement for maximum efficiency and increased positive results.
Turn-key Services - DataMark offers a turn-key operation to which the
client can outsource its entire targeted advertising including
targeting, creating, producing, delivering and analyzing the campaign.
VALUONE ONLINE
Market Overview
Online services enable people using personal computers or other access
devices to interact with other people and outside sources of information using
telephone line connections channeled through a central host computer. Since the
early 1980's, the range of services and the number of people using online
services have grown significantly. Although the Company intends to obtain
subscription fees for its V-Network Internet service, the Company intends to
rely on advertising revenue, rather than end-user subscription fees, as its
primary source of revenue from ValuOne Online. The estimated $250 billion spent
on advertising in the United States in 1995 overshadows expected end-user
subscription fees earned by all online providers. The Company believes that a
number of key factors will contribute to continued growth in the consumer online
services market in the 1990's, including:
Growth of the home computer market -Growth in ownership and use of home
computers is being driven by lower hardware prices, standardization of
user-friendly graphical interfaces, expansion to mass-market retail
distribution channels and a renewed commitment to the lower end of the
computer market among major personal computer manufacturers. In
addition, increased exposure to computers in the workplace and at
school has resulted in growing use of computers in the home.
Expansion of modem penetration - According to published sources, an
estimated 18 million households in 1995 owned a personal computer
equipped with a modem. The Company expects this installed base to
increase in the future, as modems are now being pre-installed in a
growing number of new computers. In addition, modem prices have
declined substantially, making modems more accessible to both new and
existing computer users.
Growing awareness and use of online services - Awareness and use of
online services is growing rapidly because of broader press coverage of
online services, a growing interest in developing a national
"information super highway" and the promotional and marketing efforts
of online service providers. In addition, increased participation and
related promotion on the part of media companies, software publishers
and information providers, greater use of electronic mail, and the
growing popularity of the Internet and connectivity applications in the
business market all are facilitating the expansion of online services.
Development of easy to use services - With the introduction of
graphical user interfaces and improved functionality, online services
are becoming easier to use. The Company believes continued advances in
ease of use will broaden the appeal of online services and will be a
significant factor in creating mass market demand for such services.
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Increased advertiser interest - As online services continue to become a
widely accepted mainstream advertising medium, more and more
advertisers desire to place their promotional message in front of the
online audience.
Business Strategy
The goal of ValuOne Online is to capitalize on the growing demand for
online services by providing advertiser supported services on both a national
and local level. The Company believes that both local and national advertisers
are willing to pay reasonable amounts to offer their products to desirable
computer users. Current commercial services, such as CompuServe, Prodigy and
America OnLine, have limited advertising resources which are primarily directed
towards large national advertisers. ValuOne Online accommodates local and
regional advertisers as well as the national advertisers sought by the other
commercial services. ValuOne Online will also offer interactivity, such as the
ability to frequently update ads, and to offer coupons and promotions, to an
extent not currently being offered elsewhere.
End-users in ValuOne's targeted areas will call a local telephone number to
access the service. The local number will connect the user to a point of
presence ("PoP") which will connect the user to ValuOne Online via the Internet
or private network lines. The Company intends to establish PoPs in its targeted
areas by installing and owning the PoP equipment itself, establishing local
affiliates who will operate the PoP in exchange for local advertising revenue or
by leasing PoP access from national or regional service providers. Targeted
users accessing ValuOne Online from a PoP will not be charged for the access,
but they will not be able to access any area of the Internet other than ValuOne
Online. ValuOne Online will also be available to users of the Internet generally
through their normal internet service provider.
By establishing PoPs that the Company owns or operates through affiliates,
ValuOne Online will allow consumers to access the service without paying fees to
an Internet provider. Since the PoP can identify the locality from which the
user is calling, local advertising revenue can be generated. The Company
believes these advantages justify the expense of providing independent telephone
access to ValuOne Online.
The targeted users of ValuOne Online will be provided with the necessary
software and local telephone number to access the service. ValuOne Online will
also be available as a home page on the Internet's World Wide Web.
The Company also intends to offer a value added Internet access service
code-named V-Network. V-Network will be marketed on a family oriented Internet
service, in that access to potentially objectionable sites will be blocked. The
Company's browser will display advertising during the time that Web pages are
loading. V-Network would only be offered in those calling areas where the
Company establishes a local PoP for ValuOne Online.
Description of ValuOne Online
ValuOne Online is designed to provide advertisers a new and effective
medium to get their message directly to their target consumer audience. The
Company has not commenced operation of ValuOne Online as of the date of this
report. Unlike virtually every other advertising medium, ValuOne Online offers
the advertisers the flexibility to interactively -- via modem -- place, adjust,
or totally change their message, thus providing the advertiser the freedom to
modify their marketing strategy for whatever reason at any time.
The Company believes that ValuOne Online will combine the best of what
yellow pages, newspapers, magazines, catalogs, direct mail guides, TV, radio and
directories have to offer at a fraction of the cost. Rather than attempting to
convince consumers to do their shopping in cyberspace, ValuOne Online is
intended to encourage targeted consumers to utilize existing distribution
channels (stores, catalogs, 800-numbers) by providing timely and entertaining
information and promotions.
The consumer using ValuOne Online, whether a business or an individual, has
an instantaneous, electronic promotional guide to the best values in
entertainment, groceries, clothing, household goods, travel, shopping, sports,
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employment, recreation and a myriad of other products and services. ValuOne
Online allows users to immediately know where to find what they are looking for
and who has it at the best price.
The features that make ValuOne Online unique:
Interactive: ValuOne Online is fully interactive for both users and
advertisers.
Online Access: Advertisers have continuous access to their ads. They
can update their promotional message or offer as needed to adjust for
inventory, sales volume, special events, etc. End-users also benefit
from this feature. They view only what they want, when they want, and
know that it is the latest promotion available.
Flash Find: Unlike traditional media which require the audience to view
hundreds of ads that do not interest them. ValuOne's key word search
feature, Flash Find, allows end-users to access exactly what they want.
Advertiser Sponsored: ValuOne Online is paid for by the advertiser.
The end-user has continuous free access to money-savings promotions,
coupons and an almost inexhaustible resource of consumer and business
products and services.
Speed and Security: The Company believes that ValuOne Online will allow
users to find the ads or promotions they want almost instantaneously,
enhancing the online experience and increasing the likelihood of repeat
usage.
Advertising Options
ValuOne Online offers a wide variety of advertising services. Advertisers
can choose from the following list of services to create a package that gets
maximum exposure of their product or service at a fraction of the cost of
traditional advertising media to a highly targeted consumer buying segment:
Power Display: Allows advertisers to display all of their products with
full color graphics and pictures, much as they would on shelves in a
retail store or in a catalog. Advertisers can choose to use full, half
or smaller screens to display their products. Advertisers display their
products independently or on a co-op basis with other advertisers.
ValuOne Online allows advertisers to instantly update their Power
Display promotional advertising.
Marquees: Advertiser names and promotional messages will move across
all end-user screens at intervals. Unlike a TV commercial, which
interrupts the viewer, the marquee promotional messages provide the
end-user with important, timely information in an unobtrusive, yet
highly visible format. Marquees are somewhat like billboard
advertising.
Sponsorships: Allows advertisers to sponsor various sections of ValuOne
Online. When a specific section is accessed by an end-user, the
sponsor's company name, logo and a brief promotional message appear on
the screen. This is much like in-arena sponsorships of sporting events.
Daily Specials: Opportunity for advertisers to offer date sensitive
offerings on a daily basis, such as a chef special in a restaurant or a
Thursday pants special at a dry cleaning business.
Online FSI: Free standing inserts (FSI's) are the coupon and
advertising inserts distributed with newspapers on a regular schedule,
typically Wednesdays and Sundays. Although the specific advertisers in
an FSI will vary from week to week, consumers come to expect
promotional offers on the days that the FSI is distributed, typically
increasing newspaper circulation on such days. ValuOne Online will
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generate similar consumer interest by having a regularly scheduled time
for a special coupon and promotional section to be available online.
Coupons: Provides the advertisers the opportunity to use coupons that
can be easily found by end-users on many areas of ValuOne Online.
Sales and Promotions: Offers advertisers the opportunity to notify
end-users of their sales and special events, such as Labor Day,
inventory reduction or anniversary sales, etc.
Menus: Offers restaurant industry advertisers the ability to place
their menus on the screen for customers to peruse. Restaurants can
change their displayed menus as often as they like. Restaurant reviews
will also be available.
Classified: This section is similar to newspaper classified, allowing
advertisers the ability to place the following types of ads:
Real estate Apartments
Automobile Business opportunities
Home and business Schools and instruction
services Miscellaneous
Consumer items
Boats, R.V.'s, etc.
Job Seeker/Help Wanted: This section serves two job placement
functions.
Job Seekers is a bulletin board where people can feature their entire
resume/qualifications for potential employers to read. They can either
identify themselves or remain anonymous. This will be a valuable tool
for people looking for work, looking for a better job, or looking for a
career change. This may also be used by individuals who simply want to
test the job market.
Help Wanted is similar to newspaper classified, allowing businesses to
list job openings, etc.
Calendar of Events: This section contains a list of community events
such as fairs, conventions, art festivals, seminars, athletic events,
concerts, etc.
Entertainment: Offers advertisers in the entertainment field to list
current and upcoming events and offer promotional discounts, coupons,
etc.
Future Developments: ValuOne Online will be updated in response to
market demand to add new advertising features.
Consumer and Business End-User Options
For end-users of the service, ValuOne Online will offer a fast, complete
and up-to-date way to find any of the following items at the best price:
Instant coupons and daily specials Groceries
What's on sale and where to find it Clothing and accessories
Business and service directories Household Goods and improvements
Travel, sports and entertainment guides Auto, real estate and apartment
Job seekers placement services deals
Instant classified ads Dining guide and menu information
Other
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Users can search for this information using keywords, category searches,
browsing or "Hot Buttons" that come up all throughout the program. Unlike
virtually every other traditional online service, ValuOne Online is offered to
the end-users free of charge.
ValuOne Online Systems
ValuOne Online is divided into the following systems, depending on which
customer group or function they serve.
1. Business Advertiser System
In this system, advertisers on ValuOne Online can:
Create ads
Maintain ads
Delete ads
View ads
Business Advertiser Creative Module
In this module, Advertiser can log onto the system to create their own ads
or give us their copy to place on the system. The various advertising
options, as previously discussed are:
Power Display
Promotions
Coupons
Marquees
Classified
Sponsorships
Business Advertiser Maintenance Module
The Advertiser Maintenance Module is designed to allow advertiser instant
access to advertiser listings, allowing them to make changes, additions or
deletions on demand. No other advertising medium offers this kind of
flexibility. Also, in this module, an advertiser can view his or her ad
exactly the way it will appear in the software program.
2. Consumer Advertiser System
In this system end-users can:
Create their own listing in the job seeker/help wanted section
Create their own classified advertisements
Maintain their classified advertisements
Other
Consumer Advertiser Development Module
This is similar to the Advertiser Creative Module for the advertisers,
without all the options. End-users can log onto the system and easily create
their own classified advertisements. From selling an old car to listing a
home for sale, the module offers an end-user opportunity to get their
message in front of thousands of interested buyers at a much lower cost than
newspaper classifieds.
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Consumer Advertiser Maintenance Module
The Maintenance Module will allow end-users the capability of editing and
deleting their listings on demand. The newspaper classifieds cannot come
close to matching this type of flexibility.
3. Ad Search System
In this system end-users are able to search the system for advertisements,
specials, events, coupons, etc., by the following criteria:
Flash Find
Promotions
Coupons
Power Display
Classified
Geography
Network
The Company has acquired a central computer on which ValuOne Online will
operate. The Company intends to purchase computer and networking equipment which
will initially allow simultaneous access to the system by 6,000 persons. The
Company currently estimates that each session will last for 15 minutes or less,
and that approximately 1.5 million active household end-users can be
accommodated with the equipment. The service has been designed so that
additional computers and network equipment can be added to allow for additional
simultaneous users in 6,000 user increments. DataMark's on-line network computer
system comprises state-of-the-art technology integrating On-Line Transaction
Processing (OLTP) and client/server processing. Specific technologies include
Hewlett-Packard's premier mainframe computers; two HP 9000/T520's and six
HP9000/K400's; fiber optic (FDDI) connectivity; Sybase database management
system; and Cisco high speed communication routers.
The Company initially intends to install the ValuOne Online central server
system in or near Salt Lake City, Utah. Access to the server will be over the
Internet, including PoPs established by the Company in targeted cities.
Software and Services Development
The Company has developed proprietary software that makes its services easy
to use and visually appealing. In addition, the Company has developed a database
engine that greatly speeds and simplifies the processing of advertising and
searching particular areas of ValuOne Online.
In addition, the Company conducts ongoing development activities and
licenses technology from third parties with the goal of making access to its
service easier and improving the functionality of the service so it is easier to
use. The Company believes that ease of use is a very important attribute and
will become increasingly more important as consumer online services become a
mass market service.
Competition
The consumer online services market is highly competitive. The Company's
competitors range from small companies with limited resources to large companies
with substantially greater financial, technical and marketing resources than
those of the Company. Major direct competitors include Prodigy, a joint venture
of IBM and Sears, CompuServe, America OnLine and MicroSoft. These competitors
concentrate primarily on end-user fees, rather than advertising revenue. The
Company believes that existing competitors are likely to expand their service
offerings and that new competitors, including AT&T and other computer
software/services, telephone and media companies, are likely to enter the
consumer online services market, resulting in greater competition for the
Company. Competition is also expected from newly created companies that are
providing access to the Internet and tools to information providers to enable
them to publish electronically on the Internet. Competitive pressures could
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result in reduced market share, price reductions and increased spending on
marketing and product development, which could adversely affect the Company's
financial condition and operating results.
The Company believes the principal competitive factors in the consumer
online services industry include product features and quality, ease of use,
access to distribution channels, advertising, brand recognition, reliability and
price. The Company believes that it will be able to compete effectively in these
areas.
Proprietary rights
The Company's software will be protected by copyright laws. The Company
will distribute the end-user software to more than 1.5 million targeted end-user
households and will make the end-user software available for download over the
Internet and will allow other end-users to distribute the software to others.
The central server computer software will also be copyrighted, and may be
licensed to others to operate local versions of ValuOne Online or services
proprietary to a single company. The licenses for such software will restrict
the usage to a single computer. The Company may also attempt to obtain limited
patent protection for the architecture of its products. The Company's limited
financial resources could restrict its ability to litigate any infringement of
its copyrights.
Direct Mail Advertising
The Company's principal current business is to provide highly targeted
direct mail advertising. The advertising on which the Company has concentrated
its efforts consist of targeted mailings requesting a return mailing or other
response from the consumer.
The concept for the Company was developed by Chad Evans while he was CEO of
Mountainwest Technology. Mountainwest relied heavily on direct mail as part of
its marketing. Despite this reliance, there was little firm information
available to guide the company in creating an effective direct mail strategy,
choosing a suitable distribution list or following up on any leads generated by
the mailing. Mr. Evans developed practices which were effective for Mountainwest
in these areas. As a result of visiting numerous private schools throughout the
country, Mr. Evans recognized that there was a demand for similar information
from other schools and companies. When Mountainwest determined not to pursue
this market, Mr. Evans formed DataMark.
The Company provides a full range of direct mail services for its clients.
A project will commence with the determination of the lifestyle profile of the
customer's target market. The Company will then design a mailing piece to appeal
to the market, which will often consist of a variation on standard pieces used
by the Company for similar businesses in other locales. The Company then chooses
a mailing list from lists available from third party vendors. By correlating
lifestyle information available from list vendors and other sources, the Company
can identify specific zip codes, mail carrier routes, neighborhoods, block
segments or individuals which are most likely to match the customer's target
market. The advertising material can be produced in the state of the art
printing plant operated by the Company's subsidiary DataMark Printing, Inc.
Final assembly and mailing is performed by the Company. The Company provides the
customer with training and assistance in making sales to the leads generated by
the mailings and developing future direct mail marketing plans based upon
response patterns.
The Company initially concentrated on the proprietary school market.
Although schools still account for a large portion of the Company's customers,
the Company has expanded to also service automobile, software and other service
industries.
The direct mail advertising industry is highly competitive, with
competitors including large national mailing houses, numerous local and regional
printers and mailers, and national and local advertising agencies. Many of such
competitors are larger and better financed than the Company. The Company
believes that its philosophy of providing full service to industries in which it
has amassed substantial experience allows it to compete with third parties who
may have an advantage based on price alone.
The cost of postage is a significant element of any direct mail campaign.
Increases in postal rates will increase the costs of direct mailings and may
therefore depress the number or profitability of mailings by the Company in the
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future. The Company does not believe that recent postal rate increases have had
a material long term effect on its direct mail business.
The Company believes that the direct mail industry is continuing to expand
from its current $40 billion per year level. In an effort to capitalize on such
expansion, the Company intends to establish a network of approximately 10
regional sales representatives through the country to solicit direct mail
advertising. The Company intends that the representatives will concentrate on
marketing direct mail to advertising agencies as an adjunct to campaigns in
other media. The Company believes that advertising agencies, especially on the
regional level, are not fully exploiting direct mail. The Company's regional
representatives will assist the agencies in planning and implementing direct
mail campaigns. Creative and production for the campaign will be performed by
DataMark at its existing central facilities. The Company believes that the
increased volume from regional sales will compensate for the costs of
establishing the regional representatives and the payment of fees to the
advertising agencies. The Company has not previously marketed direct mail in
this manner, and there is no assurance that the attempted expansion will be
successful.
Employees
The Company currently has approximately 40 full time employees and plans to
hire additional staff for marketing its commercial products. The current
employees have considerable experience and expertise in all areas of the
multimedia software industry related to the Company's product line. None of the
Company's employees are unionized.
Government Regulation
The Company is not subject to direct regulation other than regulation
applicable to businesses generally. However, changes in the regulatory
environment relating to the telecommunications and media industry could have an
effect on the Company's business, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone companies. Additionally, various proposed
legislation is pending before Congress which would impose additional regulations
and obligations on online service providers such as the Company. Management
cannot predict the likelihood that any such legislation will pass, or if passed,
the financial impact, if any, the resulting regulation may have on its business.
ITEM 2. PROPERTIES.
The Company is leasing from a third party modern office space in Murray,
Utah, a suburb of Salt Lake City, Utah. These offices include a software
development lab and general offices. In August, 1996 the Company moved its
offices to 12,000 square feet of modern office space in a nearby office building
leased from third parties. The computer equipment and software development
facilities remain in the previous location. The new offices are being leased
under a five-year arrangement with an option to renew. The initial rental is
$16,787 per month, subject to an annual inflation adjustment. The Company also
leases space in suburban Salt Lake City, Utah for its printing plant. These
facilities are believed adequate for the Company's current needs. As the ValuOne
business expands, the Company may require additional space.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which, in its belief,
could have a material adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended June 30, 1996.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded over the counter and is quoted on the
OTC Bulletin Board. During 1993 and 1994, there was no public market for the
securities of the Company's predecessor, and the Company is not aware of any
quotations for its securities during this period. In prior years, securities of
the Company's predecessor Exchequer were traded in the over-the-counter market,
and some sporadic unsolicited trading may have continued. Commencing in January
1995, the Company's Common Stock began to be quoted on the OTC Bulletin Board.
The following table reflects the high and low bid quotations reported by
the OTC Bulletin Board for the periods indicated. The quotes represent
interdealer quotations, do not include retail mark-up, mark-down or commission
and may not reflect actual transactions.
High Low
Fiscal Year Ended June 30, 1995
January 1 to March 31, 1995 $2.88 $2.25
April 1 to June 30, 1995 $4.75 $2.50
Fiscal Year Ended June 30, 1996
July 1 to September 30, 1995 $7.75 $3.75
October 1 to December 31, 1995 $7.50 $7.25
January 1 to March 31, 1996 $12.50 $8.00
April 1 to June 30, 1996 $21.38 $8.00
On October 10, 1996, the Common Stock was quoted on the OTC Bulletin Board
at $11.325 bid and $12.325 asked. The Company has applied for Nasdaq listing. As
of the date of this report, the Company believes it meets the Nasdaq
requirements for listing of its Common Stock on the Nasdaq SmallCap Market.
There is no assurance that the Common Stock will ever be so listed on Nasdaq.
As of June 30, 1996, there were approximately 673 holders of record of the
Company's Common Stock.
Dividend Policy
The Company has not paid any cash dividends since its inception. The
Company's revolving loan agreements currently prohibit it from declaring any
dividends without the written permission of the lender. The Company currently
intends to retain future earnings in the operation and expansion of its business
and does not expect to pay any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with the
financial statements and notes thereto bound elsewhere herein. Information for
fiscal 1996, 1995, 1994 and 1993 is derived from the Company's audited financial
statements. Information for fiscal 1992 is derived from unaudited financial
statements.
<TABLE>
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Year Ended June 30,
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales $4,256,887 $3,443,965 $3,017,805 $2,516,022 $2,878,013
---------- ---------- ---------- ---------- ----------
Cost of Sales
Postage 1,580,484 1,360,976 1,133,710 985,599 1,202,916
Materials and printing 1,310,184 1,035,954 790,744 611,838 645,124
--------- --------- --------- --------- ---------
Total Cost of Sales 2,890,668 2,396,930 1,924,454 1,597,437 1,848,040
--------- --------- --------- --------- ---------
Gross Margin 1,366,219 1,047,035 1,093,351 918,585 1,029,973
--------- --------- --------- ------- ---------
Operating Expenses
Research and development 1,565,718 560,915 89,250 - -
General and administrative 1,094,375 268,765 456,039 362,494 421,369
Selling 700,429 466,181 440,236 459,270 576,641
Compensation expense related
to issuance of options by
principal stockholder 1,484,375 - - - -
--------- --------- --------- ------- ---------
Total operating expenses 4,844,897 1,295,861 985,525 821,764 998,010
--------- --------- --------- --------- ---------
Total other income (expense),
net 45,597 (18,564) (16,272) (25,108) (20,613)
------ ------- ------- ------ ------
Income (loss) before
incomes taxes (3,433,081) (267,390) 91,554 71,713 11,350
Benefit (provision) for
income taxes - 3,120 (28,556) (18,386) (10,173)
------ ----- ------- ------ ------
Net income (loss) (3,433,081) (264,270) 62,998 53,327 1,177
========= ======= ====== ====== =====
Net income (loss) per
common share (.58) (.06) .01 .01 .00
===== ==== === === ===
Weighted average common
shares outstanding 5,917,491 4,713,028 4,282,299 4,242,026 4,242,026
========= ========= ========= ========= =========
<CAPTION>
As of June 30,
Balance Sheet Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital $12,774,113 $794,156 $350,428 $224,121 $247,757
Total assets 16,543,253 1,631,445 884,493 759,379 597,959
Long-term debt, net
of current portion - 25,332 47,248 56,179 30,695
Stockholders' equity $15,541,624 $1,073,225 $476,210 $285,703 $284,526
</TABLE>
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<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company began operations in 1987 to provide highly targeted business to
consumer advertising through direct mail. Since the Company's founding, the
direct mail business has provided substantially all of its revenues and the
Company intends to continue to grow its direct mail business.
In fiscal 1994, the Company began developing its own proprietary advertiser
and end-user funded national online network - ValuOne Online. Since fiscal 1994,
the Company has devoted significant resources towards the development of ValuOne
Online and anticipates launching the service in the first quarter of calendar
year 1997. The Company believes that in the future the revenues of ValuOne
Online should surpass those of the direct mail business.
The Company's DataMark Systems subsidiary charges fees based primarily on
the number of mailings provided to each customer. Support services which are
typically bundled with the mailing include targeting and profiling the mailing
audience, designing and printing the mailing, and analyzing the results of the
mailing campaign.
The cost of postage is a significant element of any direct mail campaign.
Recent increases in postal rates will increase the costs of direct mailings.
Although management believes that the postal rate increase will not have a
material long term effect on demand, there is no assurance that postal rate
increases will not depress the number or reduce the profitability of mailings by
the Company. Additionally, fluctuations in the price of paper or other materials
may adversely impact the profitability of mailings by the Company in the future.
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<PAGE>
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the fiscal years ended June 30, 1996, 1995 and 1994.
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales
Postage 37.1 39.5 37.6
Materials and printing 30.8 30.1 26.2
---- ---- ----
Total cost of sales 67.9 69.6 63.8
---- ---- ----
Gross margin 32.1 30.4 36.2
---- ---- ----
Operating expenses
Research and development 36.8 16.3 3.0
General and administrative 25.7 7.8 15.1
Selling 16.4 13.5 14.6
Compensation expense related
to issuance of options by
principal stockholder 34.9 - -
----- ----- -----
Total operating expenses 113.8 37.6 32.7
----- ----- -----
Income (loss) from operations (81.7) (7.2) 3.5
----- ----- -----
Total other income (expense), net 1.0 (0.6) (0.5)
----- ----- -----
Income (loss) before income taxes (80.7) (7.8) 3.0
Benefit (provision) for income
taxes - 0.1 (0.9)
---- ----- -----
Net income (loss) (80.7)% (7.7)% 2.1%
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30, 1995
Net Sales
Net sales for fiscal 1996 increased by 23.6% to $4,256,887 from $3,443,965
for fiscal 1995. Net sales growth resulted primarily from a 10.7% increase in
the number of pieces mailed, to 10,991,467 pieces mailed during fiscal 1996 from
9,932,869 pieces mailed during fiscal 1995. The average price per piece mailed
increased 20.7% to $0.419 during fiscal 1996 from $0.347 during fiscal 1995.
Cost of Sales
Postage expense increased 16.1% to $1,580,484 during fiscal 1996 from
$1,360,976 during fiscal 1995. The increase was attributable to a higher number
of pieces mailed during fiscal 1996 than during fiscal 1995. Postage expense as
a percentage of net sales decreased to 37.1% during fiscal 1996 from 39.5%
during fiscal 1995. The decrease in postage expense as a percentage of net sales
was primarily attributable to an increase in sales prices charged by the Company
to reflect past increases in postal rates.
Materials and printing expense increased 26.5% to $1.310,184 during fiscal
1996 from $1,035,954 during fiscal 1995. The increase was primarily attributable
to a higher number of pieces mailed during fiscal 1996 than during fiscal 1995.
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<PAGE>
Materials and printing expense as a percentage of net sales increased to 30.8%
during fiscal 1996 from 30.1% during fiscal 1995 The increase in materials and
printing expense as a percentage of net sales was attributable to higher paper
costs which were not immediately reflected in higher sales prices charged by the
Company.
Operating Expenses
Research and development of ValuOne Online increased 179.1% to $1,565,718
during fiscal 1996 from $560,915 during fiscal 1995. Research and development of
ValuOne Online as a percentage of net sales increased to 36.8% during fiscal
1996 from 16.3% during fiscal 1995. The Company anticipates launching ValuOne
Online during the first quarter of calendar year 1997.
General and administrative expense increased 307.2% to $1,094,375 during
fiscal 1996 from $268,765 during fiscal 1995. General and administrative expense
as a percentage of net sales increased to 25.7% during fiscal 1996 from 7.8%
during fiscal 1995. The increase in general and administrative expense as a
percentage of net sales was due to the addition of administrative staff
associated with ValuOne Online.
Selling expense increased 50.2% to $700,429 during fiscal 1996 from
$466,181 during fiscal 1995. Selling expense as a percentage of net sales
increased to 16.4% during fiscal year 1996 from 13.5% during fiscal 1995. The
increase in selling expense as a percentage of net sales was due to initial
marketing expenses incurred in connection with the ValuOne Online product.
In June 1996, in connection with an employment agreement with an officer of
DataMark Media, a principal stockholder granted an option to the officer to
purchase 237,500 shares of restricted common stock from the principal
stockholder at $1.50 per share. As part of the "March 1996 Placement," during
the year the Company sold shares of restricted common stock in this private
placement at $7.75 per share; accordingly, the Company recognized $1,484,375 of
compensation expense related to grant of options to this officer during fiscal
1996.
Segment Operating Results
Direct mail marketing net sales for fiscal 1996 increased by 23.6% to
$4,256,887 from $3,443,965 for fiscal 1995. Net sales growth resulted primarily
from a 10.7% increase in the number of pieces mailed to 10,991,467 pieces mailed
during fiscal 1996 from 9,932,869 pieces mailed during fiscal 1995. The average
price per piece mailed increased 20.7% to $0.419 during fiscal 1996 from $0.347
during fiscal 1995. Net income for fiscal 1996 decreased by 29.3% to $245,331
from $347,015 for fiscal 1995. The decrease in net income was primarily
attributable to increases in selling and administrative costs associated with
the direct mail marketing segment.
The net loss from the computer online marketing segment increased 534.6% to
$3,761,388 for fiscal 1996 from $592,720 for fiscal 1995. The increase was due
to continued research and development efforts, the addition of administrative
and support staff and marketing and promotional expenses incurred in connection
with the ValuOne Oneline product.
Net corporate interest income was $82,976 for fiscal 1996. This interest
was earned on the proceeds from the March 96 placement. During fiscal 1995 the
Company incurred interest expense of $21,685.
Fiscal Year Ended June 30, 1995 Compared with Fiscal Year Ended June 30, 1994
Net Sales
Net sales for fiscal 1995 increased by 14.1% to $3,443,965 from $3,017,805
for fiscal 1994. Net sales growth resulted primarily from an 11.9% increase in
the number of pieces mailed, to 9,932,869 pieces mailed during fiscal 1995 from
8,875,852 pieces mailed during fiscal 1994. The average price per piece mailed
increased 2.1% to $0.347 during fiscal 1995 from $0.340 during fiscal 1994.
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<PAGE>
Cost of Sales
Postage expense increased 20.0% to $1,360,976 during fiscal 1995 from
$1,133,710 during fiscal 1994. The increase was attributable to a higher number
of pieces mailed during fiscal year 1995 than during fiscal 1994. Postage
expense as a percentage of net sales increased to 39.5% during fiscal 1995 from
37.6% during fiscal 1994. The increase in postage expense as a percentage of net
sales was attributable to an increase in postal rates without an immediate
related increase in sales prices charged by the Company.
Materials and printing expense increased 31.0% to $1,035,954 during fiscal
1995 from $790,744 during fiscal 1994. The increase was primarily attributable
to a higher number of pieces mailed during fiscal 1995 than during fiscal 1994.
Materials and printing expense as a percentage of net sales increased to 30.1%
during fiscal 1995 from 26.2% during fiscal 1994. The increase in materials and
printing expense as a percentage of net sales was attributable to higher paper
costs which were not immediately reflected in higher sales prices charged by the
Company.
Operating Expenses
Research and development of ValuOne Online continued during fiscal 1995 and
the Company incurred $560,915 of related costs. The Company anticipates
launching ValuOne Online during the first quarter of calendar year 1997.
General and administrative expense declined 41.1% to $268,765 during fiscal
1995 from $456,039 during fiscal 1994. General and administrative expense as a
percentage of net sales declined to 7.8% during fiscal 1995 from 15.1% during
fiscal 1994. The decline in general and administrative expense as a percentage
of net sales was primarily due to a redirection of certain administrative
efforts toward research and development of ValuOne Online.
Selling expense increased 5.9% to $466,181 during fiscal 1995 from $440,236
during fiscal 1994. Selling expense as a percentage of net sales declined to
13.5% during fiscal year 1995 from 14.6% during fiscal 1994. The decline in
selling expense as a percentage of net sales was due to tighter cost controls
over the sales force offset by an increase in the number of pieces mailed.
Segment Operating Results
Direct mail marketing net sales for fiscal 1995 increased by 14.1% to $3,443,965
from $3,017,805 for fiscal 1994. Net sales growth resulted primarily from a
11.9% increase in the number of pieces mailed to 9,932,869 pieces mailed during
fiscal 1995 from 8,875,852 pieces mailed during fiscal 1994. The average price
per piece mailed increased 2.1% to $0.347 during fiscal 1995 from $0.340 during
fiscal 1994. Net income for fiscal 1995 increased by 42.8% to $347,015 from
$242,937 for fiscal 1994. The increase in net income was primarily attributable
to decreases in selling and administrative costs associated with the direct mail
marketing segment.
The net loss from the computer online marketing segment increased 356.8% to
$592,720 for fiscal 1995 from $129,744 for fiscal 1994. The increase was
primarily was due to continued increased research and development efforts for
ValuOne Online.
Net corporate interest expense was $21,685 for fiscal 1995 and $21,639 for
fiscal 1994.
Quarterly Results.
The following tables set forth certain quarterly financial information of
the Company for each quarter of fiscal 1996 and fiscal 1995. This information
has been derived from the quarterly financial statements of the Company which
are unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited financial statements included herein and include all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the financial results for such periods. This information should
be read in conjunction with the financial statements and the notes thereto and
the other financial information appearing elsewhere herein.
-16-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Sep. 30, 1995 Dec. 31, 1995 Mar 31, 1996 Jun 30, 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $1,074,559 $ 935,517 $ 939,534 $1,307,277
---------- ---------- ----------- ----------
Cost of Sales
Postage 433,766 354,378 346,790 445,550
Materials and printing 282,438 283,417 315,654 428,675
Total cost of sales 716,204 637,795 662,444 874,225
------- ------- ------- -------
Gross Margin 358,355 297,722 277,090 439,052
------- ------- ------- -------
Operating Expenses
Research and development 164,350 308,462 431,328 661,578
General and administrative 145,965 196,188 294,307 457,915
Selling 164,369 171,698 159,648 204,714
Compensation expense related
to issuance of options by
principal stockholder - - - 1,484,375
---------- ----------- ---------- ---------
Total Operating Expenses 474,684 676,348 885,283 2,808,582
--------- --------- --------- ---------
(Loss) from operations 1,190,888 1,314,143 1,547,727 3,682,807
--------- --------- ---------
Total other income (expense),
net (4,367) (11,249) (24,536) 85,749
--------- --------- ---------- ------
(Loss) before income taxes (120,696) (389,875) (632,729) (2,289,781)
Benefit (provision) for
income taxes - - (13,161) 13,161
--------- --------- --------- ----------
Net (loss) $ (120,696) $ (389,875) $ (645,890) $(2,276,620)
========== =========== =========== ===========
Net (loss) per common
share (1) $ (.02) $ (.07) $ (.12) $ (.38)
========== =========== =========== ============
Weighted average common
shares outstanding 5,539,953 5,539,953 5,543,470 5,917,491
========= ========= ========= =========
</TABLE>
(1) The sum of net income (loss) per share amounts for the four quarters may not
equal annual amounts due to rounding.
-17-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Sep. 30, 1994 Dec. 31, 1994 Mar 31, 1995 Jun 30, 1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 894,541 $ 767,338 $ 859,779 $ 922,307
----------- ---------- ---------- ----------
Cost of Sales
Postage 333,390 328,334 360,306 338,946
Materials and printing 245,227 221,382 245,714 323,631
------- ------- ------- -------
Total cost of sales 578,617 549,716 606,020 662,577
------- ------- ------- -------
Gross Margin 315,924 217,622 253,759 259,730
------- ------- ------- -------
Operating Expenses
Research and development 95,907 103,288 110,823 156,163
General and administrative 80,386 60,977 53,021 74,381
Selling 103,933 104,225 152,422 200,335
------- ------- ------- -------
Total operating expenses 280,226 268,490 316,266 430,879
------- ------- ------- ---------
Income (loss) from operations 35,698 (50,868) (62,507) (171,149)
------- ------- ------- ---------
Total other income (expense),
net (8,083) (2,612) (6,625) (1,244)
------- ------- ------- ------
Income (loss) before income
taxes 27,615 (53,480) (69,132) (172,393)
Benefit (provision) for
income taxes (301) 583 987 1,851
---- --- --- -----
Net income (loss) $ 27,314 $ (52,897) $(68,145) $(170,542)
========== ========= ======== =========
Net income (loss) per
common share (1) $ .01 $ (.01) $ (.01) $ (.03)
========== ========= ======== =========
Weighted average common
shares outstanding 4,365,045 4,462,612 4,941,513 5,031,315
========== ========= ========= =========
</TABLE>
(1) The sum of net income (loss) per share amounts for the four quarters may not
equal annual amounts due to rounding.
Liquidity and Capital Resources
The Company historically has satisfied its cash requirements through cash
flows from operating activities and borrowings from financial institutions and
related parties. However, in order to fund the expenses of developing and
launching ValuOne Online, in March 1996, the Company began a private placement
to major institutions and other accredited investors (the "March 96 Placement").
The Company completed the March 96 Placement for total net proceeds of
$16,408,605 during fiscal 1996, including the exercise of warrants.
Operating activities consumed $1,098,912 of cash in fiscal 1996, compared
to $166,499 in fiscal 1995. The reduction in cash flows provided by operating
activities during 1996 as compared to 1995 was primarily attributable to higher
research and development costs associated with ValuOne Online.
Cash flows used in investing activities was $2,713,864 and $142,956 during
fiscal 1996 and 1995, respectively. This increase in cash used for investing
activities was primarily attributable to the acquisition of computer equipment
for ValuOne Online. The Company's capital expenditures historically have
consisted of printing machinery and office equipment.
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<PAGE>
Cash flows provided by financing activities was $16,933,175 and $258,805
during fiscal 1996 and 1995, respectively. The increase in cash flow provided by
financing activities during 1996 as compared to 1995 was primarily attributable
to the proceeds of the March 96 Placement.
It is anticipated that the Company will be required to spend an additional
$3,600,000 for cost associated with the ValuOne Online product before its launch
during the first quarter of 1997. In addition, the Company anticipates that it
also needs to expend approximately $3,900,000 more than anticipated revenues
during the next fiscal year for initial marketing of the product and additional
capital expenditures.
As of June 30, 1996 the Company had committed to expend approximately
$600,000 for capital expenditures associated with ValuOne Online.
Management believes the Company has sufficient cash and cash equivalent to
meet the Company's requirements during the next fiscal year.
Forward-Looking Statements
Statements regarding the Company's expectations as to demand for its
products and certain other information presented in this Form 10-K constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors which could
cause actual results to differ from expectations include, but are not limited
to, uncertainty of future profitability, uncertainty of market acceptance,
dependence on limited products, extent of regulations, and the uncertainty
regarding patents and proprietary rights and technological obsolescence.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE.
I. Hansen, Barnett & Maxwell
Effective June 28, 1996, the Registrant dismissed Hansen, Barnett & Maxwell
("Hansen") as its certifying accountant. Hansen's reports on the Registrant's
financial statements for the years ended June 30, 1995 and 1994 did not contain
an adverse opinion or a disclaimer of opinion and were not qualified as to
uncertainty, audit scope, or accounting principles.
The Registrant's board of directors unanimously approved dismissal of
Hansen.
During the Registrant's two most recent fiscal years ended June 30, 1995
and 1994 and the interim period subsequent to June 30, 1995, there were no
disagreements, as defined in Regulation S-K Item 304, with Hansen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements would have caused Hansen to
make a reference to the subject matter of the disagreement in connection with
its reports.
On June 28, 1996, the Registrant engaged Arthur Andersen LLP ("Andersen")
to perform its audits and provide various accounting services thereafter. The
Registrant did not consult with Andersen prior to such date regarding any
reportable matter.
II. Jones, Jensen, Orton & Company
Effective January 16, 1995, the Company dismissed Jones, Jensen, Orton &
Company ("Jones") as its certifying accountant. Jones' report dated December 7,
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<PAGE>
1994 on the Company's financial statements for the years ended December 31,
1993, 1992 and 1991 did not contain an adverse opinion and was not qualified as
to audit scope or accounting principles. The report contains the following:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3
to the financial statements, the Company is a development stage
company with no significant operating results to date. Unless the
Company is able to obtain significant outside financing, there is
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company's board of directors approved dismissal of Jones.
During the Company's fiscal years ended December 31, 1993, 1992 and 1991
and the period subsequent to December 31, 1993, there were no disagreements, as
defined in Regulation S-K Item 304, with Jones on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
On January 16, 1995, the Company engaged Hansen, Barnett & Maxwell to
perform its audits and provide various accounting services thereafter. The
Company and Hansen, Barnett & Maxwell did not consult prior to such date
regarding any reportable matter. Hansen, Barnett & Maxwell had previously been
the auditor for DataMark.
-20-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is information regarding (i) the current directors of the
Company, who will serve until the next annual meeting of shareholders or until
their successors are elected or appointed and qualified, and (ii) the current
executive officers of the Company, who are elected to serve at the discretion of
the Board of Directors.
The Company's executive officers and directors are as follows:
Name Age Position
Chad L. Evans 42 Chief Executive Officer,
President, Director
James A. Egide* 62 Chief Financial Officer, Director
Stanton Jones 38 Director, Chief Executive Officer
of DataMark Media
Kenneth Woolley* 50 Director and Senior Vice
President of Strategic Planning
C. Scott Stone* 32 Director
James Bowers 47 Secretary, Treasurer
Michael D. Bard 49 Controller
*Serves on compensation committee.
Chad L. Evans: Chairman, Chief Executive Officer, Director
Mr. Evans was a founder of DataMark Systems, Inc., the predecessor to
DataMark Holding, Inc., in 1987 and has been its Chief Executive Officer since
1989. He was instrumental in the start-up, operation and growth of DataMark
Holding's subsidiaries DataMark Systems, Inc. and DataMark Printing, Inc. Prior
to devoting his full time to DataMark in 1989, Mr. Evans was involved in a
number of successful companies. He served as Chief Executive Officer of
Mountainwest Technology, Inc. and its subsidiary Mountainwest Junior College
from 1984 until the sale of the College to Phillips Colleges in 1989. Mr. Evans
continues to advise the Phillips Colleges group concerning student recruitment
advertising. Mr. Evans is on the Board of Directors of Utah Industries for the
Blind.
Stanton Jones: Chief Operating Officer
Mr. Jones joined the Company in 1996. Mr. Jones was Vice President and
General Sales Manager of KSTU-TV, a television station in Salt Lake City owned
and operated by Fox Television Stations, Inc. from 1993 to 1996.Prior to joining
Fox, Mr. Jones was Vice-President, National Sales Manager for the Katz Media
Group where he was responsible for their west coast operations including 25
television stations and 6 media sales offices. Mr. Jones held various management
and sales positions for Katz in Los Angeles, San Francisco and New York City
from 1981 to 1993. Prior to joining Katz, Mr. Jones was an account executive in
New York City for PGW, a national TV representative firm. Mr. Jones holds a
bachelors degree in communications with an emphasis in media sales management
from BYU.
C. Scott Stone: Director
Mr. Stone has been a director of the Company since March 1, 1996. Since
February, 1995, Mr. Stone has been Director of Business Operations for the West
Tennessee District of Bellsouth Mobility, a cellular telephone company. From
1992 until 1995 Mr. Stone was Regional Manager of Business Operations for
Bellsouth Cellular - American Cellular Communications. During 1992, Mr. Stone
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<PAGE>
was College Director and Controller for Collegiate Systems, an operator of four
proprietary colleges. From 1990 to 1992, he was a Senior Internal Auditor with
Cooper Industries, a global manufacturing concern. Earlier positions include
senior acquisition accountant with Phillips Colleges, Inc. and senior auditor
with KPMG Peat Marwick. Mr. Stone obtained his Master of Professional
Accountancy and Bachelors of Science - Accounting degrees from the University of
Southern Mississippi. Mr. Stone is a certified public accountant.
Kenneth Woolley: Director, Vice President of Strategic Planning
Mr. Woolley has been a founder and director of several companies. Mr.
Woolley served on the Board of Directors of Megahertz Holding Corporation, the
leading manufacturer of fax/modems for laptop and notebook computers until
February, 1995. Prior to the merger of Megahertz and VyStar Group, Inc. in June,
1993, Mr. Woolley had served as President of the parent company. Since 1979, Mr.
Woolley has been a principal in Extra Space Management, Inc. and Extra Space
Storage, privately held companies engaged in the ownership and management of
mini-storage facilities. Since 1989, Mr. Woolley has been a partner in D.K.S.
Associates, and since 1990 a director and executive officer of Realty
Management, Inc., privately held companies engaged in the ownership and
management of apartments, primarily in Las Vegas, Nevada. Mr. Woolley is a
director of Cirque Corporation. Mr. Woolley also serves as an associate
professor of business management at Brigham Young University. Mr. Woolley holds
a B.A. in Physics from Brigham Young University, an M.B.A. and Ph.D. in Business
Administration from the Stanford University Graduate School of Business. Mr.
Woolley is available to the Company on a part-time, as needed basis.
James Bowers: Secretary, Treasurer
Mr. Bowers has been with DataMark since 1989 and was appointed to his
offices with the Company on January 11, 1995. From 1986 to 1989, Mr. Bowers
owned his own accounting firm in Gunnison, Colorado. From 1975 to 1986, Mr.
Bowers held positions as accountant or controller with various firms, including
Computer Associates and R.M. Taylor Steel Fabricators. Mr. Bowers received an
Associates degree in accounting from LDS Business College.
Michael Bard: Controller
Mr. Bard joined the Company in September 1996. Mr. Bard was the Controller
for Ard, Inc., a professional services corporation located in Burlington,
Vermont from 1991 to 1996. Prior to joining Ard, Inc., Mr. Bard was Senior Vice
President, Controller for CACI, Inc. International, an information technology
company located in Fairfax, Virginia from 1976 to 1991. Mr. Bard is a Certified
Public Accountant and holds a bachelors degree in accounting.
James A. Egide: Chief Financial Officer, Director
Mr. Egide was appointed as a Director of the Company on January 11, 1995.
Since 1990, Mr. Egide has primarily been involved in managing his personal
investments, including multiple international and national business enterprises.
In 1978 he co-founded Carme, a public company, and served as CEO and Chairman of
the Board until 1989 when it was sold. From 1976 until 1980, Mr. Egide's primary
occupation was President and Director of Five Star Industries, Inc., a
California corporation which was a general contractor and real estate developer.
His principal responsibilities were land acquisition, lease negotiations and
financing.
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<PAGE>
Significant Employees
Arthur Benjamin: President of DataMark Systems
Mr. Benjamin has 25 years in marketing and sales and 12 years in
proprietary school marketing and operations. He has held executive positions
with Group W, CBS, Admarketing (a national media buying service), Connecticut
Public Broadcasting, CPI (a group of four proprietary schools), and Advantage
Media and Marketing (a consumer ad agency). He has overseen numerous public
relations campaigns and designed and published a regional magazine. Prior to
joining the Company in January 1995, as a full time employee, Mr. Benjamin had
been President of Watterson College since 1994, in addition to serving as CEO of
MCS Technologies, Inc., a company engaged in vocational training since 1993, and
Senior Vice President/Marketing of Rhodes Group, a company engaged in vocational
training since 1989, President, Marketing By Design (a national marketing
agency) since 1981, and Travel By Design (a national travel agency) since 1992.
He is a graduate of Clark University, the Burklyn Business School and the Career
College Association leadership conference.
Mark N. Johnson: Information Systems Director
Mr. Johnson has over 10 years in the information systems industry. Prior to
joining the Company in 1995 he served as the Director of Information Systems for
Antenna Technology Communications, Inc., a wireless communications company from
1994 to 1995 and as Vice President of Information Systems for One-2-One, a
long-distance telephone company from 1993 to 1994. He was also the Director of
Information Systems for Phillips Junior College in Salt Lake City, Utah from
1989 to 1993. Mr. Johnson holds a Masters degree in Business Administration from
the University of Phoenix, May 1995, and a Bachelors degree in Computer Science
and Information Systems from Idaho State University, December 1984. He also has
significant experience in design and implementation of client server database
management systems.
Tom Dearden: Creative Director
Mr. Dearden received his Bachelors degree (BFA) from the University of Utah
in Graphic Design and Advertising. He has been with DataMark Systems, Inc. since
1989. Previously he served as art director and advertising manger for a
publisher and also owned and operated a small advertising agency. His expertise
includes virtually all aspects of advertising from print production to state of
the art creative. Throughout his career he has been responsible for literally
millions of pieces of direct mail. He has designed advertising campaigns for all
kinds of clients including hundreds of private educational institutions across
the nation. He has also designed campaigns for the medical, insurance, finance
and real estate fields as well as work for charitable organizations.
Rick Bentz: Market Research Director
Mr. Bentz has served as National director of Market Research for Mrs.
Fields Cookies, Executive Director of Market Research for RETECH (with clients
such as Kentucky Fried Chicken - Canada and Winchells Doughnuts -U.S.) and
President of GEOSTATE, a national marketing research firm. He has been with
DataMark Systems since 1990. He has extensive knowledge and background in
sophisticated marketing database systems. His methodologies include the use of
demographic and lifestyle segmentation systems for site evaluation, customer /
product profiles and direct mail targeting. Mr. Bentz holds a Bachelor of
Science degree in Business Marketing from the University of Utah.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met except as follows: Kenneth Woolley, a director of
-23-
<PAGE>
the Company, inadvertently omitted certain derivative securities from his Form
3. This omission should have been corrected on a Form 5 filed within 45 days
after the end of the fiscal year. The Form 5 was not timely filed.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer as of June 30, 1996 and to each of the Company's other
executive officers whose annual salary and bonus exceeded $100,000.
Summary Compensation
Annual Compensation Long Term Compensation
------------------- ----------------------
Year Other Annual
Name and Ended Salary Bonus Compensation Options/SARs
Principal Position 6/30 ($) ($) ($) (#)
- ------------------ ----- ------ ------ ------------- --------------
1996 $123,600
Chad Evans 1995 $123,600 (1)
Chairman/CEO 1994 $123,600
(1) Mr. Evans receives the use of a Company owned car. The estimated annual
cost to the Company is $6,000.
The Company does not have a compensation committee. Compensation of the
executive officers may be increased from time to time as determined by the Board
of Directors.
Stock Options Granted in Last Fiscal Year
Information concerning fiscal 1996 grants to named executive officers is
reflected in the table below. The amounts shown for each of the named executive
officers as potential realizable values are based on arbitrarily assumed
annualized rates of stock price appreciation of five percent and ten percent
over the full term of the options. These potential realizable values are based
solely on arbitrarily assumed rates of price appreciation required by applicable
SEC regulations. Actual gains, if any, on option exercises and common
stockholdings are dependent on the future performance of the Company and overall
stock market conditions. There can be no assurance that the potential realizable
values shown in this table will be achieved.
================================================================================
Individual Grants Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
for Option Term
================================================================================
Name Options % of Total Exercise Expiration (5%) (10%)
Granted(#) Options Price Date ($) ($)
Granted to
Employees
in 1996
================================================================================
Chad L. Evans 25,000 $5.00 $6,250 $12,500
================================================================================
-24-
<PAGE>
Aggregated Option Exercises and Year-End Option Values in Fiscal 1996. The
following table summarizes for each of the named executive officers of the
Company the number of stock options, if any, exercised during fiscal 1996, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at June 30, 1996 and the aggregate dollar value of in-the-money
unexercised options, if any, held at June 30, 1996. Value realized upon exercise
is the difference between the fair market value of the underlying stock on the
exercise date and the exercise price of the option. The value of unexercised,
in-the-money options at June 30, 1996 is the difference between its exercise
price and the fair market value of the underlying stock on June 30, 1996, which
was $12.75 per share based on the closing bid price of the Common Stock on June
30, 1996. The underlying options have not been and, may never be exercised; and
actual gains, if any, on exercise will depend on the value of the Common Stock
on the actual date of exercise. There can be no assurance that these values will
be realized.
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
6/30/96 6/30/96
------- -------
Shares
Acquired Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------
Chad L. Evans -0- $-0- 25,000 -0- $193,750 $0
Stock Option Plan
The Company has adopted the DataMark Systems Omnibus Stock Option Plan (the
"Option Plan") to assist the Company in securing and retaining key employees and
directors. The Option Plan provides that options to purchase a maximum of
780,532 shares of Common Stock may be granted to (i) directors and consultants,
and (ii) officers (whether or not a director) or key employees of the Company
("Eligible Employees"). The Option Plan will terminate in 2014 unless sooner
terminated by the Board of Directors.
The Option Plan is administered by a committee (the "Option Committee")
currently consisting of the Board of Directors. The total number of options
granted in any year to Eligible Employees, the number and selection of Eligible
Employees to receive options, the number of options granted to each and the
other terms and provisions of such options are wholly within the discretion of
the Option Committee, subject to the limitations set forth in the Option Plan.
The option exercise price for options granted under the Plan may not be less
than 100% of the fair market value of the underlying common stock on the date
the option is granted. Options granted under the Option Plan expire upon the
earlier of an expiration date fixed by the Option Committee or five years from
the date of grant.
Under the Option Plan, the Company may issue both qualified and
non-qualified stock options. As of June 30, 1996, options to purchase 451,623
shares of Common Stock were outstanding under the Plan.
Compensation of Directors
The Company's non-employee Directors are not currently compensated for
attendance at Board of Director meetings. Non-employee directors may be granted,
on an ad hoc basis, stock options upon being appointed to the Board. The Company
may adopt a formal director compensation plan in the future. All of the
Directors are reimbursed for their expenses for each Board and committee meeting
attended.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding Common Stock of the
Company beneficially owned as of June 30, 1996 by: (i) each person known by the
Company to beneficially own 5% or more of the outstanding Common Stock, (ii) by
each director and director nominee, (iii) by each executive officer named in the
Summary Compensation Table, and (iv) by all officers and directors as a group.
As of June 30, 1996, there were 7,870,907 shares of Common Stock outstanding and
no Preferred Stock outstanding.
Names and Addresses of Amount of Percentage of
Principal Stockholders Common Shares Voting Securities*
- -------------------------------- --------------- --------------------
Quantum Industrial Partners LDC 675,000 8.6%
Kaye Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
Pequot International Fund L.P. 450,000 5.7%
and Pequot Partners Fund L.P.
354 Pequot Ave
SouthPort, CT
Names and Address of
Officers and Directors
- -------------------------------------
Chad L. Evans 2,736,375(1) 34.8%
488 East Winchester Street, Suite 100
Salt Lake City, Utah 84107
James A. Egide 1,530,256(2) 19.4%
488 East Winchester Street, Suite 100
Salt Lake City, Utah 84107
C. Scott Stone 15,000(3) 0.2%
1100 Concourse Parkway
Birmingham, AL
Kenneth Woolley 165,000(4) 2.1%
7001 S. 900 E.
Midvale, UT 84048
Stanton D. Jones 287,500 3.5%
488 East Winchester, Suite 100
Salt Lake City, Utah 84107
All Directors and Executive 4,536,631 55.9%
Officers (7 persons)
- ----------------------------
* Assumes exercise of all exercisable options held by listed security
holders which can be acquired within 60 days from June 30, 1996.
(1) Includes shares held by a trust controlled by Mr. Evans. Also includes
25,000 shares which Mr. Evans may acquire on exercise of options.
(2) Includes 25,000 shares which Mr. Egide may acquire on exercise of
options.
-26-
<PAGE>
(3) Includes 15,000 shares which Mr. Stone may acquire on exercise of
options. Does not include an additional 30,000 shares which may be
acquired on exercise of options which are not currently exercisable.
(4) Includes 25,000 shares which Mr. Woolley may acquire on exercise of
options, but does not include an additional 100,000 shares which may be
acquired on exercise of options which are not currently exercisable.
(5) Consists of 50,000 shares Mr. Jones may acquire on exercise of options
from the company and another 237,500 shares on exercise of options
granted by another stockholder. Does not include an additional 125,000
shares which may be acquired on exercise of options which are not
currently exercisable.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the fiscal year ended June 30, 1995, the Company borrowed $13,500
from Mr. Evans and $116,000 from a private company affiliated with Mr. Egide.
Such loans bear interest at 10% per annum, after an initial grace period, and
are due on demand. The loans were approved by the disinterested members of the
Board of Directors.
At June 30, 1995, the Company had notes receivable from shareholders in the
amount of $719,000. These notes, which arose from the April 95 Placement, were
collected during the first quarter of fiscal 1996.
During the fiscal year ended June 30, 1995, the Company provided
advertising services to a proprietary school for which Mr. Benjamin was an
officer. The amount of such services was $200,000. The Company believes that
such services were provided on substantially the same terms as were available to
all of the Company's customers.
In April 1996, the Company borrowed $500,000 from a bank to fund computer
equipment purchases. The loan is guaranteed by Messrs. Evans and Egide and two
other shareholders. In exchange for this guarantee, such persons received a
one-year option to purchase 25,000 shares each at a price of $5.00 per share.
In June, 1996 Chad Evans granted an option to an officer of DataMark Media
to induce such person to enter into an employment agreement. The exercise price
of the option was less than the fair market value of the common stock at the
date of grant. For financial reporting purposes, the Company was required to
record a compensation expense for these options as if the options had been
granted by the Company itself. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Title of Documents Page No.
DATAMARK HOLDING, INC.
Reports of Independent Public Accountants. . . . . . . . . . . . . . F-1
Consolidated Balance Sheets at June 30, 1996 and 1995. . . . . . . . F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . . F-5
-27-
<PAGE>
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1996, 1995 and 1994. . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-8
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended June 30, 1996.
(c) Exhibits
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
3.1 Articles of Incorporation, as amended +
3.2 By-laws +
10.1 Agreement and Plan of Reorganization *
10.2 Lease Agreement +
10.3 Omnibus Stock Option Plan +
21.1 Subsidiaries of the Registrant +
* Incorporated by reference to the Company's Current Report on Form 8-K dated
January 11, 1995.
* Incorporated by reference to the Company's Annual Report for June 30, 1995.
-28-
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
TOGETHER WITH REPORTS OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DataMark Holding, Inc.:
We have audited the accompanying consolidated balance sheet of DataMark Holding,
Inc. and subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial position of DataMark Holding,
Inc. and subsidiaries as of June 30, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 26, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
DataMark Holding, Inc.:
We have audited the accompanying consolidated balance sheet of DataMark Holding,
Inc. and subsidiaries as of June 30, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended June 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DataMark Holding,
Inc. and subsidiaries as of June 30, 1995, and the results of their operations
and their cash flows for each of the two years in the period ended June 30,
1995, in conformity with generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
October 5, 1995
F-2
<PAGE>
Page 1 of 2
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1995
ASSETS
1996 1995
----------- --------
CURRENT ASSETS:
Cash $13,159,404 $ 39,005
Trade accounts receivable 502,996 450,814
Receivables from sale of common stock to
shareholders - 719,000
Inventory 82,972 107,921
Note receivable from officer 1,000 1,000
Other current assets 29,370 9,304
----------- -----------
Total current assets 13,775,742 1,327,044
----------- -----------
PROPERTY AND EQUIPMENT:
Computer and office equipment 2,752,114 231,684
Printing equipment 259,198 227,289
Furniture, fixtures and leasehold
improvements 188,099 48,800
Vehicles 40,525 32,866
----------- -----------
3,239,936 540,639
Less accumulated depreciation and
amortization (476,573) (320,808)
----------- -----------
Total property and equipment, net 2,763,363 219,831
----------- -----------
OTHER ASSETS 4,148 84,570
----------- -----------
$16,543,253 $1,631,445
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
Page 2 of 2
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
--------- ----------
CURRENT LIABILITIES:
Accounts payable $ 737,810 $ 225,617
Accrued liabilities 192,541 59,336
Other current liabilities 26,411 25,470
Current portion of notes payable 43,201 71,299
Notes payable to related parties 1,666 151,166
----------- -----------
Total current liabilities 1,001,629 532,888
----------- -----------
LONG-TERM NOTES PAYABLE - 25,332
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value;
2,500,000 shares authorized; no shares
issued - -
Common stock, $.0001 par value; 20,000,000
shares authorized; 8,085,407 and
5,539,953 shares outstanding, respectively 808 554
Additional paid-in capital 20,585,276 1,187,913
Stock subscriptions receivable (1,496,137) -
Accumulated deficit (3,548,323) (115,242)
----------- -----------
Total stockholders' equity 15,541,624 1,073,225
----------- -----------
$16,543,253 $1,631,445
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 4,256,887 $3,443,965 $3,017,805
----------- ----------- -----------
COST OF SALES:
Postage 1,580,484 1,360,976 1,133,710
Materials and printing 1,310,184 1,035,954 790,744
----------- ----------- -----------
Total cost of sales 2,890,668 2,396,930 1,924,454
----------- ----------- -----------
Gross margin 1,366,219 1,047,035 1,093,351
----------- ----------- -----------
OPERATING EXPENSES:
Research and development 1,565,718 560,915 89,250
General and administrative 1,094,375 268,765 456,039
Selling 700,429 466,181 440,236
Compensation expense related to
issuance of options by principal
stockholder 1,484,375 - -
----------- ----------- -----------
Total operating expenses 4,844,897 1,295,861 985,525
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (3,478,678) (248,826) 107,826
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 96,008 3,121 5,367
Interest expense (50,411) (21,685) (21,639)
----------- ----------- -----------
Total other income (expense), net 45,597 (18,564) (16,272)
----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (3,433,081) (267,390) 91,554
BENEFIT (PROVISION) FOR INCOME TAXES - 3,120 (28,556)
----------- ----------- -----------
NET (LOSS) INCOME $(3,433,081) $ (264,270) $ 62,998
=========== =========== ===========
NET (LOSS) INCOME PER COMMON SHARE $ (0.58) $ (0.06) $ 0.01
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES 5,917,491 4,713,028 4,282,299
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Stock Accumulated
Common Stock Paid-in Subscriptions Earnings
Shares Amount Capital Receivable (Deficit)
---------- ------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 4,242,026 $424 $ 252,576 $ - $ 86,030
Cash contribution
by a shareholder - - 6,912 - -
Issuance of common
stock for cash 82,719 8 39,262 - -
Conversion of amount
due to a shareholder - - 8,000 - -
Conversion of note payable
to a related party 40,300 4 19,996 - -
Net income - - - - 62,998
--------- ---- ----------- ----------- -----------
BALANCE, June 30, 1994 4,365,045 436 326,746 - 149,028
Issuance of common
stock for cash 223,622 23 168,477 - -
Issuance of common stock
upon merger with
Exchequer I, Inc. 471,952 47 (26,262) - -
Issuance of common stock
for notes receivable 479,334 48 718,952 - -
Net loss - - - - (264,270)
--------- ---- ----------- ----------- -----------
BALANCE, June 30, 1995 5,539,953 554 1,187,913 - (115,242)
Issuance of common stock
for cash, net of
offering costs of
$1,524,538 1,992,179 199 13,914,650 - -
Stock subscriptions, net
of commissions to be
paid of $166,238 214,500 21 1,496,116 (1,496,137) -
Exercise of stock warrants 321,775 32 2,493,724 - -
Issuance of options by
principal stockholder - - 1,484,375 - -
Exercise of stock options 17,000 2 8,498 - -
Net loss - - - - (3,433,081)
--------- ---- ----------- ----------- -----------
BALANCE, June 30, 1996 8,085,407 $808 $20,585,276 $(1,496,137) $(3,548,323)
========= ==== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $(3,433,081) $(264,270) $ 62,998
Compensation expense related to issuance
of options by principal stockholder 1,484,375 - -
Depreciation and amortization 165,596 92,139 76,846
Interest income added to note
receivable from related party - (5,000) -
Loss on asset dispositions 4,736 816 -
Changes in operating assets and liabilities-
Trade accounts receivable (52,182) 13,622 (99,918)
Inventory 24,949 3,451 (45,275)
Other assets 60,356 (15,875) (2,000)
Accounts payable 512,193 111,054 21,209
Accrued liabilities 133,205 9,604 21,019
Other current liabilities 941 (37,241) 55,818
Deferred income taxes - - (8,487)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (1,098,912) (91,700) 82,210
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,724,064) (142,956) (100,225)
Proceeds from sale of assets 10,200 - -
Increase in note receivable from officer - - (45,000)
----------- ----------- -----------
Net cash used in investing activities (2,713,864) (142,956) (145,225)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock and other contributed capital 16,417,105 93,701 46,182
Proceeds from borrowings 652,309 129,500 105,000
Principal payments on borrowings (855,239) (39,195) (107,790)
Collection of receivables from sale of
common stock 719,000 - -
----------- ----------- -----------
Net cash provided by financing activities 16,933,175 184,006 43,392
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 13,120,399 (50,650) (19,623)
CASH AT BEGINNING OF YEAR 39,005 89,655 109,278
----------- ----------- -----------
CASH AT END OF YEAR $13,159,404 $ 39,005 $ 89,655
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 56,942 $ 22,333 $ 18,049
Cash paid for income taxes - 27,848 9,022
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES (See Note 2)
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Organization and Principles of Consolidation
DataMark Systems, Inc. ("Systems") was incorporated under the laws of the State
of Nevada on April 29, 1987. DataMark Printing, Inc. ("Printing") was
incorporated under the laws of the State of Utah on March 23, 1992 by the then
existing shareholders of Systems to perform printing services for Systems.
DataMark Media, Inc. ("Media") was incorporated as a wholly-owned subsidiary of
Systems on October 3, 1994. Systems negotiated a plan of reorganization and
subscription agreement with the shareholders of Printing (who at the date of the
reorganization were owners of greater than 80 percent of the outstanding common
shares of Systems) whereby those shareholders transferred all of the outstanding
shares of common stock of Printing to Systems as an additional contribution to
capital in December 1994. No additional shares of the common stock of Systems
were issued in the transaction. The business combination of Systems and Printing
was accounted for as a reorganization of entities under common control.
Accordingly, the financial statements reflect the business combination at
historical cost in a manner similar to pooling-of-interests accounting. The
accompanying consolidated statements of operations, stockholders' equity and
cash flows include the combined operations of Systems and Printing for all
periods presented.
Exchequer I, Inc. ("Exchequer"), a publicly held Delaware corporation, was
incorporated May 16, 1985. On January 11, 1995, Systems consummated a merger
agreement with Exchequer whereby Systems became a wholly-owned subsidiary of
Exchequer, which changed its name to DataMark Holding, Inc. ("Holding"). The
shareholders of Systems received 2121.013 shares of Holding's common stock for
each share of Systems' common stock outstanding at the date of the merger.
Accordingly, the 2,132 shares of Systems' common stock were converted into
4,522,000 shares of Holding's common stock. The accompanying financial
statements have been restated to reflect the stock conversion for all periods
presented. The merger was accounted for as a reorganization with Systems being
considered the acquiring company for accounting purposes. Prior to the merger,
Holding had no assets, $26,215 of liabilities and 471,952 shares of common stock
issued and outstanding. The reorganization was accounted for by recording the
liabilities of Holding at the date of merger at their historical cost because
Exchequer had no operations and was a shell company. The operations of Holding
have been included in the accompanying consolidated financial statements from
the date of the merger. Operations of Holding were immaterial prior to the
merger; therefore, pro forma operating information is not presented.
Holding, Systems, Printing and Media are collectively referred to herein as the
Company. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Nature of Operations and Related Risks
The Company provides highly targeted business to consumer advertising for its
clients. The medium for such targeted advertising has been direct mail and is
being expanded to include an online network. The Company utilizes sophisticated
F-8
<PAGE>
consumer profiling techniques to target advertising to the persons most likely
to purchase the specific product or service being marketed. The Company's
advertising programs provide highly predictable and measurable advertising
campaigns.
In fiscal 1994, the Company began developing an advertiser funded national
online network ("ValuOne Online") and anticipates launching the service in early
1997. ValuOne Online will be the first interactive promotional national
marketing network which incorporates highly successful direct mail strategies
and methodologies. The Company intends to grow ValuOne Online very rapidly and,
as a result, a significant portion of the Company's growth prospects is
dependent upon the success of ValuOne Online. The Company has no operating
history for ValuOne Online upon which an evaluation of the Company's prospects
for the service can be based. The Company's prospects for the service must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of developing a business line,
particularly lines in new and rapidly evolving competitive markets. To address
these risks, the Company must, among other things, anticipate market needs;
respond to competitive developments; continue to attract, retain and motivate
qualified persons; and continue to upgrade its technologies and to commercialize
products and services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks or that the Company
will achieve or sustain profitability of ValuOne Online.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
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 these estimates.
Trade Accounts Receivable and Concentration of Credit Risk
The allowance for doubtful accounts at June 30, 1996 and 1995 was immaterial.
While the Company typically requires payment prior to mailing direct mail
products for customers, a portion of net sales are routinely made on credit to
institutional customers. Collateral is not generally required from these
customers.
Inventory
Inventory is valued at the lower of cost or market, with cost being determined
using the first-in first-out method. Inventory consists of the following:
June 30, June 30,
1996 1995
-------- ---------
Raw materials used in printing $ 52,555 $ 45,464
Completed direct mail
advertising products 30,417 62,457
-------- --------
$ 82,972 $107,921
======== ========
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when
incurred. Depreciation and amortization of property and equipment is computed
using primarily an accelerated method over the estimated useful lives of the
related assets which are as follows:
Vehicles 5 years
Printing equipment 5 years
Computer and office equipment 5 - 7 years
Furniture, fixtures and leasehold
improvements 5 - 10 years
Depreciation and amortization expense was $165,596, $92,139 and $76,846 for the
years ended June 30, 1996, 1995 and 1994, respectively.
F-9
<PAGE>
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net
income (loss).
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated balance sheets
for cash, accounts and notes receivable, and accounts payable approximate fair
values because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's long-term notes payable also
approximate fair value based on current rates for similar debt.
Revenue Recognition
Revenue from marketing services from customers and related product sales is
recognized at the time of mailing the products for the customers. Prepayments
from customers prior to shipment are accounted for as deferred revenue and are
included in other current liabilities.
Research and Development
Research and development costs incurred in the development of ValuOne Online
have been expensed as incurred.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. These deferred tax assets
or liabilities are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
Net Income (Loss) Per Common Share
Net income (loss) per common share is based on the weighted average number of
common and dilutive common equivalent shares outstanding during each year.
Common equivalent shares consist of the incremental common shares issuable upon
exercise of outstanding stock options and warrants that have a dilutive effect
when applying the treasury stock method. In years where losses are recorded,
common stock equivalents would decrease the loss per share and are therefore not
added to weighted average shares outstanding.
Supplemental Cash Flow Information
Noncash investing and financing activities consist of the following:
During the year ended June 30, 1996, the Company received subscription
agreements for the purchase of 214,500 shares of common stock at $7.75 per share
amounting to $1,496,137, net of commissions to be paid of $166,238, for which
payment has not yet been received (see Note 7).
During the year ended June 30, 1995, $50,000 of notes payable to a related party
were offset against a note receivable in the same amount from the same related
party. Also during the year ended June 30, 1995, 479,334 shares of common stock
were issued for subscriptions receivable totaling $719,000.
During the year ended June 30, 1994, $20,000 of notes payable to a related party
and $8,000 of accrued liabilities were converted to stockholders' equity. The
Company also executed a $65,000 note payable in connection with the purchase of
equipment.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued 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").
SFAS No. 121 is required to be adopted for fiscal year1996. The effect of
implementing SFAS No. 121 is not expected to be material to the Company's
consolidated financial position and results of operations when adopted.
F-10
<PAGE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company has determined that it will adopt
SFAS No. 123 on July 1, 1996. As allowed by SFAS No. 123, the Company will
continue to account for the cost of compensation from stock options and awards
based upon their intrinsic value on the date granted or awarded pursuant to
Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees. The Company will also provide pro forma results of operations as if
the compensation from granting stock options and awards was based on their fair
values. The adoption of SFAS No. 123 will have no material impact on the
financial statements of the Company.
Reclassifications
Certain minor reclassifications have been made to the fiscal year 1994 and
fiscal year 1995 consolidated financial statements to be consistent with the
fiscal year 1996 presentation.
(3) RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1994, the Company made cash loans to two officers
totaling $46,000, which were settled during the year ended June 30, 1995, except
for $1,000 which was outstanding at June 30, 1995 and 1996.
Prior to July 1, 1993, the Company had borrowed money from certain officers.
Additional borrowings of $50,000 and $129,500 were made during the years ended
June 30, 1996 and 1995, respectively. Principal payments on these notes were
$199,500, $2,152, and $10,907 during the years ended June 30, 1996, 1995 and
1994, respectively. The amounts due on these loans at June 30, 1996 and 1995
were $1,666 and $151,166, respectively, as further discussed in Note 4.
During the year ended June 30, 1996, the Company borrowed $500,000 from a bank
to fund computer equipment purchases. The loan was guaranteed by certain
officers and shareholders. In exchange for the guarantee, such persons received
a one year option to purchase 25,000 shares of common stock at $5.00 per share
(see Note 8).
(4) NOTES PAYABLE
Notes payable consist of the following:
June 30, June 30,
1996 1995
Notepayable to a bank; interest at
prime plus 2 percent (10.25 percent
at June 30, 1996); monthly payments of
$2,083 due through June 1997; secured by
certain equipment; guaranteed by certain
officers and shareholders $ 24,148 $ 45,912
Line-of-credit agreement with a bank;
interest at prime plus 2 percent (10.25
percent at June 30, 1996); due September
8, 1996 and not renewed, secured by
all inventory, chattel paper, accounts
and general intangibles; guaranteed by
an officer and shareholder 19,053 -
$100,000 line-of-credit agreement with a bank;
interest at prime plus 2 percent (11 percent
at June 30, 1995); paid in full during
fiscal year 1996 - 46,894
Other, paid in full during fiscal year 1996 - 3,825
-------- --------
Total notes payable 43,201 96,631
Less current portion (43,201) (71,299)
-------- --------
$ - $ 25,332
======== ========
F-11
<PAGE>
Notes payable to related parties consist of the following:
9 percent note payable to an officer,
due on demand, unsecured $ 1,666 $ 1,666
9 percent note payable to an officer,
due on demand, unsecured - 20,000
10 percent note payable to a director,
due on demand, unsecured - 116,000
10 percent note payable to an officer,
due on demand, unsecured - 13,500
-------- --------
$ 1,666 $151,166
======== ========
(5) INCOME TAXES
The components of the net deferred tax assets are as follows:
June 30, June 30,
1996 1995
Net operating loss carryforwards $790,300 $ 89,400
Reserves and accrued liabilities 21,600 -
Other - (1,400)
-------- --------
Total deferred tax assets 811,900 88,000
Valuation allowance (811,900) (88,000)
-------- --------
Net deferred tax asset $ - $ -
======== ========
As of June 30, 1996, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $2,171,000. For federal
income tax purposes, utilization of these carryforwards is limited if the
Company has had more than a 50 percent change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a change occurs in
the future. The tax net operating losses will expire beginning in 2009.
No benefit for income taxes has been recorded during the year ended June 30,
1996. As discussed in Note 1, certain risks exist with respect to the Company's
future profitability, and management has concluded that, due to these
uncertainties, the related deferred tax asset may not be realized. Accordingly,
a valuation allowance was recorded to offset the deferred tax asset.
The following presents the components of the benefit (provision) for income
taxes for the years ended June 30, 1995 and 1994:
1995 1994
-------- ------
Current:
Federal $ (598) $(30,747)
State (1,164) (6,296)
Deferred:
Federal 4,228 7,399
State 654 1,088
------- --------
Benefit (provision) for income taxes $ 3,120 $(28,556)
======= ========
Income taxes computed at the federal statutory rate of 34 percent are reconciled
to the actual income tax (provision) benefit as follows for the years ended June
30, 1995 and 1994:
F-12
<PAGE>
1995 1994
-------- ------
Income taxes at federal statutory
rate $ 90,913 $(31,128)
Difference due to graduated tax rates
5,896 6,525
Net operating loss carryback (16,533) -
Current net operating loss not utilized (75,569) -
State income tax, net of federal
benefit (336) (3,437)
Nondeductible expenses (1,251) (516)
-------- --------
Benefit (provision) for
income taxes $ 3,120 $(28,556)
======== ========
(6) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain office and warehouse facilities under noncancelable
operating lease agreements. Total rent expense under these operating leases for
the years ended June 30, 1996, 1995 and 1994 was $118,923, $53,435, and $49,077,
respectively. Future minimum lease payments required under the terms of the
operating lease agreements for the years ending June 30, 1997, 1998, 1999, 2000
and 2001 are $317,003, $309,903, $285,111, $231,894 and $98,196, respectively.
Marketing Commitment
As of June 30, 1996, the Company had entered into a representation agreement
with Katz Media Group, Inc. (Katz) to be the Company's sole representative and
sales agent for ValuOne Online. Under the agreement, the Company has agreed to
pay a specified commission rate and to fund up to $300,000 of costs to be
incurred by Katz in the initial advertising effort. Katz has agreed to achieve a
minimum level of gross billings for the ValuOne Online service during the
initial year of operations.
Purchase Commitments
As of June 30, 1996, the Company had entered into a pricing agreement with
Sprint Data Communications Products and Services to establish special prices and
minimum purchase commitments in connection with the use of communication
products for ValuOne Online. The Company has agreed to a minimum annual
commitment of $1,000,000 over a three-year period beginning six months after the
products and services are installed and available for the Company's use.
Legal Matters
The Company is the subject of certain minor legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these legal
matters will not have a material impact on the consolidated financial position,
liquidity or results of operations of the Company.
(7) CAPITAL TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $.0001 par
value preferred stock. As of June 30, 1996, no preferred stock was outstanding.
The Company's Board of Directors is authorized, without shareholder approval, to
fix the rights, preferences, privileges and restrictions of one or more series
out of the authorized shares of preferred stock.
Common Stock Issuances and Other Transactions
Prior to the reverse merger of Systems and Holding discussed in Note 1, Systems'
Board of Directors authorized private sales of restricted shares of Systems'
common stock and other equity transactions. During the year ended June 30, 1994,
Systems received a cash contribution to capital by a stockholder of $6,912 with
no additional shares being issued and an accrued liability to a shareholder of
$8,000 was converted to equity with no additional shares being issued. In
F-13
<PAGE>
addition, Systems sold 82,719 (post merger) shares of common stock for $39,270
of cash at a price of approximately $.47 per share and converted a note payable
for $20,000 to 40,300 (post merger) shares of common stock at a price of
approximately $.50 per share. During the year ended June 30, 1995, Systems sold
156,955 (post merger) shares for $68,500 of cash at a price of approximately
$.44 per share. Subsequent to the merger, Holding sold 66,667 shares of common
stock for $100,000 of cash at a price of $1.50 per share. Also, as of June 30,
1995, the Company had received stock subscription agreements from shareholders
to purchase an additional 479,334 shares for $719,000 at a price of $1.50 per
share. The amounts due under the subscription agreements were paid in fiscal
year 1996.
During the year ended June 30, 1996, the Company raised additional equity
capital through private placements of its common stock. Under the private
placements, the Company offered shares of restricted common stock at an offering
price of $7.75 per share on a best efforts basis by the officers of the Company.
The Company engaged finders to introduce potential investors to the Company. The
finders received a 10 percent commission and warrants to purchase 250,000 shares
of the Company's common stock at a price of $7.75 per share. In connection with
the private offerings, the Company sold 1,992,179 shares of common stock for
$13,914,849 in proceeds, net of offering costs of $1,524,538, and received
subscriptions for an additional 214,500 shares of common stock. The Company also
issued warrants to purchase up to 377,900 shares of the Company's common stock
at $7.75 per share to certain of the investors. During the year ended June 30,
1996, 321,775 of these warrants to purchase shares of the Company's common stock
were exercised. The remaining warrants to purchase 56,125 shares of common stock
and the finders' warrants to purchase 250,000 shares of common stock are
outstanding and exercisable as of June 30, 1996.
The Company also agreed with certain of the investors to use its best efforts to
register the shares purchased or subscribed and the warrants issued under the
Securities Act of 1933. The Company has filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission (the "SEC"). The stock
subscriptions receivable of $1,496,137 as of June 30, 1996 are not due and
payable to the Company until the Form S-1 Registration Statement has been
declared effective by the SEC.
(8) STOCK OPTIONS
In August 1993, Systems granted an option to an employee to purchase 150,592
(post merger) shares of common stock at $0.25 per share. These options expire on
June 30, 1999. During fiscal year 1996, the Company granted options to purchase
470,000 additional shares of common stock. Of these new grants, 100,000 options
were granted to officers who provided guarantees on certain debt of the Company
(see Note 3). These options are exercisable at $5.00 per share with an
expiration date of October 31, 1996. The remaining 370,000 options were granted
as consideration to certain individuals who provided services related to the
private stock offerings. These options are exercisable at prices ranging from
$7.75 and $9.00 per share for three years. As of June 30, 1996, 414,236 of the
above options were exercisable. The respective Boards of Directors of Holding
and Systems, have determined that all options have been granted at fair value at
the dates of grant.
Effective September 30, 1994, the Company established the Omnibus Stock Option
Plan (the "Plan") for employees and consultants. Options granted under the Plan
may be incentive stock options or nonqualified stock options. The maximum number
of shares which may be optioned and issued under the Plan is 780,532 shares of
common stock. Options to purchase 175,000 and 634,946 shares were granted under
the Plan during the years ended June 30, 1996 and 1995, respectively, and
options to purchase 341,323 shares were forfeited or canceled during the year
ended June 30, 1996. Total outstanding options under the plan at June 30, 1996
was 451,623 of which 72,235 were exercisable. Generally, the options granted
under the Plan vest within three years of the date granted. The options expire,
if not exercised, from October 30, 1996 through April 1, 2000.
F-14
<PAGE>
The following is a summary of all stock options for the years ended June 30,
1996, 1995 and 1994:
Options Outstanding
Number of Option Price
Shares Per Share
Balance at June 30, 1993 - $ -
Granted 150,592 0.25
--------- ----------
Balance at June 30, 1994 150,592 0.25
Granted 634,946 0.50-1.00
--------- ----------
Balance at June 30, 1995 785,538 0.25-1.00
Granted 645,000 5.00-9.00
Expired or canceled (341,323) .50-1.00
Exercised (17,000) .50
--------- ----------
Balance at June 30, 1996 1,072,215 $0.25-9.00
========= ==========
In June 1996, in connection with an employment agreement with an officer of
Media, a principal stockholder granted an option to the officer to purchase
237,500 shares of restricted common stock from the principal stockholder at
$1.50 per share. As discussed in Note 7, during the year the Company sold shares
of restricted common stock in a private placement at $7.75 per share;
accordingly, the Company recognized $1,484,375 of compensation expense related
to this transaction during the year ended June 30, 1996.
The two principal stockholders granted options to an employee during the year
ended June 30, 1995. The options allow the employee to purchase 150,000 shares
of common stock at $0.50 per share from the stockholders. The Company did not
recognize compensation expense from these options due to the market value of the
common stock being equal to the exercise price on the date the options were
granted.
(9) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of its
employees. All employees are eligible to participate and may elect to contribute
to the plan annually. The Company has no obligation to contribute and did not
contribute additional matching amounts to the Plan during any period presented.
(10) SEGMENT INFORMATION
The following summarizes the Company's operations and identifiable assets as of
and for the years ended June 30, 1996, 1995 and 1994 relating to its direct mail
marketing and computer online marketing segments. Development of the Company's
computer online promotional advertising and marketing products began during the
year ended June 30, 1994.
F-15
<PAGE>
<TABLE>
<CAPTION>
Corporate
Computer Interest
Direct Mail Online Income
Marketing Marketing (Expense) Total
------------- -------------- ------------- -------------
Year Ended June 30, 1996:
<S> <C> <C> <C> <C>
Net sales $4,256,887 $ - $ - $4,256,887
Income (loss) before
income taxes 245,331 (3,761,388) 82,976 (3,433,081)
Depreciation 78,768 86,828 - 165,596
Property and equipment
purchases 110,084 2,589,212 - 2,699,296
Identifiable assets at year-end
559,913 2,680,023 - 3,239,936
Year Ended June 30, 1995:
Net sales 3,443,965 - - 3,443,965
Income (loss) before
income taxes 347,015 (592,720) (21,685) (267,390)
Depreciation 71,258 20,881 - 92,139
Property and equipment
purchases 74,804 68,152 - 142,956
Identifiable assets at year-end
1,490,202 66,444 - 1,556,646
Year Ended June 30, 1994:
Net sales 3,017,805 - - 3,017,805
Income (loss) before
income taxes 242,937 (129,744) (21,639) 91,554
Depreciation 72,314 4,532 - 76,846
Property and equipment
purchases 142,566 22,659 - 165,225
Identifiable assets at year-end
862,708 21,785 - 884,493
</TABLE>
Sales to a major customer accounted for 10 percent and 12 percent of net sales
during the years ended June 30, 1995 and 1994, respectively. During the year
ended June 30, 1996, sales to no customer accounted for more than 10 percent of
net sales.
F-16
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DATAMARK HOLDING, INC.
Dated: October 10, 1996 By /s/ Chad Evans
Chad Evans, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------- --------------------- ---------------------
/s/ Chad Evans Principal Executive October 10, 1996
- -------------------- Officer and Director
Chad Evans
/s/ James A. Egide Principal Financial October 10, 1996
- -------------------- Officer and Director
James A. Egide
/s/ Stanton D. Jones Director October 10, 1996
- ---------------------
Stanton D. Jones
Director October __, 1996
- ----------------------
Ken Woolley
Director October __, 1996
- ----------------------
Scott Stone
/s/ Michael D. Bard
- ---------------------- Controller December 9, 1996
Michael D. Bard
-29-
DATAMARK HOLDING, INC.
Subsidiaries of the Registrant
The Company has three operating subsidiaries DataMark Systems, Inc.,
Datamark Media, Inc. and Datamark Printing, Inc. All are Nevada corporations and
are wholly owned (directly or through Datamark Systems, Inc.) by the Company.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 13,159,404
<SECURITIES> 0
<RECEIVABLES> 502,996
<ALLOWANCES> 0
<INVENTORY> 82,972
<CURRENT-ASSETS> 13,775,742
<PP&E> 3,239,936
<DEPRECIATION> 476,573
<TOTAL-ASSETS> 16,543,253
<CURRENT-LIABILITIES> 1,001,629
<BONDS> 0
0
0
<COMMON> 808
<OTHER-SE> 15,540,816
<TOTAL-LIABILITY-AND-EQUITY> 16,543,253
<SALES> 4,256,887
<TOTAL-REVENUES> 4,256,887
<CGS> 2,890,668
<TOTAL-COSTS> 7,735,565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,411
<INCOME-PRETAX> (4,433,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,433,081)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,433,081)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
