SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] 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
Check whether the registrant (1) has filed all reports required to be
filed by Sections 13 and 15(d) of the Exchange Act 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
--------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant has only one class of stock issued and outstanding which
is Common Stock with $.0001 par value. As of October 30, 1997, 8,605,767 of the
Registrant's Common Shares were issued and outstanding.
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, June 30,
1997 1997
---- ----
CURRENT ASSETS:
Cash $ 1,794,648 $ 4,952,274
Trade accounts receivable, net of allowance
for doubtful accounts of $61,000 795,437 668,743
Inventory 665,820 361,571
Other current assets 62,482 224,514
----------- -----------
Total current assets 3,318,387 6,207,102
----------- -----------
INVESTMENTS 750,000 -
----------- -----------
PROPERTY AND EQUIPMENT:
Computer and office equipment 5,886,443 5,807,690
Furniture, fixtures and leasehold
improvements 960,891 872,555
Printing equipment 479,747 479,635
Vehicles 40,525 40,525
----------- -----------
7,367,606 7,200,405
Less accumulated depreciation and
amortization (1,430,970) (1,045,066)
----------- -----------
Net property and equipment 5,936,636 6,155,339
----------- -----------
OTHER ASSETS 46,436 46,436
----------- -----------
$10,051,459 $12,408,877
=========== ===========
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
2
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1997 1997
---- ----
CURRENT LIABILITIES:
Accounts payable $ 1,260,357 $ 1,482,865
Accrued liabilities 857,322 896,905
Notes payable 20,340 128,024
Other current liabilities 75,000 75,000
----------- -----------
Total current liabilities 2,213,019 2,582,794
----------- -----------
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; 8,560,932 and 8,085,407
shares outstanding, respectively 856 856
Additional paid-in capital 22,714,366 22,714,366
Accumulated deficit (14,876,782) (12,889,139)
----------- -----------
Total stockholders' equity 7,838,440 9,826,083
----------- -----------
$10,051,459 $12,408,877
=========== ===========
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
NET SALES:
Direct mail marketing $ 2,546,836 $ 1,481,171
Computer online marketing 256,532 -
----------- -----------
Total sales 2,803,368 1,481,171
----------- -----------
COST OF SALES:
Postage 1,048,489 524,499
Materials and printing 707,442 514,266
Computer online operations 129,564 -
----------- -----------
Total cost of sales 1,885,495 1,038,765
----------- -----------
GROSS MARGIN 917,873 442,406
----------- -----------
OPERATING EXPENSES:
General and administrative 1,553,392 373,463
Selling 923,304 391,490
Research and development 473,350 679,447
----------- -----------
Total operating expenses 2,950,046 1,444,400
----------- -----------
LOSS FROM OPERATIONS (2,032,173) (1,001,994)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 45,597 162,643
Interest expense (1,067) (1,150)
----------- -----------
Net other income 44,530 161,493
----------- -----------
NET LOSS (1,987,643) $(840,501)
=========== ===========
NET LOSS PER COMMON SHARE $(0.23) $(0.10)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,560,932 8,110,407
=========== ===========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Increase (Decrease) in Cash
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,987,643) $ (840,501)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 385,904 65,709
Changes in operating assets and
liabilities, net of effect of
acquisition-
Trade accounts receivable (126,694) (185,190)
Inventory (304,249) 15,787
Other assets 162,031 (6,442)
Accounts payable (222,508) (314,792)
Accrued liabilities (39,583) 70,046
Other current liabilities - (26,413)
----------- ---------
Net cash used in operating activities (2,132,742) (1,221,796)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments (750,000) -
Purchase of property and equipment (167,201) (772,953)
----------- ---------
Net cash used in investing activities (917,201) (772,953)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock and other contributed capital - 39,750
Principal payments on borrowings (107,683) (24,113)
----------- ---------
Net cash provided by financing activities (107,683) 15,637
----------- ---------
NET DECREASE IN CASH (3,157,626) (1,979,112)
CASH AT BEGINNING OF PERIOD 4,952,274 13,159,404
----------- ---------
CASH AT END OF PERIOD $ 1,794,648 $11,180,292
=========== ===========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of September
30, 1997 and for the three months ended September 30, 1997 and 1996 are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation have been
included. The financial statements are condensed and, therefore, do not include
all disclosures normally required by generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997. The results of operations for the three
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the entire fiscal year ending June 30, 1998. Certain previously
reported amounts have been reclassified to conform to the current presentation.
These reclassifications had no affect on the previously reported net loss.
NOTE 2 - ACQUISITION
In January 1997, the Company acquired all of the outstanding shares of
common stock of Sisna, Inc. in exchange for 325,000 shares of the Company's
common stock, of which 25,000 shares are held in escrow pending the collection
of trade accounts receivable. The acquisition has been accounted for as a
purchase. The excess of the initial purchase price over the estimated fair value
of the acquired assets less liabilities assumed was approximately $1,675,000.
Due to the early stage of Sisna's technology development and commercialization,
the excess purchase price was allocated to purchased research and development
and expensed at the date of the acquisition. The assets acquired consisted of
approximately $32,000 of trade accounts receivable, $124,000 of inventory and
$500,000 of computer and office equipment and the liabilities assumed consisted
of approximately $289,000 of trade accounts payable, $233,000 of notes payable
and $134,000 of other accrued liabilities. The operations of Sisna, Inc. have
been included in the accompanying statement of operations for the three months
ended September 30, 1997.
The following pro forma information for the three months ended September
30, 1996 presents the results of operations as if the acquisition of Sisna, Inc.
had occurred at the beginning of that period. The pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made at the beginning of that
applicable period or of the results which may occur in the future.
6
<PAGE>
Pro Forma
Three Months Ended
September 30, 1996
------------------
(Unaudited)
Net sales $1,955,494
Loss from operations (1,162,889)
Net loss (1,001,396)
Net loss per common share (0.12)
NOTE 3 - SEGMENT INFORMATION
Segment information for the Company as of September 30, 1997 and for the
three months then ended, relating to the direct mail marketing business and the
computer on-line marketing business, is as follows:
<TABLE>
<CAPTION>
Corporate
Computer Interest Income
Direct Mail On-line Net of Interest
Marketing Marketing Expense Total
----------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Net sales $2,546,836 $ 256,532 $ - $2,803,368
Net income (loss) 167,429 (2,196,125) 41,053 (1,987,643)
Depreciation and
amortization 19,618 366,286 - 385,904
Property and equipment
purchases 114,537 52,664 - 167,201
Identifiable assets at
September 30, 1997 933,879 6,433,727 7,367,606
</TABLE>
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 marketing business has provided substantially all of the Company's
revenues and it intends to continue to grow its direct mail marketing business.
In fiscal 1994, the Company began developing its own proprietary
advertiser and end-user funded national online network, known as, WorldNow
Online (formerly named ValuOne Online). Since fiscal 1994, the Company has
7
<PAGE>
devoted significant resources towards the development of WorldNow Online and
launched this proprietary service in the fourth quarter of fiscal 1997.
In January 1997, the Company acquired Sisna, Inc. ("Sisna") an Internet
service provider headquartered in Salt Lake City, Utah. The acquisition was
accounted for as a purchase. The Company agreed to issue up to 325,000 shares
(25,000 of which are held in escrow pending the collection of trade accounts
receivable) of its common stock to acquire all of the outstanding shares of
common stock of Sisna. Sisna's results of operations for the three months ended
September 30, 1997 are included in the accompanying consolidated statement of
operations.
The Company 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. Although
management believes that a postal rate increase will not have a material
long-term effect on demand, there can be 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.
Results of Operations
The following table sets forth certain financial data as a percentage of
net sales for the three months ended September 30, 1997 and 1996.
1997 1996
Net sales:
Direct mail marketing 90.8% 100.0%
Computer online marketing 9.2 -
----- -----
100.0 100.0
----- -----
Cost of sales:
Postage 37.4 35.4
Materials and printing 25.3 34.7
Computer online operations 4.6 -
----- -----
67.3 70.1
----- -----
Gross margin 32.7 29.9
----- -----
Operating expenses:
General and administrative 55.4 25.2
Selling 32.9 26.4
Research and development 16.9 45.9
----- -----
105.2 97.5
----- -----
Loss from operations (72.5) (67.6)
----- -----
Other income, net 1.6 10.9
----- ----
Net loss (70.9)% (56.7)%
===== =====
8
<PAGE>
Three months ended September 30, 1997 compared with three months ended September
30, 1996
Net Sales
Net sales for the three months ended September 30, 1997 increased by
89.3% to $2,803,368 from $1,481,171 for the three months ended September 30,
1996. Net sales growth resulted primarily from a 65.4 % increase in the number
of pieces mailed, to approximately 5,848,000 pieces during the three months
ended September 30, 1997 from approximately 3,535,000 pieces during the three
months ended September 30, 1996. The average price per piece mailed increased by
3.8% to $.435 during the three months ended September 30, 1997 from $.419 during
the three months ended September 30, 1996. The acquisition of Sisna resulted in
net sales of $238,988 during the three months ended September 30, 1997. Net
sales from WorldNow Online during the three months ended September 30, 1997 were
minimal.
Cost of Sales
Postage expense increased 99.9% to $1,048,489 during the three months
ended September 30, 1997 from $524,499 for the three months ended September 30,
1996. The increase was primarily attributable to a higher number of pieces
mailed during the three months ended September 30, 1997 than during the three
months ended September 30, 1996. Postage expense as a percent of direct mail
marketing sales was 41.2% during the three months ended September 30, 1997 as
compared to 35.4% during the three months ended September 30, 1996. This
increase was primarily attributable to using more specialized mail patterns for
direct mail marketing for customers during the three months ended September
30,1997, when compared to the three months ended September 30, 1996.
Materials and printing expense increased 37.6% to $707,442 during the
three months ended September 30, 1997 from $514,266 during the three months
ended September 30, 1996. The increase was primarily attributable to a higher
number of pieces mailed during the three months ended September 30, 1997 than
during the three months ended September 30, 1996. Materials and printing expense
as a percentage of direct mail marketing sales decreased to 27.8% during the
three months ended September 30, 1997 from 34.7% during the three months ended
September 30, 1996. The decrease in materials and printing expense as a
percentage of net sales was primarily attributable to production efficiencies
attained in the Company's print shop.
Cost of sales for the computer online operations were $129,564 or 50.5%
of computer online marketing sales.
9
<PAGE>
Operating Expenses
Research and development costs decreased 30.3% to $473,350 during the
three months ended September 30, 1997 from $679,447 during the three months
ended September 30, 1996. Research and development costs as a percentage of net
sales decreased to 16.9% during the three months ended September 30, 1997 from
45.9% during the three months ended September 30, 1996. Research and development
costs have decreased due to reduced levels of activity currently required for
the development of WorldNow Online
General and administrative expense increased 315.9% to $1,553,392 during
the three months ended September 30, 1997 from $373,463 during the three months
ended September 30, 1996. General and administrative expense as a percentage of
net sales increased to 55.4% during the three months ended September 30, 1997
from 25.2% during the three months ended September 30, 1996. The increase in
general and administrative expense as percentage of net sales was due to the
addition of administrative and support staff, as well as increased related
facilities costs, associated with WorldNow Online and the addition of
administrative staff associated with the acquisition of the Internet service
provider business.
Selling expense increased 135.8% to $923,304 during the three months
ended September 30, 1997 from $391,490 during the three months ended September
30, 1996. Selling expense as a percentage of net sales increased to 32.9% during
the three months ended September 30, 1997 from 26.4% during the three months
ended September 30, 1996. The increase in selling expense as a percentage of net
sales was due to sales and marketing expenses incurred in connection with
WorldNow Online and an increase in sales staff associated with direct mail
marketing.
Segment Operating Results
Direct mail marketing net sales for the three months ended September
30, 1997, increased by 71.9% to $2,546,836 from $1,481,171 for the three months
ended September 30, 1996. Net sales growth resulted primarily from an increase
in the number of pieces mailed during the three months ended September 30, 1997.
Net income for the three months ended September 30, 1997 increased by 20.8% to
$167,429 from $138,639 for the three months ended September 30, 1996.
The net loss before income taxes from the computer online marketing
segment increased 95.8% to $2,196,125 for the three months ended September 30,
1997, from $1,121,668 for the three months ended September 30, 1996. This
increase was due to continued research and development efforts, the addition of
administrative and support staff, as well as related facilities costs, and sales
and marketing expenses incurred in connection with WorldNow Online.
Net Corporate interest income was $41,053 for the three months ended
September 30, 1997 and $142,528 for the three months ended September 30, 1996.
Liquidity and Capital Resources
10
<PAGE>
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 WorldNow 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 net proceeds of $16,408,605
during fiscal year 1997, including the exercise of warrants.
Operating activities consumed $2,132,742 during the three months ended
September 30, 1997 compared to $1,221,796 during the three months ended
September 30, 1996. The increase in cash consumed by operating activities during
the three months ended September 30, 1997 as compared to 1996 was primarily
attributable to increased costs associated with WorldNow Online.
Cash used in investing activities was $917,201 and $772,953 during the
three months ended September 30, 1997 and 1996, respectively. This increase in
cash used for investing activities was primarily attributable to the investment
in CommTouch, Ltd. of $750,000 and acquisition of equipment for $167,201during
the quarter ended September 30, 1997 as compared to the acquisition of $772,953
of equipment during the quarter ended September 30, 1997.
Cash used for principal repayments on loans was $107,683 during the
three months ended September 30, 1997. Cash provided by financing activities was
$15,637 during the three months ended September 30, 1996. This decrease in cash
provided by financing activities was due to the Company not raising funds
through the issuance of common stock in 1997 while loan repayments increased by
$83,570 during the three months ended September 30, 1997 as compared to the
three months ended September 30, 1996.
Management's current projections indicate that there will not be
sufficient cash flows from operating activities during fiscal year 1998 to
provide adequate working capital for the Company to implement its marketing
strategy for WorldNow Online. As of September 30, 1997, the Company had
$1,794,648 of cash and is attempting to obtain additional debt or equity
funding. If adequate funding is not available, the Company may be required to
revise its plans and reduce future expenditures. There can be no assurance that
the additional funding will be available or if available, that it will be
available on acceptable terms or in required amounts.
The Company has entered into a three year sale and leaseback agreement
which provided the Company with $3,000,000 in additional working capital during
October 1997. The Company was required to place $250,000 in escrow upon signing
this agreement and an additional $500,000 in escrow six months after the date of
the agreement.
11
<PAGE>
Forward Looking Information
Statements regarding the Company's expectations as to future growth of
the direct mail business, future revenue from WorldNow Online, and certain other
statements presented in the Form 10-Q constitute forward looking information
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
expectations. In addition to matters affecting the Company's industry generally,
factors which could cause actual results to differ from expectations include,
but are not limited to (i) WorldNow Online has only generated minimal revenues,
and it has not generated and may not generate the level of television station
affiliates, users or advertisers anticipated, (ii) the costs to market the
WorldNow Online service to television station affiliates, advertisers and users
could be substantially higher than anticipated, (iii) the online industry is
rapidly changing, and the Company may not have the technical or financial
resources to obtain sufficient television station affiliates and advertisers and
to generate sufficient Internet traffic in order to compete against existing
online services or against services which are newly introduced or modified, and
(iv) the direct mail business may not grow as anticipated due to competitive
factors, including postage and material price increases which make direct mail
uneconomical with other forms of advertising, and competition from other direct
mailers over which the Company may not have a competitive advantage.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27.1
SIGNATURES
Pursuant to the requirements 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.
Date: November 4 , 1997 By /s/ Michael D. Bard
------ -----------------------------------
Michael D. Bard
Chief Financial Officer
12
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