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 December 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)
448 E. Winchester Street, Suite 400
Salt Lake City, Utah 84107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(801) 268-2202
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 January 31, 1998, 8,593,767 of the
Registrant's Common Shares were issued and outstanding.
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,417,125 $ 4,952,274
Trade accounts receivable, net of allowance
for doubtful accounts of $61,000 940,024 668,743
Inventory 218,697 361,571
Other current assets 245,815 224,514
----------- -----------
Total current assets 3,821,661 6,207,102
----------- -----------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,036,403 5,807,690
Furniture, fixtures and leasehold
improvements 859,878 872,555
Printing equipment 681,111 479,635
Vehicles 11,466 40,525
----------- -----------
7,588,858 7,200,405
Less accumulated depreciation and
amortization (1,813,468) (1,045,066)
----------- -----------
Net property and equipment 5,775,390 6,155,339
----------- -----------
INVESTMENT 750,000 -
----------- -----------
OTHER ASSETS 51,139 46,436
----------- -----------
$10,398,190 $12,408,877
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
2
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,044,969 $ 1,482,865
Current portion of capital lease obligation 866,816 -
Accrued liabilities 616,079 896,905
Notes payable 17,597 128,024
Other current liabilities 75,000 75,000
----------- -----------
Total current liabilities 2,620,461 2,582,794
----------- -----------
CAPITAL LEASE OBLIGATION, net of current portion 1,658,495 -
----------- -----------
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; 8,605,767 and 8,560,932
shares outstanding, respectively 861 856
Additional paid-in capital 22,736,779 22,714,366
Accumulated deficit (16,618,406) (12,889,139)
----------- -----------
Total stockholders' equity 6,119,234 9,826,083
----------- -----------
$10,398,190 $12,408,877
=========== ===========
</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
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES:
Direct mail marketing $ 2,932,923 $ 1,236,841
Computer online marketing 174,668 -
----------- -----------
Total sales 3,107,591 1,236,841
----------- -----------
COST OF SALES:
Postage 1,139,085 486,527
Materials and printing 916,219 391,972
Computer online operations 212,577 -
----------- -----------
Total cost of sales 2,267,881 878,499
----------- -----------
GROSS MARGIN 839,710 358,342
----------- -----------
OPERATING EXPENSES:
General and administrative 1,539,168 385,287
Selling 653,218 357,339
Research and development 373,717 806,803
----------- -----------
Total operating expenses 2,566,103 1,549,429
----------- -----------
LOSS FROM OPERATIONS (1,726,393) (1,191,087)
----------- -----------
OTHER (EXPENSE) INCOME:
Interest and other income 45,524 128,839
Interest expense (60,755) -
----------- -----------
Net other (expense) income (15,231) 128,839
----------- -----------
NET LOSS $(1,741,624) $(1,062,248)
=========== ===========
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $(0.20) $(0.13)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 8,605,767 8,128,649
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES:
Direct mail marketing $ 5,479,759 $ 2,718,012
Computer online marketing 431,200 -
----------- -----------
Total sales 5,910,959 2,718,012
----------- -----------
COST OF SALES:
Postage 2,187,574 1,011,026
Materials and printing 1,623,661 906,238
Computer online operations 342,141 -
----------- -----------
Total cost of sales 4,153,376 1,917,264
----------- -----------
GROSS MARGIN 1,757,583 800,748
----------- -----------
OPERATING EXPENSES:
General and administrative 3,092,560 758,750
Selling 1,576,522 748,829
Research and development 847,067 1,486,250
----------- -----------
Total operating expenses 5,516,149 2,993,829
----------- -----------
LOSS FROM OPERATIONS (3,758,566) (2,193,081)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 91,121 291,482
Interest expense (61,822) (1,150)
----------- -----------
Other income, net 29,299 290,332
----------- -----------
NET LOSS $(3,729,267) $(1,902,749)
=========== ===========
BASIC AND DILUTED NET LOSS PER
COMMON SHARE
$(0.43) $(0.23)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 8,605,767 8,126,936
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
Increase (Decrease) in Cash
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,729,267) $(1,902,749)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 784,721 139,478
Loss on disposition of equipment 24,106 -
Changes in operating assets and liabilities, net of
effect of acquisition-
Trade accounts receivable (271,281) (44,208)
Inventory 142,874 25,523
Other current assets (21,301) (340,812)
Other assets (4,703) (36,781)
Accounts payable (437,896) (252,073)
Accrued liabilities (280,826) 70,682
Other current liabilities - (26,411)
----------- ---------
Net cash used in operating activities (3,793,573) (2,367,351)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investment (750,000) -
Purchase of property and equipment (449,816) (1,421,819)
Proceeds from sale of equipment 20,938 -
----------- ---------
Net cash used in investing activities (1,178,878) (1,421,819)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale and lease back of equipment 2,750,000 -
Principal payments on capital lease obligation (224,689) -
Principal payments on notes payable (110,427) (44,867)
Net proceeds from the exercise of common stock
options 22,418 53,450
----------- ---------
Net cash provided by financing activities 2,437,302 8,583
----------- ---------
NET DECREASE IN CASH (2,535,149) (3,780,587)
CASH AT BEGINNING OF PERIOD 4,952,274 13,159,404
----------- ---------
CASH AT END OF PERIOD $ 2,417,125 $9,378,817
=========== =========
</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 CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of December
31, 1997 and June 30, 1997 and for the three and six months ended December 31,
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 and six months ended December 31, 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 period presentation. These
reclassifications did not affect the previously reported net loss.
NOTE 2 - ACQUISITIONS
In January 1997, the Company acquired all of the outstanding shares of
common stock of Sisna, Inc. ("Sisna") 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 certain trade accounts receivable. The acquisition was accounted
for as a purchase. The excess of the 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, 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 have been
included in the accompanying statements of operations since the acquistion date
for the three and six months ended December 31, 1997.
7
<PAGE>
The following pro forma information for the three and six months ended December
31, 1996 presents the results of operations as if the acquisition of Sisna 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 that
applicable period or of the results which may occur in the future.
Pro Forma Pro Forma
Three Months Ended Six Months Ended
December 31, 1996 December 31, 1996
----------------- -----------------
(Unaudited) (Unaudited)
Net sales $1,367,125 $3,322,619
Loss from operations (1,202,308) (2,365,197)
Net loss (1,080,552) (2,081,948)
Basic net loss per common share (0.13) (0.25)
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. in exchange for shares of the Company's stock, in a transaction
that will be accounted for as a purchase. The shareholders' of Books Now, Inc.
received 100,000 shares of the Company's stock upon signing the agreement. The
shareholders' of Books Now, Inc. can receive a maximum of 87,500 additional
shares for each year for the next three years based on performance goals
established in the exchange agreement. The average of the bid and ask price for
the Company's stock on the date of exchange was $3.13.
NOTE 3 - EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings per Share" which became effective December 15, 1997, basic net income
per common share was computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
common share takes into consideration the dilutive effects of outstanding stock
options and warrants. Due to the Company's net loss position, the inclusion of
the common stock equivalents would decrease the net loss per share and therefore
have not been added to basic weighted average shares.
As of December 31, 1997 and 1996, the Company had 1,359,980 and 924,815
options and warrants to purchase shares of common stock outstanding,
respectively.
8
<PAGE>
NOTE 4 - SEGMENT INFORMATION
Segment information for the Company as of December 31, 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 Expense
Direct Mail Online Net of Interest
Marketing Marketing Income Total
--------- --------- ------ -----
<S> <C> <C> <C> <C>
Net sales $2,932,923 $ 174,668 $ - $3,107,591
Net income (loss) 60,835 (1,787,228) (15,231) (1,741,624)
Depreciation and
amortization 40,647 358,170 - 398,817
Property and equipment
purchases 40,124 242,491 - 282,615
</TABLE>
Segment information for the Company as of December 31, 1997 and for the
six 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 Online Net of Interest
Marketing Marketing Expense Total
--------- --------- ------- -----
<S> <C> <C> <C> <C>
Net sales $5,479,759 $ 431,200 $ - $5,910,959
Net income (loss) 228,264 (3,986,830) 29,299 (3,729,267)
Depreciation and
amortization 60,265 724,456 - 784,721
Property and equipment
purchases 154,661 295,155 - 449,816
Identifiable assets at
December 31, 1997 1,088,540 6,500,318 - 7,588,858
</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.
9
<PAGE>
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 devoted
significant resources towards the development of WorldNow Online and launched
this proprietary service in the fourth quarter of fiscal 1997. WorldNow Online
is attempting to create a national Internet-based network of local television
stations by signing affiliation agreements with television stations in major
television markets in the United States. By providing free web hosting services
and revenue opportunities to local television stations, WorldNow Online obtains
free television commercial advertising driving Internet traffic to the WorldNow
Online website. WorldNow Online provides and aggregates national content and
advertising for its local television station affiliates, who augment the
national content with highly relevant local content and advertising. Although
the Company believes it will sign affiliate agreements with television stations
in up to 100 markets, WorldNow Online has to date only signed affiliate
agreements with television stations in nineteen markets.
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 certain trade
accounts receivable) of its common stock to acquire all of the outstanding
shares of common stock of Sisna. Sisna's results of operations are included in
the accompanying consolidated statements of operations since the date of
acquisition.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. in exchange for a maximum of 362,500 shares of the Company's
common stock. 100,000 shares were issued at closing, and 262,500 shares are
subject to a three year earn-out based upon financial performance. The
acquisition will be accounted for as a purchase.
The Company charges fees for its direct mail operation 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.
10
<PAGE>
<TABLE>
Results of Operations
The following table sets forth certain summary financial data as a
percentage of total net sales for the three months ended December 31, 1997 and
1996.
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales:
Direct mail marketing 94.4% 100.0%
Computer online marketing 5.6 -
----- -----
100.0 100.0
----- -----
Cost of sales:
Postage 36.7 39.3
Materials and printing 29.5 31.7
Computer online operations 6.8 -
----- -----
73.0 71.0
----- -----
Gross margin 27.0 29.0
----- -----
Operating expenses:
General and administrative 49.6 31.2
Selling 21.0 28.9
Research and development 12.0 65.2
----
82.6 125.3
----- -----
Loss from operations (55.6) (96.3)
----- -----
Other (expense) income, net (0.4) 10.4
----- -----
Net loss (56.0)% (85.9)%
</TABLE>
<TABLE>
The following table sets forth certain summary financial data as a
percentage of total net sales for the six months ended December 31, 1997 and
1996.
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales:
Direct mail marketing 92.7% 100.0%
Computer online marketing 7.3 -
----- -----
100.0 100.0
----- -----
Cost of sales:
Postage 37.0 37.2
Materials and printing 27.5 33.3
Computer online operations 5.8 -
----- -----
70.3 70.5
----- -----
Gross margin 29.7 29.5
----- -----
Operating expenses:
General and administrative 52.3 27.9
Selling 26.7 27.6
Research and development 14.3 54.7
----- -----
93.3 110.2
----- -----
Loss from operations (63.6) (80.7)
----- -----
Other income, net 0.5 10.7
----- -----
Net loss (63.1)% (70.0)%
===== =====
</TABLE>
11
<PAGE>
Three months ended December 31, 1997 compared with three months ended December
31, 1996, and six months ended December 31, 1997 compared with six months ended
December 31, 1996
Net Sales
Net sales for the three months ended December 31, 1997 increased by
151.3% to $3,107,591 from $1,236,841 for the three months ended December 31,
1996. Net sales growth resulted primarily from a 131.2 % increase in the number
of pieces mailed, to approximately 6,820,000 pieces during the three months
ended December 31, 1997 from approximately 2,950,000 pieces during the three
months ended December 31, 1996. This increase in the number of pieces sold and
mailed is attributable to the increase in the sales staff. The average price per
piece mailed increased by 2.6% to $.430 during the three months ended December
31, 1997 from $.419 during the three months ended December 31, 1996. The
acquisition of Sisna resulted in net sales of $172,715 during the three months
ended December 31, 1997. Net sales from WorldNow Online during the three months
ended December 31, 1997 were minimal due to the delay in signing television
affiliates.
Net sales for the six months ended December 31, 1997 increased by
117.5% to $5,910,959 from $2,718,012 for the six months ended December 31, 1996.
Net sales growth resulted primarily from a 95.3% increase in the number of
pieces mailed, to approximately 12,668,000 pieces during the six months ended
December 31, 1997 from approximately 6,485,000 pieces during the six months
ended December 31, 1996. This increase in the number of pieces sold and mailed
is attributable to the increase in the sales staff. The average price per piece
mailed increased by 2.6% to $.430 during the six months ended December 31, 1997
from $.419 during the six months ended December 31, 1996. The acquisition of
Sisna resulted in net sales of $411,703 during the six months ended December 31,
1997. Net sales from WorldNow Online during the six months ended December 31,
1997 were minimal due to the delay in signing television affiliates.
Cost of Sales
Postage expense increased 134.1% to $1,139,085 during the three months
ended December 31, 1997 from $486,527 for the three months ended December 31,
1996. The increase was primarily attributable to a higher number of pieces
mailed during the three months ended December 31, 1997 than during the three
months ended December 31, 1996. Postage expense as a percent of direct mail
marketing sales was 38.8% during the three months ended December 31, 1997 as
compared to 39.3% during the three months ended December 31, 1996.
Postage expense increased 116.4% to $2,187,574 during the six months
ended December 31, 1997 from $1,011,026 for the six months ended December 31,
1996. The increase was primarily attributable to a higher number of pieces
mailed during the six months ended December 31, 1997 than during the six months
12
<PAGE>
ended December 31, 1996. Postage expense as a percent of direct mail marketing
sales was 39.9% during the six months ended December 31, 1997 as compared to
37.2% during the six months ended December 31, 1996. This increase was primarily
attributable to using more specialized mail patterns for direct mail marketing
for customers during the six months ended December 31, 1997, when compared to
the six months ended December 31, 1996.
Materials and printing expense increased 133.7% to $916,219 during the
three months ended December 31, 1997 from $391,972 during the three months ended
December 31, 1996. The increase was primarily attributable to a higher number of
pieces mailed during the three months ended December 31, 1997 than during the
three months ended December 31, 1996. Materials and printing expense as a
percentage of direct mail marketing sales decreased to 31.2% during the three
months ended December 31, 1997 from 31.7% during the three months ended December
31, 1996.
Materials and printing expense increased 79.2% to $1,623,661 during the
six months ended December 31, 1997 from $906,238 during the six months ended
December 31, 1996. The increase was primarily attributable to a higher number of
pieces mailed during the six months ended December 31, 1997 than during the six
months ended December 31, 1996. Materials and printing expense as a percentage
of direct mail marketing sales decreased to 29.6% during the six months ended
December 31, 1997 from 33.3% during the six months ended December 31, 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 during the three
months ended December 31, 1997 were $212,577 or 121.7% of computer online
marketing sales. Cost of sales for the computer online operations during the six
months ended December 31, 1997 were $342,141 or 79.3% of computer online
marketing sales. Cost of sales during the quarter ended December 31, 1997 were
greater than the net sales from computer online operations due to
telecommunications costs. Since December 31, 1997, telecommunications costs have
been reduced and are expected to be less than the associated net sales.
Operating Expenses
General and administrative expense increased 299.5% to $1,539,168
during the three months ended December 31, 1997 from $385,287 during the three
months ended December 31, 1996. General and administrative expense as a
percentage of net sales increased to 49.6% during the three months ended
December 31, 1997 from 31.2% during the three months ended December 31, 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, the
addition of administrative staff associated with the acquisition of the Internet
13
<PAGE>
service provider business and increased staff required to support the growth in
the direct mail marketing business.
General and administrative expense increased 307.6% to $3,092,560
during the six months ended December 31, 1997 from $758,750 during the six
months ended December 31, 1996. General and administrative expense as a
percentage of net sales increased to 52.3% during the six months ended December
31, 1997 from 27.9% during the six months ended December 31, 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, the addition of
administrative staff associated with the acquisition of the Internet service
provider business and increased staff required to support the growth in the
direct mail marketing business.
Selling expense increased 82.8% to $653,218 during the three months
ended December 31, 1997 from $357,339 during the three months ended December 31,
1996. The increase in selling expense was due to sales and marketing expenses
incurred in connection with WorldNow Online and an increase in sales staff
associated with direct mail marketing. Selling expense as a percentage of net
sales decreased to 21.0% during the three months ended December 31, 1997 from
28.9% during the three months ended December 31, 1996. The decrease in selling
expense as a percentage of net sales was due to increased net sales in the
direct mail marketing business.
Selling expense increased 110.5% to $1,576,522 during the six months
ended December 31, 1997 from $748,829 during the six months ended December 31,
1996. The increase in selling expense was due to sales and marketing expenses
incurred in connection with WorldNow Online and an increase in sales staff
associated with direct mail marketing. Selling expense as a percentage of net
sales decreased to 26.7% during the six months ended December 31, 1997 from
27.6% during the six months ended December 31, 1996. The decrease in selling
expense as a percentage of net sales was due to increased net sales.in the
direct mail marketing business
Research and development costs decreased 53.7% to $373,717 during the
three months ended December 31, 1997 from $806,803 during the three months ended
December 31, 1996. Research and development costs as a percentage of net sales
decreased to 12.0% during the three months ended December 31, 1997 from 65.2%
during the three months ended December 31, 1996. Research and development costs
have decreased due to reduced levels of activity currently required for the
development of WorldNow Online. To remain competitive, the Company must continue
to enhance and improve the responsiveness, functionality, features and content
of the WorldNow online main site.
Research and development costs decreased 43.0% to $847,067 during the
six months ended December 31, 1997 from $1,486,250 during the six months ended
December 31, 1996. Research and development costs as a percentage of net sales
decreased to 14.3% during the six months ended December 31, 1997 from 54.7%
14
<PAGE>
during the six months ended December 31, 1996. Research and development costs
have decreased due to reduced levels of activity currently required for the
development of WorldNow Online. To remain competitive, the Company must continue
to enchance and improve the responsiveness, functionality, features and content
of the WorldNow online main site.
Segment Operating Results
Direct mail marketing net sales for the three months ended
December 31, 1997 increased by 137.1% to $2,932,923 from $1,236,841 for the
three months ended December 31, 1996. Net sales growth resulted primarily from
an increase in the number of pieces mailed during the three months ended
December 31, 1997. Net income for the three months ended December 31, 1997
decreased by 31.3% to $60,835 from $88,493 for the three months ended December
31, 1996. Profits have decreased due to the cost of additional staff required to
support the current and future revenue growth.
Direct mail marketing net sales for the six months ended December 31,
1997 increased by 101.6% to $5,479,759 from $2,718,012 for the six months ended
December 31, 1996. Net sales growth resulted primarily from an increase in the
number of pieces mailed during the three months ended December 31, 1997. Net
income for the six months ended December 31, 1997 increased by 0.5% to $228,264
from $227,132 for the six months ended December 31, 1996. Profits have not
increased due to the cost of additional staff required to support the current
and future revenue growth.
The net loss before income taxes from the computer online marketing
segment increased 39.7% to $1,787,228 for the three months ended December 31,
1997, from $1,279,580 for the three months ended December 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 sales
and marketing expenses incurred in connection with WorldNow Online.
The net loss before income taxes from the computer online marketing
segment increased 64.7% to $3,986,830 for the six months ended December 31,
1997, from $2,421,363 for the six months ended December 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 sales
and marketing expenses incurred in connection with WorldNow Online.
Net corporate interest expense was $15,231 for the three months ended
December 31, 1997 due to interest payments on the capital lease obligation
offset by interest income earned on the cash balances. Interest income was
$128,839 for the three months ended December 31, 1996 due to higher average cash
balances.
Net Corporate interest income was $29,299 for the six months ended
December 31, 1997 due to interest earned on cash balances offset by interest
15
<PAGE>
payments on the capital lease obligation. Interest income earned on cash
balances was $290,332 for the six months ended December 31, 1996.
Liquidity and Capital Resources
Prior to calendar year 1996, the Company 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.
In October 1997, the Company entered into a three year sale and
leaseback agreement which provided the Company with $2,750,000,000 in additional
working capital. The Company was required to place $250,000 in escrow upon
signing this agreement and will be required to place an additional $500,000 in
escrow six months after the date of the agreement.
Operating activities used $3,793,573 during the six months ended
December 31, 1997 compared to $2,367,351 during the six months ended December
31, 1996. The increase in cash used by operating activities during the six
months ended December 31, 1997 as compared to 1996 was primarily attributable to
increased costs associated with WorldNow Online.
Cash used in investing activities was $1,178,878 and $1,421,819 during
the six months ended December 31, 1997 and 1996, respectively. During the six
months ended December 31, 1997, the Company's investing activities included the
investment in CommTouch, Ltd. of $750,000 and acquisition of equipment for
$449,816. During the six months ended December 31, 1996, the Company acquired
$1,421,819 of equipment.
Cash provided by financing activities was $2,437,302 during the six
months ended December 31, 1997 as compared to $8,583 during the six months ended
December 31, 1996. The increase in cash provided was attributable to the net
receipt of $2,750,000 from the sale leaseback agreement entered into in October
1997. This increase in cash provided during the six months ended December 31,
1997 was offset in part by principal repayments on the capital lease obligation
and other notes payable totaling $335,116.
Management projects that there will not be sufficient cash flows from
operating activities during fiscal year 1998 to provide capital for the Company
to implement its marketing strategy for WorldNow Online. As of December 31,
1997, the Company had $2,417,125 of cash. The Company is attempting to obtain
additional debt or equity funding and is considering the sale of certain
tangible and intangible assets as an alternative source of working capital. 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
16
<PAGE>
additional funding will be available or, if available, that it will be available
on acceptable terms or in required amounts.
Year 2000 Issue
The Company's systems are compliant with the Year 2000 issues. It
further expects that costs associated to achieve compliance with the Year 2000
issue with other entities with which the Company electronically interacts will
be minimal.
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
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: February 6, 1998 By /s/ Michael D. Bard
----- --------------------------
Michael D. Bard
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 2417125
<SECURITIES> 0
<RECEIVABLES> 940024
<ALLOWANCES> 61000
<INVENTORY> 218697
<CURRENT-ASSETS> 3821661
<PP&E> 7588858
<DEPRECIATION> 1813468
<TOTAL-ASSETS> 10398190
<CURRENT-LIABILITIES> 2620461
<BONDS> 1658495
0
0
<COMMON> 861
<OTHER-SE> 6118373
<TOTAL-LIABILITY-AND-EQUITY> 10398190
<SALES> 5910959
<TOTAL-REVENUES> 5910959
<CGS> 4153376
<TOTAL-COSTS> 9669525
<OTHER-EXPENSES> (91121)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61822
<INCOME-PRETAX> (3729267)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3729267)
<DISCONTINUED> (0)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3729267)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
