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 March 31, 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 May 9, 1997, 8,510,932 of the
Registrant's Common Shares were issued and outstanding.
<PAGE>
Page 1 of 2
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,234,578 $ 13,159,404
Trade accounts receivable, net 417,690 502,996
Inventory 156,305 82,972
Advances to employees 487,851 --
Note receivable from officer -- 1,000
Other current assets 66,829 29,370
------------ ------------
Total current assets 9,363,253 13,775,742
------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 5,331,393 2,752,114
Furniture, fixtures and leasehold
improvements 806,616 188,099
Printing equipment 433,710 259,198
Vehicles 40,525 40,525
------------ ------------
6,612,244 3,239,936
Less accumulated depreciation and
amortization (686,867) (476,573)
------------ ------------
Total property and equipment, net 5,925,377 2,763,363
------------ ------------
OTHER ASSETS 43,683 4,148
------------ ------------
$ 15,332,313 $ 16,543,253
============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
2
<PAGE>
Page 2 of 2
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
March 31, June 30,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 909,605 $ 737,810
Accrued liabilities 513,647 192,541
Notes payable 128,024 43,201
Other current liabilities - 26,411
Notes payable to related parties - 1,666
------------ ------------
Total current liabilities 1,551,276 1 ,001,629
------------ ------------
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, 8,510,932 and 8,085,407
shares outstanding, respectively
851 809
Additional paid-in capital 22,593,372 20,585,275
Stock subscription receivable - (1,496,137)
Accumulated deficit (8,813,186) (3,548,323)
------------ ------------
Total stockholders' equity 13,781,037 15,541,624
------------ ------------
$ 15,332,313 $ 16,543,253
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<CAPTION>
1997 1996
---- ----
NET SALES
<S> <C> <C>
Direct mail marketing $ 1,852,710 $ 939,539
Internet operations 219,226 --
----------- -----------
Total net sales 2,071,936 939,539
----------- -----------
COST OF SALES:
Postage 695,714 346,790
Materials and printing 628,777 315,659
Internet operations 153,595 --
----------- -----------
Total cost of sales 1,478,086 662,449
----------- -----------
GROSS MARGIN 593,850 277,090
----------- -----------
OPERATING COSTS AND EXPENSES:
Research and development 2,793,601 590,351
General and administrative 765,854 165,309
Selling 516,422 161,406
----------- -----------
Total operating costs and
expenses 4,075,877 917,066
----------- -----------
LOSS FROM OPERATIONS (3,482,027) (639,976)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 123,013 --
Interest expense (3,100) (24,587)
----------- -----------
Total other income (expense),
net 119,913 (24,587)
----------- -----------
NET LOSS $(3,362,114) $ (664,563)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.40) $ (0.12)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,479,376 5,719,953
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<CAPTION>
1997 1996
---- ----
NET SALES
<S> <C> <C>
Direct mail marketing $ 4,570,722 $ 2,949,610
Internet operations 219,226 --
----------- -----------
Total net sales 4,789,948 2,949,610
---------- -----------
COST OF SALES:
Postage 1,706,740 1,134,934
Materials and printing 1,535,015 881,509
Internet operations 153,595 --
----------- -----------
Total cost of sales 3,395,350 2,016,443
----------- -----------
GROSS MARGIN 1,394,598 933,167
----------- -----------
OPERATING COSTS AND EXPENSES:
Research and development 4,279,851 1,063,163
General and administrative 1,524,604 507,462
Selling 1,265,251 497,473
----------- -----------
Total operating costs and
expenses 7,069,706 2,068,098
----------- -----------
LOSS FROM OPERATIONS (5,675,108) (1,134,931)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 414,495 --
Interest expense (4,250) (40,203)
----------- -----------
Total other income (expense),
net 410,245 (40,203)
----------- -----------
NET LOSS $(5,264,863) $(1,175,134)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.64) $ (0.21)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,242,116 5,599,953
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (5,264,863) $ (1,175,134)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 210,294 161,730
Acquired research and development 1,674,721 --
Changes in operating assets and liabilities,
net of effects of acquisition:
Trade accounts receivable, net 117,518 118,436
Inventory 50,818 21,461
Advances to employees (487,851)
Other current assets (37,459) --
Other assets (39,535) (31,938)
Accounts payable (116,982) 374,912
Accrued liabilities 186,662 25,116
Deferred revenue -- (12,220)
Other current liabilities (26,411) --
------------ ------------
Net cash used in operating activities (3,733,088) (517,637)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,872,308) (753,718)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock
and other contributed capital 1,829,555 1,029,000
Proceeds from borrowings -- 651,290
Principal payments on borrowings (149,985) (116,815)
Payments for deferred offering costs -- (105,016)
Repayment of note receivable from officer 1,000 --
------------ ------------
Net cash provided by financing activities 1,680,570 1,458,459
------------ ------------
NET (DECREASE) INCREASE IN CASH (4,924,826) 187,104
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,159,404 39,005
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,234,578 $ 226,109
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements as of March 31, 1997, and
for the three and nine months ended March 31, 1997, and 1996, have been prepared
by the Company and are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation have been included, and consist only of normal
recurring adjustments. 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 year ended June 30, 1996. The results of operations for the
three and nine months ended March 31, 1997, are not necessarily indicative of
the results to be expected for the entire fiscal year ending June 30, 1997.
Certain previously reported amounts have been reclassified to conform to the
current period presentation. These reclassifications had no effect 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 were 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 has been allocated to purchased research and
development and expensed at the date of the acquisition. The assets acquired
consist of approximately $32,000 of trade accounts receivable, $124,000 of
inventory and $500,000 of computer and office equipment and the liabilities
assumed consist 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 statements of operations from
the date of acquisition.
The following pro forma information for the nine months ended March 31,
1997, and 1996 presents the results of operations as if the acquisition of
Sisna, Inc. had occurred at the beginning of each 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 the applicable period or of the results which may occur in the
future.
7
<PAGE>
Pro Forma Pro Forma
Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
Net sales $5,394,555 $4,880,975
Net loss (5,444,062) (1,388,890)
Net loss per common share (0.64) (0.23)
NOTE 3 - SEGMENT INFORMATION
Information regarding the Company's operations for the three months
ended March 31, 1997, relating to the direct mail marketing segment, the
computer on-line marketing segment and the Internet services segment, is as
follows:
<TABLE>
<CAPTION>
Computer Corporate
Direct Mail On-line Internet Interest
Marketing Marketing Services Income Total
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $1,852,710 $ - $ 219,226 $ - $2,071,936
Net income (loss) 190,688 ( 3,548,322) (127,493) 123,013 (3,362,114)
Depreciation and
amortization 25,736 20,044 25,036 - 70,816
Property and equipment
purchases 82,012 1,367,750 727 - 1,450,489
</TABLE>
Information regarding the Company's operations for the nine months
ended March 31, 1997, relating to the direct mail marketing segment, the
computer on-line marketing segment and the Internet services segment, is as
follows:
<TABLE>
<CAPTION>
Computer Corporate
Direct Mail On-line Internet Interest
Marketing Marketing Services Income Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $4,570,722 $ - $ 219,226 $ - $4,789,948
Net income (loss) 417,820 ( 5,969,685) (127,493) 414,495 (5,264,863)
Depreciation and
amortization 70,244 115,014 25,036 - 210,294
Property and equipment
purchases 196,466 2,675,115 727 - 2,872,308
Identifiable assets at
March 31, 1997 787,084 5,138,295 573,993 - 6,499,372
</TABLE>
8
<PAGE>
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 net
sales and the Company intends to continue to grow its direct mail business.
In fiscal year 1994, the Company began developing its own proprietary
advertiser and end-user funded national on-line network - WorldNow Online
(formerly named ValuOne Online). Since fiscal year 1994, the Company has devoted
significant resources towards the development of WorldNow Online and anticipates
the imminent launch of the service in the second quarter of calendar year 1997.
The Company believes that in the future the net sales from WorldNow Online
should surpass those of the direct mail business.
In January 1997, the Company acquired Sisna, Inc., ("Sisna") an
Internet service provider headquartered in Salt Lake City, Utah. The acquisition
has been accounted for as a purchase. The Company agreed to issued up to
325,0000 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 March 31, 1997, are included in the accompanying 1997 financial
statements.
The Company charges direct mailing 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 is no assurance that a postal rate
increase 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.
9
<PAGE>
Results of Operations
The following table sets forth certain financial data as a percentage
of net sales for the three months ended March 31, 1997, and 1996.
1997 1996
----- -----
Net sales:
Direct mail marketing 89.4% 100.0%
Internet operations 10.6 -
------ -----
Total net sales 100.0 100.0
----- -----
Cost of sales:
Postage 33.6 36.9
Materials and printing 30.3 33.6
Internet operations 7.4 -
------ ------
Total cost of sales 71.3 70.5
---- ----
Gross margin 28.7 29.5
----- -----
Operating costs and expenses:
Research and development 134.8 62.8
General and administrative 37.0 17.6
----
Selling 24.9 17.2
------ ----
Total operating costs and expenses 196.7 97.6
----- ----
Loss from operations (168.0) (68.1)
Total other income (expense), net 5.8 ( 2.6)
------ -------
Net loss (162.2%) (70.7%)
======== ========
The following table sets forth certain financial data as a percentage
of net sales for the nine months ended March 31, 1997, and 1996.
1997 1996
----- -----
Net sales:
Direct mail marketing 95.4% 100.0%
Internet operations 4.6 -
------- -------
Total net sales 100.0 100.0
----- -----
Cost of sales:
Postage 35.6 38.5
Materials and printing 32.1 29.9
Internet operations 3.2 -
------ -------
Total cost of sales 70.9 68.4
---- ----
Gross margin 29.1 31.6
----- ----
Operating costs and expenses:
Research and development 89.4 36.0
General and administrative 31.8 17.2
----
Selling 26.4 16.9
----- ----
Total costs and operating expenses 147.6 70.1
------ ----
Loss from operations (118.5) (38.5)
Total other income (expense), net 8.6 ( 1.3)
-------- -------
Net loss (109.9%) (39.8%)
======== ========
10
<PAGE>
Three Months Ended March 31, 1997, Compared with Three Months Ended March 31,
1996, and Nine Months Ended March 31, 1997, Compared with Nine Months Ended
March 31, 1996
Net Sales
Net sales for the three months ended March 31, 1997, increased by
120.5% to $2,071,936 from $939,539 for the three months ended March 31, 1996.
The increase in net sales from direct mail marketing resulted primarily from an
increase in the number of direct mail pieces mailed during the three months
ended March 31, 1997. The average price per piece mailed increased by 6.4% to
$.446 during the three months ended March 31, 1997, from $.419 during the three
months ended March 31, 1996. The acquisition of Sisna, Inc., during January
1997, resulted in net sales of $219,226 from Internet operations during the
three months ended March 31, 1997.
Net sales for the nine months ended March 31, 1997, increased by 62.4%
to $4,789,948 from $2,949,610 for the nine months ended March 31, 1996. Net
sales from the direct mail marketing segment account for $4,570,722 and
$2,949,610 of the net sales, respectively. Net sales growth resulted primarily
from an increase in the number of pieces mailed during the nine months ended
March 31, 1997. The average price per piece mailed increased by 7.3% to $.428
during the nine months ended March 31, 1997, from $.399 during the nine months
ended March 31, 1996. Also during the nine months ended March 31, 1997, the
Company began providing access to the Internet as a result of the Sisna, Inc.
acquisition.
Cost of Sales
Postage expense increased 100.6% to $695,714 during the three months
ended March 31, 1997, from $346,790 during the three months ended March 31,
1996. The increase was primarily attributable to a higher number of pieces
mailed during the three months ended March 31, 1997, than during the three
months ended March 31, 1996. Postage expense as a percentage of net sales
decreased to 33.6% during the three months ended March 31, 1997, from 36.9%
during the three months ended March 31, 1996. The decrease in postage expense as
a percentage of net sales was primarily attributable to the inclusion of
Internet sales in the total net sales. Postage expense as a percent of direct
mail advertising sales was 37.6% for the three months ended March 31, 1997, as
compared to 36.9% for the three months ended March 31, 1996. This increase was
primarily attributable to using more specialized mail patterns for direct mail
marketing for customers during the three months ended March 31, 1997, when
compared to the three months ended March 31, 1996.
These specialized mailing patterns cannot utilize the lowest bulk mail rates.
Postage expense increased 50.4% to $1,706,740 during the nine months
ended March 31, 1997, from $1,134,934 during the nine months ended March 31,
1996. The increase was primarily attributable to a higher number of pieces
mailed during the nine months ended March 31, 1997, than during the nine months
11
<PAGE>
ended March 31, 1996. Postage expense as a percentage of net sales decreased to
35.6% during the nine months ended March 31, 1997, from 38.5% during the nine
months ended March 31, 1996. The decrease in postage expense as a percentage of
net sales was attributable to an increase in sales prices charged by the Company
as well as the inclusion of Internet service sales in the year to date net
sales.
Materials and printing expense increased 99.2% to $628,777 during the
three months ended March 31, 1997, from $315,659 during the three months ended
March 31, 1996. The increase was primarily attributable to a higher number of
pieces mailed during the three months ended March 31, 1997, than during the
three months ended March 31, 1996. Materials and printing expense as a
percentage of sales decreased to 30.3% during the three months ended March 31,
1997, from 33.6% during the three months ended March 31, 1996. The decrease in
materials and printing expense as a percentage of net sales was primarily
attributable to the inclusion of Internet service sales during the three months
ended March 31, 1997.
Materials and printing expense increased 74.1% to $1,535,015 during the
nine months ended March 31, 1997, from $881,509 during the nine months ended
March 31, 1996. The increase was attributable to a higher number of pieces
mailed, higher paper costs and the delivery of more material dominant direct
mail products during the nine months ended March 31, 1997, than during the nine
months ended March 31, 1996. Materials and printing expense as a percentage of
sales increased to 32.1% during the nine months ended March 31, 1997, from 29.9%
during the nine months ended March 31, 1996. The increase in materials and
printing expense as a percentage of net sales was attributable to higher paper
costs and delivery of more material dominant direct mail products.
The cost of sales for Internet service operations was $153,595 or 70.1%
of Internet service revenue of $219,226.
Operating Expenses
Research and development costs related to WorldNow Online increased
373.2% to $2,793,601 during the three months ended March 31, 1997, from $590,351
during the three months ended March 31, 1996. In connection with the acquisition
of Sisna, Inc., the Company allocated the excess of the purchase price over the
estimated fair value of acquired assets less liabilities assume of $1,674,721 to
purchased research and development, which was expensed at the acquisition date.
Other research and development costs have increased due to increased levels of
activity and personnel associated with WorldNow Online.
Research and development costs related to WorldNow Online increased
302.6% to $4,279,851 during the nine months ended March 31, 1997, from
$1,063,163 during the nine months ended March 31, 1996. Research and development
costs have increased due to increased levels of activity and personnel
12
<PAGE>
associated with WorldNow Online and the purchase of research and development
related to Sisna, Inc. as discussed. The Company anticipates the imminent launch
of WorldNow Online during the second quarter of calendar year 1997.
General and administrative expense increased 363.3% to $765,854 during
the three months ended March 31, 1997, from $165,309 during the three months
ended March 31, 1996. General and administrative expense as a percentage of net
sales increased to 37.0% during the three months ended March 31, 1997 from 17.6%
during the three months ended March 31, 1996. The increase in general and
administrative expense as a 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 administrative costs associated with the
Internet service segment of the Company.
General and administrative expense increased 200.4% to $1,524,604
during the nine months ended March 31, 1997, from $507,462 during the nine
months ended March 31, 1996. General and administrative expense as a percentage
of net sales increased to 31.8% during the nine months ended March 31, 1997,
from 17.2% during the nine months ended March 31, 1996. The increase in general
and administrative expense as a 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 220.0% to $516,422 during the three months
ended March 31, 1997, from $161,406 during the three months ended March 31,
1996. Selling expense as a percentage of net sales increased to 24.9% during the
three months ended March 31, 1997, from 17.2% during the three months ended
March 31, 1996. The increase in selling expense as a percentage of net sales was
due to marketing and promotional expenses incurred in connection with the
WorldNow Online service.
Selling expense increased 154.3% to $1,265,251 during the nine months
ended March 31, 1997, from $497,473 during the nine months ended March 31, 1996.
Selling expense as a percentage of net sales increased to 26.4% during the nine
months ended March 31, 1997, from 16.9% during the nine months ended March 31,
1996. The increase in selling expense as a percentage of net sales was due to
marketing and promotional expenses incurred in connection with the WorldNow
Online service.
Segment Operating Results
Direct mail marketing net sales for the three months ended March 31,
1997, increased by 97.2% to $1,852,710 from $939,539 for the three months ended
March 31, 1996. Net income for the three months ended March 31, 1997, increased
by 692.3% to $190,688 from $24,068 for the three months ended March 31, 1996,
for this segment. Profits increased at a greater rate than revenue due to a
reduction of operating costs as a percent of sales during the three months ended
March 31, 1997, when compared to the three months ended March 31, 1996.
13
<PAGE>
Direct mail marketing net sales for the nine months ended March 31,
1997, increased by 55.0% to $4,570,722 from $2,949,610 for the nine months ended
March 31, 1996. Net income for the nine months ended March 31, 1997, increased
by 107.6% to $417,820 from $201,215 for the nine months ended March 31, 1996,
for this segment. Profits increased at a greater rate than net sales due to a
reduction of operating costs as a percent of sales.
The net loss from the computer online marketing segment increased to
$3,548,322 for the three months ended March 31, 1997, from $664,044 for the
three months ended March 31, 1996. The acquisition of Sisna, Inc. and the
immediate write-off of purchased research and development accounted for
$1,674,721 of the increase. The balance of the increase was due to continued
research and development efforts, the addition of administrative and support
staff, as well as related facilities costs, and marketing and promotional
expenses incurred in connection with the WorldNow Online service.
The net loss from the computer online marketing segment increased to
$5,969,685 for the nine months ended March 31, 1997, from $1,336,146 for the
nine months ended March 31, 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 marketing and promotional expenses
incurred in connection with the WorldNow Online service and the acquisition and
immediate write-off of research and development acquired with the acquisition of
Sisna, Inc.
The Internet operations segment incurred a loss of $127,493 on revenue
of $219,226 during the three months ended March 31, 1997.
Corporate interest income was $123,013 for the three months ended March
31, 1997. This interest was earned on the unexpended proceeds from the sale of
common stock in March 1996. For the three months ended March 31, 1996, the
Company incurred interest expense of $24,587.
Corporate interest income was $414,495 for the nine months ended March
31, 1997. This interest was earned on the unexpended proceeds from the sale of
common stock in March 1996. For the nine months ended March 31, 1996, the
Company incurred interest expense of $40,203.
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, the Company sold common stock in a private placement
to major institutions and other accredited investors (the "March 96 Placement").
14
<PAGE>
The Company completed the March 96 Placement, including the exercise of
warrants, for net proceeds of $16,408,605 during fiscal year 1996.
Operating activities used $3,733,088 of cash during the nine months
ended March 31, 1997, compared to $517,637 during the nine months ended March
31, 1996. The increase in cash flows used by operating activities during the
nine months ended March 31, 1997, as compared to 1996 was primarily attributable
to increased research and development, selling and other related costs
associated with WorldNow Online.
Cash flows used in investing activities were $2,872,308 and $753,718
during the nine months ended March 31, 1997, and 1996, respectively. This
increase in cash used for investing activities was primarily attributable to the
acquisition of computer equipment for WorldNow Online.
Cash flows provided by financing activities was $1,680,570 and
$1,458,459 during the nine months ended March 31, 1997, and 1996, respectively.
This increase in cash flows provided by financing activities was due to the
Company raising $1,829,555 through the issuance of common stock during the nine
months ended March 31, 1997, as compared to $1,029,000 during the nine months
ended March 31, 1996. During the nine months ended March 31, 1997, the Company
did not receive proceeds from borrowings. During the nine months ended March 31,
1996, the Company received net proceeds from borrowings of $651,290. In addition
the Company made principal payments against borrowings of $149,985 and $116,815
during the nine months ended March 31, 1997, and 1996, respectively. The Company
made payments of $105,016 for deferred offering costs during the nine months
ended March 31, 1996.
In May 1997, the Company agreed in principle to invest up to $1,000,000
in stage amounts over the next several months to obtain a minority interest in
an Internet e-mail software company. The investment is subject to completion of
due diligence, negotiation and preparation of definitive agreements, approval by
the Company's board of directors and other customary conditions. The Company
believes that the investment will provide the Company with access to software
and technology complementary to its WorldNow and Internet business segments.
It is anticipated that the Company will be required to spend an
additional $1,250,000 for costs associated with the WorldNow Online service
before its launch during the second quarter of calendar 1997. In addition, the
Company anticipates that it needs to expend approximately $4,500,000 more than
anticipated revenues during the 12 months following launch for expansion into
its second phase of the television affiliates' network program and additional
capital expenditures to support these new programs.
Management believes that the Company has sufficient cash and working
capital at March 31, 1997, to meet its normal operating requirements for the
following twelve months. Management also anticipates raising additional working
capital during the next twelve months to enable the company to take advantage of
strategic initiatives and for unanticipated costs or changes.
15
<PAGE>
Forward Looking Information
Statements regarding the Company's expectations as to future growth of
the direct mail business, future revenue from WorldNow Online, the expected
commencement date of WorldNow Online service 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) unanticipated technical problems could delay launch of WorldNow
Online, (ii) WorldNow Online has not generated revenues, and after its launch it
may not generate the level of users or advertisers currently anticipated, (iii)
the costs to market the WorldNow Online service to advertisers and users could
be substantially higher than anticipated, (iv) the online industry is rapidly
changing, and the Company may not have the technical or financial resources to
compete against existing online services or against services which are newly
introduced or modified, and (v) 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.
16
<PAGE>
Item 2 CHANGES IN SECURITIES
(c) During the quarter ended March 31, 1997, the Company sole the
following securities without registration under the Securities Act
of 1993 (the "Act):
(i) On January 8, 1997 the Company issued 325,000 shares of
its common stock to the shareholders of Sisna, Inc. (H&D
Investment Company, David Pollei, Martin Gomez and Jeffrey
Madison) in exchange for all of the outstanding shares of Sisna.
At the closing, 25,000 of the shares were placed in escrow pending
collection of Sisna trade accounts receivable. See note 2 to the
condensed consolidated financial statements. The issuance was an
offering to a limited number of sophisticated investors not
involving a public offering and was exempt from registration
pursuant to Section 4(2) of the Act.
(ii) On January 10, 1997 the Company issued 36,125 shares of
its common stock to the Trustees of the General Electric Pension
Trust for cash consideration of $7.75 per share. The shares were
issued on exercise of warrants which had been previously sold to
the purchaser. The issuance was an offering to a limited number of
accredited investors not involving a public offering and was
exempt from registration pursuant to Sections 4(2) and 4(6) of the
Act.
(iii) On January 24, 1997 the Company issued 12,000 shares of
its common stock to MicroSystems. The shares were issued in
consideration of a license to certain software from MicroSystems
and were valued at $8.00 per share. The issuance was an offering to
a single sophisticated investor not involving a public offering
and was exempt from registration pursuant to Section 4(2) of the
Act.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27.1
Those exhibits previously filed with the Securities
and Exchange Commission asrequired by Item 601 of
Regulation S-K, are incorporated herein by reference
in accordance with the provisions of Rule 12b-32.
(b) The Company filed Forms 8-K dated January 8, 1997, as amended on
March 21, 1997, reporting the acquisition of Sisna, Inc. No
financial statements were required to be filed with such Form.
17
<PAGE>
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: May 13, 1997 By /s/ Barry D. Kelly
---------------------------------
Barry D. Kelly
Chief Financial Officer
18
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