<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
DATAMARK HOLDING, INC.
- --------------------------------------------------------------------------------
(Name of the Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
COMMON STOCK, PAR VALUE $.0001 PER SHARE, OF DATAMARK HOLDING, INC.
("DMH COMMON STOCK")
---------------------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
4,659,080 DMH SHARES
---------------------------------------------------------------------------
3. Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
The filing fee of $9,702.20 is calculated in accordance with Rule
0.11(c)(1) under the Securities Exchange Act as follows: one-fiftieth of
one percent of the value of (1) the 4,659,080 shares of DataMark Holding,
Inc. ("DMH") shares of Common Stock to be exchanged in the Stock Exchange
Agreement, dated March 19, 1998, (the "Exchange") with a total value of
$39,310,987.50, determined in accordance with Rule 0.11(a) (4) under the
exchange Act by multiplying the 4,659,080 DMH shares of Common stock by
$8.4375, the average of the high and low sale prices of the DMH Common
Stock, as reported on the Nasdaq National Market on August 3, 1998; (2)
$7,700,000 in cash received by DMH upon the sale of DataMark Systems, Inc:
and (3) DMH's repurchase for $1,500,000 in cash of 1,800,000 shares of DMH
Common Stock from Chad L. Evans.
4. Proposed maximum aggregate value of transactions:
$48,510,987.50
--------------
5. Total fee paid:
$9,702.20
---------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
1. Amount Previously Paid:
...........................................................................
2. Form, Schedule or Registration Statement No.:
...........................................................................
3. Filing Party:
...........................................................................
4. Date Filed:
...........................................................................
<PAGE>
DATAMARK HOLDING, INC.
(d/b/a/ DIGITAL COURIER TECHNOLOGIES, INC.)
448 E. 6400 S., SUITE 400
SALT LAKE CITY, UTAH 84107
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 11, 1998
TO THE STOCKHOLDERS:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of DataMark Holding, Inc. (d/b/a Digital Courier
Technologies, Inc., and referred to herein as the "Company"), which will be held
at the Company's offices at 448 E. 6400 S., Suite 400, Salt Lake City, Utah, on
Friday, September 11, 1998, at 10:00 a.m. Mountain time, to consider and act
upon the following matters;
1. To authorize the issuance of 4,659,080 shares of the Company's Common
Stock (2,169,592 to nonaffiliates) in connection with the acquisition
by the Company of Digital Courier International, Inc., a Nevada
corporation ("Digital Courier") (the "Digital Courier Acquisition"). ;
2. If the Digital Courier Acquisition is approved by the Company's
Stockholders, to consider and vote upon a proposal to approve an
Amended and Restated Certificate of Incorporation of the Company to (a)
effect a change of the name of the Company to Digital Courier
Technologies, Inc. and (b) restate the Company's existing Certificate
of Incorporation, as amended, into a single document;
3. To ratify the strategic divestiture of the Company's direct mail
business through the sale by DataMark Systems, Inc. ("DMS"), a wholly-
owned subsidiary of the Company, of its assets to Focus Direct, Inc., a
Texas corporation for $7.7 million in cash (the "DMS Asset Sale");
4. To ratify the repurchase of 1,800,000 outstanding shares of the
Company's Common Stock from Chad L. Evans ("Mr. Evans") for $1.5
million (the "Evans Stock Repurchase"); and
5. To transact such other business as may properly come before the Special
Meeting or any adjournments of the Special Meeting.
The proposals and other related matters are more fully described in the
accompanying Proxy Statement.
The affirmative vote of the holders of a majority of the outstanding shares
of Company Common Stock entitled to vote at the Special Meeting is required to
(i) approve the Digital Courier Acquisition, (ii) approve the Amended and
Restated Certificate of Incorporation, (iii) ratify the DMS Asset Sale, and (iv)
ratify the Evans Stock Repurchase, , and
Only holders of record of Common Stock of the Company at the close of
business on August 3, 1998 will be entitled to notice of and to vote at the
Special Meeting and any adjournments of the Special Meeting.
<PAGE>
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING
REGARDLESS OF THE NUMBER OF SHARES YOU HOLD. YOU ARE INVITED TO ATTEND THE
SPECIAL MEETING IN PERSON, BUT WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE.
IF YOU DO ATTEND THE SPECIAL MEETING, YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY
AND VOTE YOUR SHARES IN PERSON.
By Order of the Board of Directors
/s/ James A. Egide
------------------
James A. Egide
Chairman of the Board
Salt Lake City, Utah
August 6, 1998
2
<PAGE>
DATAMARK HOLDING, INC.
___________________
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 11, 1998
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
DataMark Holding, Inc., a Delaware corporation ("DMH" or the "Company"), for use
at DMH's Special Meeting of Stockholders (the "Special Meeting") to be held on
Friday, September 11, 1998 at 10:00 a.m., Mountain Time, and at any adjournment
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Stockholders. The Special Meeting will be held at the
Company's offices at 448 East 6400 South, Suite 400, Salt Lake City, Utah 84107.
This Proxy Statement and the enclosed proxy card were mailed on or
about August 28, 1998 to all Stockholders entitled to vote at the Special
Meeting.
RECORD DATE
Only holders of record of DMH's Common Stock, par value $.0001 per
share (the "DMH Common Stock"), at the close of business on August 3 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting. As
of the Record Date, 8,419,471 shares of DMH's Common Stock were outstanding.
For information regarding security ownership by management and by the beneficial
owners of more than 5% of DMH's Common Stock, see "Security Ownership of Certain
Beneficial Owners and Management."
PROXIES; REVOCABILITY OF PROXIES
All shares entitled to vote and represented by properly executed
proxies received prior to the Special Meeting, and not revoked, will be voted at
the Special Meeting in accordance with the instructions indicated on those
proxies. If no instructions are indicated on a properly executed proxy, the
shares represented by that proxy will be voted as recommended by the Board of
Directors. If any other matters are properly presented for consideration at the
Special Meeting, the persons named in the enclosed proxy and acting thereunder
will have discretion to vote on those matters in accordance with their best
judgment. The Company does not currently anticipate that any other matters will
be raised at the Special Meeting.
A Stockholder may revoke any proxy given pursuant to this solicitation
at any time before it is voted by delivering to DMH's Corporate Secretary a
written notice of revocation or a duly executed proxy bearing a date later than
that of the previously submitted proxy, or by attending the Special Meeting and
voting in person.
VOTING AND SOLICITATION
Each Stockholder is entitled to one vote for each share of Common
Stock on all matters presented at the Special Meeting.
The cost of soliciting proxies will be borne by DMH. DMH may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their reasonable expenses in forwarding solicitation materials to
such beneficial owners. Proxies may also be solicited by certain of DMH's
directors, officers, and regular employees, without additional compensation,
personally or by telephone, telegram, letter or facsimile.
3
<PAGE>
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence at the Special Meeting, either in person or by proxy, of
the holders of a majority of the outstanding shares of Common Stock entitled to
vote shall constitute a quorum for the transaction of business. DMH intends to
include abstentions and broker non-votes as present or represented for purposes
of establishing a quorum for the transaction of business, but to exclude
abstentions and broker non-votes from the calculation of shares entitled to
vote.
4
<PAGE>
PROPOSAL NO. 1
AUTHORIZATION OF ISSUANCE OF 4,659,080 SHARES OF COMMON STOCK IN CONNECTION WITH
THE ACQUISITION OF DIGITAL COURIER
GENERAL
The Company has entered into a Stock Exchange Agreement with Digital Courier
(the "Exchange Agreement"), dated as of March 17, 1998. Pursuant to the Exchange
Agreement, the Company has agreed to issue 4,659,0890 shares of its common stock
(the "DMH Shares") to the shareholders of Digital Courier in exchange for all of
the issued and outstanding shares of Digital Courier (the "Digital Courier
Acquisition).
CONSIDERATION
At the Closing, the Company will exchange 4,659,080 shares of its common stock
for all of the outstanding shares of Common Stock of Digital Courier in a tax-
free exchange intended to qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code, as amended (the "Code").
BACKGROUND AND CONTACTS BETWEEN THE PARTIES
The original contact between the Company and Digital Courier was the result of
certain personal investments made by the Company's Chairman, James Egide. Mr.
Egide invested in Digital Courier in May, 1997. In May, 1997, R.J. Pittman,
Chief Executive Officer of Digital Courier, visited the Company's offices in
Salt Lake City at the invitation of Mr. Egide to evaluate certain of the
Company's software development projects as well as its data center. Over the
course of the succeeding six months, Mr. Egide frequently communicated with Mr.
Pittman regarding the Company's technology and software development
capabilities. Mr. Pittman was not paid for any advice given to Mr. Egide or to
the Company.
On January 22, 1998, Mr. Egide and Mitchell Edwards, Executive Vice President
and Chief Financial Officer of the Company, visited the offices of Digital
Courier in San Francisco to discuss ways in which Digital Courier could assist
the Company in its software development contracts. Alternative collaborative
structures were discussed, including a possible contractual relationship, joint
venture or strategic alliance.
Mr. Egide spoke frequently with Mr. Pittman during January and February 1998
regarding a possible collaborative relationship, and visited the offices of
Digital Courier on several occasions.
On February 9, 1998, Mr. Edwards and Stanton Jones, President of the
Company's WorldNow division, visited the offices of Digital Courier. Mr.
Edwards and Mr. Jones met with key management of Digital Courier and furthered
the discussions of a collaborative relationship. Mr. Edwards and Mr. Jones
identified certain software development capabilities in Digital Courier that
were critical to the success of the Company, capabilities which the Company had
not to date been able to find in Salt Lake City. It was concluded, after
informal discussions among members of the Board, that the software development
skills and track record of Digital Courier, combined with the technology
backbone of the Company, could together represent a formidable combination in
the fast-paced Internet industry. Negotiations as to the terms of a possible
combination began in earnest.
On February 13, 1998, the Company and Digital Courier signed a letter of
intent regarding an acquisition.
On March 11, 1998, Mr. Edwards, Mr. Jones and Michael Bard, Controller of the
Company, visited Digital Courier to conduct due diligence. Also in attendance
at the meetings was Mr. Egide. On March 17, 1998, the Company and Digital
Courier signed the Stock Exchange Agreement.
On March 19, Mr. Pittman visited the Company's offices in Salt Lake City to
conduct due diligence and to discuss certain features of the proposed
acquisition.
5
<PAGE>
Beginning March 24, 1998, the Company began to pay all expenses of Digital
Courier, including payroll, rent and certain capital expenditures. The advances
to Digital Courier are evidenced by promissory notes pending consummation of the
Digital Courier Acquisition.
On April 21, Mr. Pittman and certain software engineers of Digital Courier
visited the Company's offices to discuss synergies and formulate a plan of
action for the combined companies.
Mr. Egide visited the offices of Digital Courier frequently during the month
of April to discuss the joint business plan of the combined companies.
During the week of May 4, 1998, Mr. Edwards, Mr. Egide and Mr. Pittman
traveled to Dallas, Texas and New York City to consult with certain
institutional stockholders, investment banks and market makers of the Company's
stock.
During the week of May 15, 1998, Mr. Edwards traveled to San Francisco to
further strategize the integration of the Company with Digital Courier.
During the week of May 24, Mr. Edwards and Mr. Pittman traveled to Dulles,
Virginia to discuss a strategic alliance with a major online service.
DATAMARK HOLDING, INC.'S REASONS FOR THE STOCK EXCHANGE; RECOMMENDATION OF THE
BOARD
The DMH Board has approved and adopted the Exchange Agreement, believes that
the Digital Courier Acquisition is in the best interest of DMH and its
stockholders and unanimously recommends adoption of the Exchange Agreement by
the holders of DMH common stock at the special meeting. Mr. Egide abstained
from the DMH Board vote approving the Exchange Agreement because of a potential
conflict of interest.
At meetings held on March 6 and June 17, 1998, the DMH Board of Directors
considered the legal, financial and other terms of the Digital Courier
Acquisition.
The DMH Board concluded that the Digital Courier Acquisition is in the best
interest of DMH and its stockholders. In reaching its decision to enter into
and recommend the adoption of the Exchange Agreement, the DMH Board considered
the following material factors:
. The combined company would likely be in a position to provide a broad
spectrum of Internet products and solutions, with the technical backbone to
compete more successfully in the competitive industry.
. Digital Courier's market proven software development team and the high
quality internet products the team has
developed.
. DMH's need for a more experienced Internet software development team and the
belief that the Digital Courier software team has proven experience and
success in the software development market.
. Digital Courier is designing technology and products that could represent
revenue streams in a shorter time frame than many of the Company's current
projects. Given the cash position of the Company, the Board concluded that
such revenue streams would only enhance the Company's ability to fully
develop and bring to market its Internet-based commerce models.
. The combined company would likely possess larger scale and greater revenue-
source diversification within the internet industry.
. The combined company will likely possess greater managerial, operational and
financial resources.
. The combined company is expected to achieve certain administrative
efficiencies and eliminate certain duplicate functions.
6
<PAGE>
. The hardware and software expertise of the combined company would enable the
Company to compete on a technical basis with companies much larger in size.
. The combined financial resources of the two companies should permit the
combined entity to accelerate the development and expansion of new products
and services.
. The public stock distribution of the combined company will likely provide
shareholders of the combined company with increased liquidity and enhance the
market visibility of the combined entity.
. The combined company's projected financial condition and results of
operations (after giving effect to the exchange) will likely be stronger than
that of the Company alone.
The DMH Board also considered the following potentially negative material
factors in its deliberations concerning the exchange: (i) the risk that the
benefit sought to be achieved in the exchange would not be achieved and (ii)
that the time to develop the Company's and Digital Courier's products and
services could be longer than anticipated, creating a need for additional
working capital. After reviewing these potentially negative factors, the DMH
Board concluded that they were outweighed by the positive factors described
above and accordingly determined that the exchange is fair to, and in the best
interests of, DMH and its stockholders.
In view of the variety of factors considered by the DMH Board in connection
with its evaluation of the Digital Courier Acquisition, the DMH Board did not
find it practical to, and did not, quantify or otherwise assign relative weights
to such factors.
The DMH Board unanimously concluded, in light of these factors, that the
Digital Courier Acquisition is fair to and in the best interest of DMH and its
stockholders. Mr. Egide abstained from voting in connection with the Exchange
Agreement because of a potential conflict of interest.
INTERESTS OF CERTAIN PERSONS IN THE DIGITAL COURIER ACQUISITION; CONFLICTS OF
INTEREST
In considering the Digital Courier Acquisition, holders of shares of DMH
Common Stock should be aware of the interests certain officers and directors of
the Company have in the Digital Courier Acquisition that are in addition to the
interests of DMH stockholders generally. The Company's Board of Directors has
considered these interests, among other matters, in approving the Exchange
Agreement and the Digital Courier Acquisition.
Employment Agreements. Upon completion of the Digital Courier Acquisition,
Mr. Pittman will have agreed to enter into Employment Agreement, pursuant to
which, among other things, he agrees that he will not compete with the business
of DMH or Digital Courier for one year after termination of their employment
with the Company. Following the Digital Courier Acquisition, the Company will
pay Mr. Pittman an annual salary of $180,000.
James A. Egide. Mr. Egide serves as Chairman of the Board of the Company,
and is also a shareholder of Digital Courier. Mr. Egide introduced Digital
Courier to the Company, although he abstained from the vote of the Board of
Directors approving the Exchange. James A. Egide currently owns 1,288,489
shares of DMH Common Stock or approximately 15.3% of the total outstanding
shares of DMH. Upon the acquisition of Digital Courier, Mr. Egide will acquire
an additional 498,895 shares of DMH Common Stock. After the acquistion Mr.
Egide will own approximately 13.7% of the total outstanding shares of DMH.
Raymond J. Pittman. Mr. Pittman serves as Chief Executive Officer and a
board member of the Company, and is also the Chief Executive Officer and a
shareholder of Digital Courier. Mr. Pittman did not serve as an officer or
board member of the Company when Board of Directors approved the Exchange. Upon
acquisition of Digital Courier International, Inc., Mr. Pittman will own
1,990,593 or approximately 15.2% of the total outstanding shares of DMH Common
Stock.
Indemnification and Insurance. Pursuant to the Exchange Agreement, the
Company agreed that, after the closing of the Digital Courier Acquisition (`the
Closing"), it will provide certain indemnification and liability insurance
benefits to certain indemnified parties, including directors and officers of
Digital Courier. See "The
7
<PAGE>
Exchange Agreement--Indemnification and Insurance."
DIGITAL COURIER ACQUISITION CONSIDERATION
At the Closing of the Digital Courier Acquisition, each share of Digital
Courier Common Stock issued and outstanding immediately prior to the Closing
will be exchanged for 4.99 shares of DMH Common Stock.
ANTICIPATED ACCOUNTING TREATMENT
The Digital Courier Acquisition will be accounted for by DMH under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. Therefore, the aggregate consideration paid by DMH in connection
with the Digital Courier Acquisition will be allocated to Digital Courier's
identifiable assets and liabilities based on their fair market values with the
excess being allocated between in process research and development and goodwill.
Management of DMH estimates that approximately 90 percent of the excess purchase
price will be allocated to in process research and development and will be
expensed in the period the Digital Courier Acquistiont is consummated. The
assets and liabilities and results of operations of Digital Courier will be
consolidated with the assets and liabilities and results of operations of DMH
subsequent to the Closing. As a result of this acquisition there will be a non-
cash charge to earnings during the year ending June 30, 1999 of approximately
$11,800,000.
PLANS FOR DIGITAL COURIER AFTER THE ACQUISITION
After the Digital Courier Acquisition, Digital Courier will be a wholly-owned
subsidiary of the Company. The Company does not have any present plans or
proposals which relate to or would result in an extraordinary corporate
transaction, such as a merger, reorganization or liquidation, involving Digital
Courier, a sale or transfer of a material amount of assets of Digital Courier or
any of its subsidiaries or any other material changes in Digital Courier's
business.
SOURCE AND AMOUNT OF FUNDS AND OTHER CONSIDERATION
4,659,080 shares of DMH Common Stock will be issued at the Closing of the
Exchange Agreement in connection with the Digital Courier Acquisition. . It is
expected that approximately $75,000 will be required to pay the expenses of DMH
in connection with the Digital Courier Acquisition, all of which will be
furnished from available general funds of DMH. It is currently expected that
approximately $50,000 will be required to pay the expenses of Digital Courier
related to the Digital Courier Acquisition, which amount will be furnished from
available general funds of DMH. See "THE EXCHANGE AGREEMENT--Expenses."
BLUE SKY LAWS
As of the date of this Proxy Statement, DMH intends to register or qualify the
shares of DMH Common Stock offered by this Proxy Statement under the securities
laws of all states where it is not exempt. Certain states require notice
filings or other filings. DMH either has complied with these filing
requirements or intends to comply with them in a timely fashion.
NO APPRAISAL RIGHTS
Section 262 of the Delaware General Corporation Law ("DGCL") provides
appraisal rights (sometimes referred to as "dissenters' rights") to stockholders
of Delaware corporations in certain situations. However, Section 262 appraisal
rights are not available to stockholders of a corporation, such as DMH, (a)
whose securities are listed on a national securities exchange or are designated
as a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. ("NASD") and (b) whose
stockholders are not required to accept in exchange for their stock anything
other than stock of another corporation listed on a national securities exchange
or an interdealer quotation system by the NASD and cash in lieu of fractional
shares. Because DMH Common Stock is traded on such a system, The Nasdaq
National Market, holders of DMH will not have appraisal rights with respect to
the Exchange.
8
<PAGE>
THE EXCHANGE AGREEMENT
The following is a brief summary of certain material provisions of the
Exchange Agreement not summarized elsewhere in this Proxy Statement. The
summary is qualified in all respects by reference to the complete text of the
Exchange Agreement, which is incorporated by reference in its entirety and
attached to this Proxy Statement as Annex I. Terms that are not otherwise
defined in this summary or elsewhere in this Proxy Statement have the meanings
set forth in the Exchange Agreement. All stockholders are urged to read the
Exchange Agreement in its entirety.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Exchange Agreement contains certain representations and warranties of
Digital Courier with respect to Digital Courier as to, among other things: (i)
due organization, valid existence and good standing; (ii) the completeness and
correctness of organizational documents; (iii) Digital Courier's capital
structure; (iv) Digital Courier's power and authority to execute and deliver the
Exchange Agreement, to perform its obligations thereunder and to consummate the
Digital Courier Acquisition; (v) the absence, other than as disclosed, of any
conflict between the execution and performance of the Exchange Agreement and
Digital Courier's organizational documents, applicable law and certain
contracts; (vi) the absence of any required consent or permit of, or filing with
any governmental or regulatory authority, except as provided in the Exchange
Agreement; (vii) the absence of material adverse changes or events; (viii) the
absence of material pending or threatened litigation against Digital Courier;
(ix) Digital Courier's labor relations; (x) title to and adequacy of Digital
Courier's assets; (xi) Digital Courier's right to use intellectual property;
(xii) certain tax matters and the payment of taxes; (xiii) certain environmental
matters; (xiv) the existence, legality and effect of material contracts; (xv)
Digital Courier's insurance coverage; (xvi) the accuracy of information supplied
to DMH by Digital Courier; and (xvii) except as disclosed, the absence of
transactions between Digital Courier and related parties.
The Exchange Agreement also contains certain representations and warranties of
DMH as to, among other things: (i) due organization, valid existence and good
standing; (ii) the completeness and correctness of organizational documents;
(iii) the authority and validity of the DMH Common stock to be issued in the
Digital Courier Acquisition; (iv) the power and authority of DMH to execute and
deliver the Exchange Agreement, to perform their obligations thereunder and to
consummate the Digital Courier Acquisition; (v) compliance with law; (vi)
availability of DMH's SEC filings; and (vii) that DMH acquired the Digital
Courier Shares for its own account for investment purposes.
INDEMNIFICATION AND INSURANCE
In the Exchange Agreement, Digital Courier and DMH have agreed that until June
30, 1999 (i) Digital Courier, subject to certain limitations contained in the
Exchange Agreement, will indemnify and hold harmless DMH and its successors and
assigns against and in respect of certain damages and actions incurred in
connection with the Exchange Agreement and (ii) DMH, subject to certain
limitations contained in the Exchange Agreement, will indemnify and hold
harmless Digital Courier and its successors and assigns against and in respect
of certain damages and actions incurred in connection with the Exchange
Agreement. Neither DMH nor Digital Courier shall be liable for any claim under
the Exchange Agreement to the extent such claim is paid by any insurer.
RESTRICTED STOCK
The shares of DMH Common Stock to be issued in the Digital Courier Acquisition
are to be restricted shares.
CONDITIONS TO CONSUMMATION OF THE DIGITAL COURIER ACQUISITION
. COMPLIANCE: DMH and Digital Courier shall be in compliance with all
applicable laws, including without limitation, federal and state securities
laws;
. NO PROCEEDINGS: No action or proceeding against Digital courier or DMH
shall have been instituted before a court or other governmental body, or
shall have been threatened which, if
9
<PAGE>
successful, will prohibit the consummation or require substantial
rescission of the transactions contemplated by the Exchange Agreement;
. STOCKHOLDER APPROVAL: Approval of the Exchange Agreement and all of the
transactions contemplated thereby by a majority of the voted shares of (a)
DMH Common Stock and (b) Digital Courier Common Stock;
. FINANCIAL CONDITION: Since the date of the Financial Statements, as defined
in the Exchange Agreement, provided to DMH, there shall have been no change
in the financial condition, business or properties of Digital Courier which
adversely affects the conduct of its business as presently being conducted
or the condition, financial or otherwise, of Digital Courier and no
additional substantial liabilities of Digital Courier shall have been
incurred;
. COMPLIANCE WITH OBLIGATIONS: Digital Courier and DMH having performed in
all material respects all of their obligations required to be performed by
them at or prior to the Effective Time, and Digital Courier and DMH having
received a certificate signed by an executive officer to such effect; and
. REPRESENTATIONS AND WARRANTIES TRUE; CONSENTS: Each of the representations
and warranties of Digital Courier and DMH set forth in the Exchange
Agreement having been true and correct when made and on and as of the
Closing Date of the Exchange as if made on and as of such date.
NON-DISCLOSURE AND NON-COMPETE
The Exchange Agreement provides that each seller of Digital Courier will keep
all proprietary information, as defined in the Exchange Agreement, relating to
Digital Courier in confidence and trust, and will not use or disclose any of
such proprietary information without the prior written consent of Digital
Courier, except as may be necessary to perform any duties such shareholder may
now or hereafter have as an employee of Digital Courier or except as required by
law. In addition, certain shareholders of Digital Courier have agreed that for
the period of their employment with Digital Courier, and for a period of two
years thereafter, such shareholders will not, directly or indirectly,
individually or in concert with others, as promoter, shareholder, officer,
director, employee, agent, representative, independent contractor or otherwise
compete with Digital Courier or DMH in any jurisdiction or marketing area in
which Digital Courier or DMH are doing business.
TERMINATION; AMENDMENT; CHANGE IN CONTROL
The Exchange Agreement may be terminated at any time prior to the Effective
Time by DMH, Digital Courier, or the shareholders of Digital Courier upon
written notice to the other parties in the following instances:
. Representations, warranties and agreements or conditions of the Exchange
Agreement to be complied with or performed by Digital Courier or the
shareholders of Digital Courier (in the case of DMH) or DMH (in the case of
Digital Courier or the shareholders of Digital Courier) on or before the
Effective Time shall not have been complied with or performed in some
material respect and such material non-compliance or non-performance shall
not have been waived by the party giving notice of termination or shall not
have been cured by the defaulting party, or cure thereof commenced and
diligently prosecuted thereafter by such party within three (3) business
days after written notice of such material non-compliance or non-
performance is given by the non-defaulting party;
. If any governmental action is commenced to prevent the consummation of the
transaction contemplated thereby; or
. By mutual consent of the parties.
10
<PAGE>
In the event of a Change in Control, as defined in the Exchange Agreement,
the number of DMH shares issuable according to the DMH stock price set forth in
the Exchange Agreement, shall automatically accelerate, such that the number of
DMH shares corresponding to the actual or effective price per share paid in the
Change in Control shall be issued in connection with such Change in Control.
EXPENSES
Except as described above, each party is responsible for the expenses that
it incurs in connection with the Digital Courier Acquisition.
THE DMH BOARD OF DIRECTORS HAS APPROVED THE EXCHANGE AGREEMENT AND
RECOMMENDS THAT THE HOLDERS OF DMH COMMON STOCK VOTE FOR THE ISSUANCE OF UP TO
4,659,080 SHARES OF COMMON STOCK IN CONNECTION WITH THE DIGITAL COURIER
ACQUISITION.
11
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
RELATING TO
PROPOSAL NUMBER 1 - AUTHORIZATION OF ISSUANCE OF 4,659,080 SHARES OF COMMON
STOCK IN CONNECTION WITH THE ACQUISITION OF
DIGITAL COURIER INTERNATIONAL, INC. BY THE COMPANY
AND
PROPOSAL NUMBER 4 - RATIFICATION OF REPURCHASE OF SHARES
The following unaudited pro forma condensed consolidated financial data is
based upon the historical consolidated financial statements of DataMark Holding,
Inc. and subsidiaries ("DataMark") as adjusted to give effect to the issuance of
common stock in connection with the acquistion of Digital Courier International,
Inc. by the Company (see Proposal No. 1) and the repurchase of 1,800,000 shares
of common stock for $1,500,000 (see Proposal No. 4) and. (Proposal No. 1) as if
the transactions had occurred on March 31, 1998, for purposes of the unaudited
pro forma condensed consolidated balance sheet and July 1, 1996 for purposes of
the unaudited pro forma condensed consolidated statements of operations for the
year ended June 30, 1997 and for the nine months ended March 31, 1998.
The pro forma adjustments are based upon information set out in this
document and its attachments and information from the Company's books and
records that management of the Company believes are reasonable and accurate.
The unaudited pro forma condensed consolidated balance sheet as of March 31,
1998 and the unaudited pro forma condensed consolidated statements of operations
for the year ended June 30, 1997 and the nine months ended March 31, 1998, are
not necessarily indicative of the results of operations of DataMark, or its
financial position, had the sale actually occurred on March 31, 1998 or July 1,
1996. The unaudited pro forma results of operations of DataMark for the nine
months ended March 31, 1998 are not necessarily indicative of the results of
operations that may be generated for the entire fiscal 1998 year. The unaudited
pro forma adjustments are described in the accompanying notes to unaudited pro
forma condensed consolidated financial data.
This unaudited pro forma condensed consolidated financial data should be
read in conjunction with the consolidated financial statements of DataMark and
the related notes thereto, included herein as of and for the fiscal year ended
June 30, 1997 and for the nine months ended March 31, 1998.
12
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
Historical
Historical Digital Pro Forma
DataMark Courier Adjustments Pro Forma
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 6,946,635 $ 13,936 $ (1,500,000) (a) $ 5,460,571
Trade accounts receivable, net 1,449 56,219 57,668
Inventory 10,291 10,291
Other current assets 516,302 3,500 - 519,802
------------ ------------ ------------ ------------
Total current assets 7,474,677 73,655 (1,500,000) 6,048,332
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 5,992,855 137,404 6,130,259
Furniture, fixtures and leasehold
improvements 737,965 - - 737,965
------------ ----------- ------------ ------------
6,730,820 137,404 6,868,224
Less accumulated depreciation
and amortization (1,603,457) (11,490) - (1,614,947)
------------ ------------ ------------ ------------
Net property and equipment 5,127,363 125,914 - 5,253,277
------------ ------------ ------------ ------------
INVESTMENT 750,000 750,000
OTHER ASSETS 1,243,220 20,500 1,309,719 (b) 2,573,439
------------ ------------ ------------ ------------
Total assets $ 14,595,260 $ 220,069 $ (190,281) $ 14,625,048
============ ============ ============ ============
CURRENT LIABILITIES:
Accounts payable $ 166,493 $ 235,314 $ - $ 401,807
Current portion of capital lease
obligation 960,777 960,777
Accrued liabilities 471,361 61,523 532,884
Other current liabilities 33,000 - - 33,000
------------ ------------ ------------ ------------
Total current liabilities 1,631,631 296,837 - 1,928,468
------------ ------------ ------------ ------------
CAPITAL LEASE OBLIGATION, net of current
portion 1,359,877 - - 1,359,877
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 883 934 (934) (b)
466 (c) 1,349
Treasury stock - - (1,500,000) (a) (1,500,000)
Additional paid-in capital 22,595,286 1,042,925 (1,042,925) (b)
13,044,958 (c) 35,640,244
Stock subscription receivable - (25,000) (25,000)
Accumulated deficit (10,992,417) ( 1,095,627) 1,095,627 (b)
- - (11,787,473) (c) (22,779,890)
------------ ------------ ------------ ------------
Total stockholders' equity 11,603,752 (76,768) (190,281) 11,336,703
------------ ------------ ------------ ------------
Total liabilities and stockholders' $ 14,595,260 $ 220,069 $ (190,281) $ 14,625,048
equity ============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
13
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Historical
Historical Digital Pro Forma
DataMark Courier Adjustments Pro Forma
----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 8,812 $ - $ - $ 8,812
COST OF SALES 492 - - 492
----------- ---------- ------------ ------------
Gross margin 8,320 - - 8,320
----------- ---------- ------------ ------------
OPERATING EXPENSES:
Research and development 4,364,252 627 11,787,473 (c) 16,152,352
General and administrative 1,400,916 261,944 (d) 1,662.860
Selling 1,897,664 - - 1,897,664
----------- ---------- ------------ ------------
Total operating expenses 7,662,832 627 12,049,417 19,712,876
----------- ---------- ------------ ------------
OPERATING LOSS (7,654,512) (627) (12,049,417) (19,704,556)
----------- ---------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 496,365 496,365
Interest expense (704) - - (704)
----------- ---------- ------------ ------------
Other income, net 495,661 - - 495,661
----------- ---------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (7,158,851)
BEFORE INCOME TAXES (627) (12,049,417) (19,208,895)
INCOME TAX BENEFIT - - - -
----------- ---------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (7,158,851) (627) (12,049,417) (19,208,895)
----------- ---------- ------------ ------------
DISCONTINUED OPERATIONS:
Income from operations of discontinued
direct mail marketing subsidiary, net of
income tax provision of $180,263 300,438 300,438
Loss from operations of discontinued
Internet service provider subsidiary, net of
income tax benefit of $180,263 (2,482,403) - - (2,482,403)
----------- ---------- ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (2,181,965) - - (2,181,965)
----------- ---------- ------------ ------------
NET LOSS $(9,340,816) $ (627) $(12,049,417) $(21,390,860)
=========== ========== ============ ============
NET LOSS PER COMMON SHARE (Basic
and Diluted):
Loss from continuing operations $(0.86) $ (1.72)
Net loss $(1.12) $ (1.92)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Basic and diluted) 8,309,467 2,859,080 (e) 11,168,547
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Historical Historical Proforma
DataMark Digital Courier Adjustments Pro Forma
------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 405,158 $ 96,895 $ - $ 502,053
COST OF SALES 323,201 39,432 - 362,633
----------- ----------- ---------- -----------
Gross margin 81,957 57,463 - 139,420
----------- ----------- ---------- -----------
OPERATING EXPENSES:
Research and development 1,301,285 540,112 1,841,397
General and administrative 2,881,136 611,351 196,458 (f) 3,688,945
Selling 1,167,222 - - 1,167,222
----------- ----------- ---------- -----------
Total operating expenses 5,349,643 1 ,151,463 196,458 6,697,564
----------- ----------- ---------- -----------
OPERATING LOSS (5,267,686) (1,094,000) (196,458) (6,558,144)
----------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 115,823 115,823
Interest expense (108,746) - - (108,746)
----------- ----------- ---------- -----------
Other income, net 7,077 - - 7,077
----------- ----------- ---------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (5,260,609) (1,094,000) (196,458) (6,551,067)
INCOME TAX BENEFIT (PROVISION) 2,684,000 (1,000) - 2,683,000
----------- ----------- ---------- -----------
LOSS FROM CONTINUING OPERATIONS (2,576,609) (1,095,000) (196,458) (3,868,067)
----------- ----------- ---------- -----------
DISCONTINUED OPERATIONS:
Income from operations of discontinued
direct mail marketing subsidiary, net of
income tax provision of $159,404 111,377 111,377
Gain on sale of direct mail marketing
subsidiary, net of income tax provision of
$2,636,831 4,394,717 4,394,717
Loss from operations of discontinued
Internet service provider subsidiary, net of
income tax benefit of $159,404 (265,674) (265,674)
Gain on sale of Internet service provider,
net of income tax provision of $139,746 232,911 232,911
----------- -----------
INCOME FROM DISCONTINUED
OPERATIONS 4,473,331 - - 4,473,331
----------- ----------- ---------- -----------
NET INCOME (LOSS) $ 1,896,722 $(1,095,000) $ (196,458) $ 605.264
=========== =========== ========== ===========
NET INCOME (LOSS) PER COMMON
SHARE :
Loss from continuing operations:
Basic $ (0.30) $ (0.34)
Diluted $ (0.29) $ (0.33)
Net Income:
Basic 0.22 0.05
Diluted 0.21 0.05
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 8,660,717 2,859,080 (e) 11,519,797
Diluted 8,862,132 2,859,080 (e) 11,721,212
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
15
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
DESCRIPTION OF THE TRANSACTIONS
- -------------------------------
These accompanying financial statements assume that the Company acquired all
of Digital Courier's Common Stock in exchange for 4,659,080 shares of common
stock as described in proposal no. 1 and the Company repurchased 1,800,000
shares of common stock for $1,500,000 as described in proposal no. 4.
(1) BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance sheet has
been prepared assuming that the repurchase of common stock (proposal no. 4) and
the acquisition of Digital Courier (proposal no. 1) occurred on March 31, 1998.
The unaudited pro forma condensed consolidated statements of operations have
been prepared assuming that these transactions had occurred on July 1, 1996, the
first day of the Company's most recent fiscal year.
(2) PRO FORMA ADJUSTMENTS
(a) Adjustment to record the repurchase of (1,800,000) shares of common stock
from Chad Evans for $1,500,000 in cash.
(b) Adjustment to eliminate equity of Digital Courier International, Inc.
(c) Adjustment to record the issuance of 4,659,080 shares of common stock to
acquire Digital Courier and to record the allocation of the purchase
price as follows:
<TABLE>
<S> <C>
Estimated fair value of common
shares issued $13,045,424
Add: Liabilities assumed 296,837
Less: Tangible assets acquired (245,069)
-----------
Excess purchase price 13,097,192
Less: Acquired in process research
and development 11,787,473
-----------
Goodwill $ 1,309,719
===========
</TABLE>
(d) Adjustment to record goodwill amortization on $1,309,719 over a five year
life for 1 year: ($1,309,719 x 20% = $261,944).
(e) Adjustment to reflect increase in weighted average common shares
outstanding for loss per share calculations as follows:
<TABLE>
<S> <C>
Shares issued to acquire
Digital Courier 4,659,080
Shares repurchased 1,800,000
---------
Net increase in weighted
average number of shares
outstanding 2,859,080
=========
</TABLE>
(f) Adjustment to record goodwill amortization on $1,309,719 over a five year
life for 9 months: ($1,309,719 x 20% x 9/12 = $196,458).
16
<PAGE>
DATAMARK HOLDING, INC.
(d/b/a DIGITAL COURIER TECHNOLOGIES, INC.)
SUMMARY
DataMark Holding, Inc. (currently doing business as "Digital Courier
Technologies, Inc.," and referred to herein as "DMH" or the "Company") was
incorporated under the laws of the State of Delaware on May 16, 1985. The
Company is an Internet services company. Through its sophisticated technology
and software and its unique business strategy, the Company engages in e-commerce
and provides complex Internet content development, packaging and distribution
for Internet portals and websites. In addition to e-commerce and complex web
hosting from its data center, the Company has created virtual content and
commerce products that can be branded and used by existing Internet portals,
websites and Internet communities. Its main product offerings are Videos Now
(TM), WeatherLabs(TM) and Books Now(TM).
The Company was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
The Company recruited an experienced management and technical team to design and
implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, the Company acquired an Internet access business and entered
into strategic alliances with companies in the electronic mail ("email")
business. The Company formed a division to create a network of interconnected
Web communities to be promoted by local television station affiliates. The
Company's VideosNow(TM), WeatherLabs(TM) and Books Now(TM), divisions have
developed Internet transaction and information products that are elegant, robust
and scalable across multiple platforms and which can be branded by the Company's
customers and used on their websites. The Company believes that numerous
revenue opportunities for its divisions exist in the rapidly expanding Internet
industry.
The Company's combined strengths of advanced technology and experience in
industries in which it is creating sophisticated Internet products give it a
competitive edge in creating viable transaction and e-commerce opportunities on
the Internet.
INTERNET STRATEGY
GENERAL
The Company provides sophisticated transactional products and solutions for
the Internet. In addition to e-commerce products and complex web hosting from
its data center, the Company has created virtual content and commerce products
that can be branded and used by existing Internet portals, websites and Internet
communities. Its three principal divisions are WeatherLabs(TM), VideosNow(TM)
and Books Now(TM). The proposed acquisition of Digital Courier adds leading
Internet software development and transaction processing and clearing technology
which will give the Company a competitive advantage in the fast-paced Internet
commerce industry.
17
<PAGE>
THE TECHNOLOGY
The Company's computer facility is a state-of-the-art data center which
supports the content products and services offered by the Company over the
Internet. It has duplicate systems in place for power, network, environment,
and fire suppression.
The computer center is divided into two basic areas. In the first area are
four HP 9000-series servers. Three of the four are HP K420 class servers with 4
processors and 1 GB RAM each, while the other is an HP T520 with 10 processors
and 4 GB of RAM. In addition to the servers, there are two high-speed
integrated disk arrays of 40 and 418 GB.
In addition to the HOP UNIX servers, there are 25 rack-mounted NT servers.
Each has 128 MB Ram, 4 GB SCSI drives, redundant network connections, and dual
power supplies.
The entire collection of servers is backed up by an EMC system running on a
Sun Sparc 1000 server.
The facility is currently wired to accept up to OC12 fiber from a service
provider. This data feed is run through a Cisco 7513 router via dual ATM
circuits to a Fore ASX-1000 Backbone Switch. From there the signal is split
into FDDI signals, and the ES-3810 ATM to ethernet switches.
The entire internal network runs on several separate systems depending on how
they are configured. A dual-homed 155 MB/s ATM system runs from a main ATM
switch to the Hewlett Packard ("HP") 9000 servers and backup unit. In addition
there is a FDDI ring between the HP 9000 servers and the main switching and
routing gear. Standard switched ethernet also connects from the main switches
to the entire data center.
The power systems include redundant power conditioning units from United Power
which operate on two power feeds for the data center. If both of these fail,
dual UPS systems will be triggered automatically (either carriers provide
sufficient capacity for the entire data center). If the power outage is long-
term, there is a backup generator with sufficient fuel for approximately one
week of sustained use.
Fire suppression systems include a standard automatic high-pressure Halon
system with a variety of heat and particulate-based detection systems. In
addition to the Halon, there is a standard dry-pipe system for emergency use.
Environmental control is centered on two HVAC units, each capable of operating
independently and individually maintaining a comfortable operating environment
for the machines.
The physical security of the data center is maintained via a card reading
system which records all movement in and out of the main room. All exits are
locked at all times and require a card or presence of an individual with the
appropriate clearance.
The network security for the center is based on the Sun Screen Secure Net 2.0
firewall product. Security is designed with compartmentalization in mind: if
some component of the systems fails or is compromised, there will not be a
system-wide failure. From the initial screening router, to the firewalls and
data servers, each component is designed to be as independent as possible
without sacrificing inter-operability.
VIDEOS NOW(TM)
Videos Now is a comprehensive online video wholesaler and retailer that helps
businesses create customized and effective virtual video storefronts. The
powerful content and commerce engines from Digital Courier give extensive
flexibility to businesses looking to seamlessly integrate a virtual video store
into their Web sites, cellular phones, kiosks or wireless PDA services. The
Company recently signed a major contract with America Online, pursuant to which
Videos Now will be the "Premier Video Partner" throughout the AOL online
service, Digital City, and AOL.com. (see "Subsequent Events" footnote 11 to the
Company's June 30, 1997 consolidated financial statements)
Videos Now, under development for the past nine months, is anticipated to go
online in September 1998 and begin accepting and processing orders for video
product purchases. Among the features of the Videos Now site
18
<PAGE>
are a library of over 100,000 videos, a broad range of movie categories, DVD and
Laserdisc inventory, streaming video previews, major discounts on selected
titles, and monthly specials. The Company is also enabling its technology to
deliver video-on-demand for its customers.
Videos Now offers highly customized, pre-indexed video libraries for niche-
oriented channels on major portals or niche-oriented businesses and special
interest Web sites, such as health care, home cooking, skiing or biotechnology.
The Videos Now library can be tailored to the specific needs of the channel,
site or business customer. For example, a sports-oriented site may wish to
offer only sports related videos through its virtual video store, keeping a
focus to its overall site. Videos Now business customers can define and
purchase their own video libraries online, and automatically receive the updates
to their video storefront the same day.
The search capabilities of Videos Now(TM) offer robust navigation through
thousands of video titles. Moreover, Videos Now is fully integrated with the
entire range of online products from the Company. This integration with Books
Now(TM) and WeatherLabs provides relevant video title offerings when cross
referenced by a book search or a weather-related media search.
By securely storing purchasing information such as billing and shipping
information for each retail customer, Videos Now offers its customers easy-to-
use, one-button, one-touch shopping. Customers can keep track of their video
title purchases and request to be notified when titles of a particular subject
matter or authorship are added to the library. In addition, customers can be
notified when particular titles are marked down by a given price percentage,
keeping them abreast of the best buys on the Internet.
WEATHERLABS
In May, 1998, the Company purchased WeatherLabs, Inc., one of the leading
providers of weather and weather-related information on the Internet.
GENERAL
WeatherLabs has provided its clients commercially-focused, weather-related
products and services that dramatically enhance the value of end-user sites and
services since 1990. From site planning and marketing development, to custom
application design and deployment, the veteran meteorologists, innovative
engineers and creative designers at WeatherLabs offer comprehensive
meteorological data available on the Internet to any business affected by the
weather. Clients include Excite Inc, @Home, Netscape, Conde Nast, SkyTel,
Nokia, and Philips Multimedia, and Preview Travel.
TECHNOLOGY
As a pioneer in object-oriented software development, WeatherLabs
encapsulates meteorological and atmospheric science into portable Java objects
in component form that accurately represent the attributes of meteorological
conditions. With this solid technology foundation and the most advanced tools
from JavaSoft, Sun Microsystems, Visigenic and Netscape Communications, the
WeatherLabs development team can continuously and easily enhance the accuracy of
forecasting and analytic engines on the fly without interrupting the production
process.
The STORM Software Framework. To ensure that weather data and
meteorological measurements are collected and processed efficiently, WeatherLabs
relies upon STORM, the Company's proprietary Java-based and object-oriented
system architecture. STORM permeates every aspect of WeatherLabs and is
responsible for numerical analysis, meteorological science and forecasting
algorithms--as well as the processing and packaging of the data as varied as ski
reports, airport delay forecasts, and editorial content. As a server side
architecture which places the bulk of weather data and algorithmic processing on
the Company's highly specialized computing facilities, STORM enables easy
integration of the entire WeatherLabs product line through a lightweight client
side connection.
19
<PAGE>
Distribution: Taking a Ride on the WeatherBus&trade. Before critical
weather information reaches clients, data speeds through the CORBA/IIOP-based
WeatherBus™ pipeline to the WeatherFactory™ research and development
facility. After thorough information analysis and processing with STORM, the
WeatherBus automatically delivers weather products to WeatherLabs clients in any
electronic format. In this critical process, built-in load balancing allows
STORM to maximize the delivery performance of information through the WeatherBus
from source to final destination.
Security and Seamless Integration. WeatherLabs products are seamlessly
integrated into proprietary systems with maximum reliability and security
through the Company's real-time encoding system which employs point-to-point
encryption, digital signatures, and dual firewall gateways.
Continuous Weather Information 24 hours a day, 7 days a week. WeatherLabs
ensures the constant flow of weather information to its clients by leveraging
system redundancy in each of its technology centers. Satellite dishes in San
Francisco, London, St. Kitts and Salt Lake City work around the clock to provide
constant--and identical--data to all three WeatherLabs weather centers which
house redundant servers and multiple T1 connections for uninterrupted weather
reporting 24 hours a day, seven days a week. As STORM assimilates volumes of
weather information around the clock, innovative WeatherLabs products from
historical analytics to detailed forecasts are available for any geocode on the
planet--down to any street address in the world.
BOOKS NOW(TM)
In January 1998, the Company purchased Books Now, Inc., which sells books
over the Internet through its strategic relations with certain magazine
distribution companies. Books Now has entered into agreements with over 200
magazine companies and online entities. Books Now provides book ordering
fulfillment services in correlation to certain magazine book reviews, book
mentions and advertisements. Among the magazines with which Books Now has
contracts are Cosmopolitan, Science News, Southern Living and Field & Stream.
Through its "Virtual Bookstore" program, Books Now develops, builds and
maintains a bookstore branded with the look, feel and navigational tools of the
partnering website. This Virtual Bookstore is linked from the partner's
websites home page and other integral locations. Visitors to the magazine's web
site are thus given the opportunity to purchase books which are thematically
related to the content and subject of the magazine. For example, a visitor to
the Field & Stream website can, through the Books Now "Virtual Bookstore"
(branded as the Field & Stream Bookstore), see specially-indexed outdoor
activity books available for sale. The "Virtual Bookstore" promotes books on
such topics as hunting, fishing, camping, hiking etc. Similarly, "Virtual
Bookstores" on other partner websites might be targeted and highlighted with
sport books, design books, health books, etc.
Books Now does not attempt to compete with the major destination
booksellers on the Internet, such as Amazon and Barnes & Noble. Books Now does
not attempt to divert Internet traffic to its destination website. Rather, it
enables existing websites to share in books sales revenue while keeping visitors
within their site and brand. Participating websites which at this time
primarily consist of magazine websites are able to brand the Company's
technology and e-commerce capabilities with its own interface and logo in the
form of a virtual bookstore. Purchases made over the Internet from such
websites result in revenue for both Books Now and the website.
MARKETING
Each division of the Company has its own specialized marketing staff to
promote and sell the Company's virtual commerce products to websites, online
services and other Internet businesses. Prominent positioning on major portals
to increase visibility has been a primary marketing goal. For example, the
prominence of the WeatherLabs weather service on major sites such as Excite has
led to numerous "inbound" requests to license the service on other websites.
The marketing staff continues to develop relationships with major Internet
companies and websites, and will attempt to position the Company's virtual
commerce products and processing and clearing technology for greater visibility
and market recognition.
The WeatherLabs marketing department works out of the Company's San
Francisco offices, and the Books Now and Videos Now departments work out of the
Company's Salt Lake City offices.
20
<PAGE>
SIGNIFICANT CUSTOMERS
The Company is not dependant upon a single customer. Videos Now, when
launched in September 1998, will initially derive most of its revenue from its
presence on the America Online network and on AOL.com. The Company is currently
in negotiations with other major portals and Web sites, however, consummation of
any of such prospective transactions will lessen the dependence of Videos Now on
America Online members and visitors. Although the WeatherLabs business model
has benefited from its high profile on the Excite search engine, its major
sources of revenue will come from licensing the technology and services to many
websites, both large and small, and from advertising revenue sharing
arrangements. Moreover, WeatherLabs has recently entered into agreements with
such major Internet companies as @Home, Netscape and Preview Travel. BooksNow
derives its income from its relationships with over 200 magazines.
RESEARCH AND DEVELOPMENT
The Company has invested significant resources in research and development
over the last three years. During the fiscal years ended June 30, 1996 and 1997
and the nine month period ended March 31, 1998, the Company has spent
$1,565,718, $4,364,252 and $1,301,285, respectively, on research and
development. Although the Company's Books Now and WeatherLabs divisions have
current revenues from a variety of sources, the VideosNow division is still
largely in development. It is anticipated that this division will begin to
generate revenue during the next fiscal year, and that the Company's
expenditures on research and development will correspondingly decrease.
SEASONALITY
To date the Company has not experienced any significant seasonal pattern to
its business. It is anticipated, however, that as the Company's virtual
commerce sites begin to generate increased revenue, the second quarter of the
Company's fiscal year (October through December) will be responsible for a
disproportionate share of the Company's revenue. This corresponds to the
increased "holiday" shopping on the Internet.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. In addition, the
Company expects the market for Internet-based commerce and advertising, to the
extent it continues to develop, to be intensely competitive. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Although the Company believes that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments.
The Company competes with many other providers of online national and local
content, advertising and commerce. Companies such as Amazon, Barnes & Noble, CD
Universe, Reel.com and others sell books and videos on the Internet, directly
competing with the Company's Books Now and Videos Now divisions. These
companies have far greater financial resources than the Company. The Company
also competes with The Weather Channel, Accu-Weather, and other major providers
of weather and weather information on the Internet.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical and
marketing resources than the Company. In addition, providers of content and
advertising on the Internet may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft or Netscape.
In the future, the Company expects to face competition in the various
demographic and geographic markets addressed by the Company. This competition
may include companies that are larger and better capitalized than the Company
and that have expertise and established brand recognition in these markets.
There can be no assurance that the Company's competitors will not develop
Internet products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's offerings. Moreover, a
number of the
21
<PAGE>
Company's current customers, licensees and partners have also established
relationships with certain of the Company's competitors, and future advertising
customers, licensees and partners may establish similar relationships.
The Company also competes with online services and other Web site
operators, as well as traditional offline media such as television, radio and
print for a share of consumers' Internet purchases and advertisers' total
advertising budgets. The Company believes that the number of companies selling
Web-based advertising and the available inventory of advertising space have
increased substantially during the past year. Accordingly, the Company may face
increased pricing pressure for the sale of advertisements. There can be no
assurance that the Company will be able to compete successfully against its
current or future competitors or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
.
22
<PAGE>
FINANCIAL DATA
The following selected unaudited consolidated financial data should be read
in conjunction with the Company's consolidated financial statements and notes
thereto appearing elsewhere herein. The selected unaudited consolidated
financial data has been retroactively restated to reflect the direct mail
marketing business and the operations of SISNA, Inc. as discontinued operations.
QUARTERLY RESULTS
The unaudited financial information of the Company is for the quarters
ended September 30, 1997, December 31, 1997 and March 31, 1998 and for each
quarter for fiscal 1997. This information has been derived from the quarterly
financial statements of the Company which are unaudited but which, in the
opinion of management, have been prepared on the same basis as the audited
financial statements included herein and include all adjustments (consisting
only of normal recurring items) necessary for a fair presentation of the
financial results for such periods.
<TABLE>
<CAPTION>
For the three months ended
--------------------------
Sep. 30, 1997 Dec. 31, 1997 Mar. 31, 1998
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net sales $ 17,545 $ 1,942 $ 385,671
Cost of sales 5,459 59,598 258,144
----------- ----------- -----------
Gross margin 12,086 (57,656) 127,527
----------- ----------- -----------
Operating expenses:
Research and development 473,350 373,717 454,218
General and administrative 934,563 824,300 1,122,273
Selling 642,006 336,355 188,861
----------- ----------- -----------
2,049,919 1,534,372 1,765,352
----------- ----------- -----------
Other income (expense), net 61,063 (27,589) (26,397)
----------- ----------- -----------
Loss from continuing operations before income
taxes (1,976,770) (1,619,617) (1,664,222)
Benefit (provision) for income taxes - (49,829) 2,733,829
----------- ----------- -----------
Income (loss) from continuing operations (1,976,770) (1,669,446) 1,069,607
----------- ----------- -----------
Discontinued operations:
Income (loss) from continuing operations
marketing operations, net of income taxes 110,558 51,368 (50,548)
Loss from operations of discontinued internet
service provider operations, net of income taxes (121,431) (123,546) (20,698)
Gain on sale of direct mail marketing operations,
net of income taxes - - 4,394,717
Gain on sale of internet service provider
operations, net of income taxes - - 232,911
----------- ----------- -----------
Income (loss) from discontinued operations (10,873) (72,178) 4,556,382
----------- ----------- -----------
Net income (loss) $(1,987,643) $(1,741,624) $ 5,625,989
=========== =========== ===========
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.23) $ (0.19) $ 0.12
Diluted (0.23) (0.19) 0.12
Net income (loss):
Basic (0.23) (0.20) 0.64
Diluted (0.23) (0.20) 0.64
Weighted average common shares outstanding
Basic 8,560,932 8,605,767 8,763,505
Diluted 8,560,932 8,605,767 8,832,086
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
For the three months ended
--------------------------
Sep. 30, 1996 Dec. 31, 1996 Mar 31, 1997 Jun. 30, 1997
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales - - - 8,812
Cost of sales - - - 492
---------- ----------- ----------- -----------
Gross margin - - - 8,320
---------- ----------- ----------- -----------
Operating expenses:
Research and development 373,463 734,131 1,050,463 2,206,194
General and administrative 109,027 272,640 388,405 630,844
Selling 657,871 273,582 341,400 624,812
---------- ----------- ----------- -----------
1,140,361 1,280,353 1,780,268 3,461,850
---------- ----------- ----------- -----------
Other income (expense), net 160,691 128,840 120,259 85,871
Loss from continuing operations before
income taxes (979,670) (1,151,513) (1,660,009) (3,367,659)
Benefit (provision) for income taxes 51,813 33,850 - -
---------- ----------- ----------- -----------
Loss from continuing operations (927,857) (1,117,663) (1,660,009) (3,367,659)
---------- ----------- ----------- -----------
Discontinued operations:
Income from discontinued direct mail marketing
operations, net of income taxes 86,356 56,415 120,901 36,766
Loss from discontinued internet service provider
operations, net of income taxes - - (1,823,006) (745,060)
---------- ----------- ----------- -----------
Income (loss) from discontinued operations 86,356 56,415 (1,702,105) (708,294)
---------- ----------- ----------- -----------
Net loss $ (841,501) $(1,061,248) $(3,362,114) $(4,075,953)
========== =========== =========== ===========
Net loss per common share:
Income (loss) from continuing operations:
Basic $ (0.11) $ (0.14) $ (0.20) $ (0.41)
Diluted (0.11) (0.14) (0.20) (0.41)
Net income (loss):
Basic (0.10) (0.13) (0.40) (0.49)
Diluted (0.10) (0.13) (0.40) (0.49)
Weighted average common shares outstanding:
Basic 8,110,407 8,126,649 8,479,376 8,309,467
Diluted 8,110,407 8,126,649 8,479,376 8,309,467
</TABLE>
(1) The sum of net income (loss) per share amounts for the four quarters may
not equal annual amounts due to rounding.
24
<PAGE>
ANNUAL RESULTS
The following unaudited selected financial data should be read in
conjunction with the Company's consolidated financial statements appearing
elsewhere herein.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------
1997 1996 1995 1994 1993
------------ ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 8,812 $ - $ - $ - $ -
Cost of sales 492 - - - -
----------- ----------- ---------- ---------- ----------
Gross margin 8,320 - - - -
----------- ----------- ---------- ---------- ----------
Operating expenses:
Research and development 4,364,252 1,565,718 560,915 - -
General and administrative 1,400,916 685,528 56,199 - -
Selling 1,897,664 - - - -
Compensation expense related to issuance
of options by principal stockholder - 1,484,375 - - -
----------- ----------- ---------- ---------- ----------
7,662,832 3,735,621 617,114 - -
----------- ----------- ---------- ---------- ----------
Other income (expense), net 495,661 57,209 (973) - -
----------- ----------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes (7,158,851) (3,678,412) (618,087) - -
Benefit for income taxes - 91,999 132,681 - -
----------- ----------- ---------- ---------- ----------
Loss from continuing operations (7,158,851) $(3,586,413) $ (485,406) $ - $ -
----------- ----------- ---------- ---------- ----------
Discontinued operations:
Income from discontinued direct
mail marketing operations, net of income taxes 300,438 153,332 221,136 62,998 53,327
Loss from discontinued internet
service provider operations, net of income taxes (2,482,403) - - - -
----------- ----------- ---------- ---------- ----------
Income (loss) from discontinued operations (2,181,965) 153,332 221,136 62,998 53,327
----------- ----------- ---------- ---------- ----------
Net income (loss) $(9,340,816) $(3,433,081) $ (264,270) $ 62,998 $ 53,327
=========== =========== ========== ========== ==========
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.86) $ (0.61) $ (0.10) $ - $ -
Diluted (0.86) (0.61) (0.10) - -
Net income (loss):
Basic (1.12) (0.58) (0.06) 0.01 0.01
Diluted (1.12) (0..58) (0.06) 0.01 0.01
Weighted average common shares outstanding:
Basic 8,309,467 5,917,491 4,713,028 4,282,299 4,242,026
Diluted 8,309,467 5,917,491 4,713,028 4,432,881 4,242,026
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
--------------
1997 1996 1995 1994 1993
----------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 3,624,308 $12,774,113 $ 794,156 $350,428 $224,121
Total assets 11,320,660 16,222,902 1,073,225 476,210 285,703
Long-term debt, net of current portion - - - - -
Stockholders' equity 9,826,083 15,541,624 1,073,225 476,210 285,703
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company began operations in 1987 to provide a highly targeted business
to consumer advertising through direct mail. Since the Company's founding, the
direct mail marketing business had provided substantially all of the Company's
revenues. The direct mail marketing business was sold in March 1998 and its
results of operations are classified as discontinued operations in the
accompanying consolidated financial statements.
In fiscal 1994, the Company began developing its own proprietary websites.
Since fiscal 1994, the Company has devoted significant resources towards the
development and launch these websites.
In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an Internet
service provider headquartered in Salt Lake City, Utah. In March 1998, Sisna
was resold to its original owner for 35,000 shares of the Company's common
stock. Sisna's results of operations are included in the accompanying
consolidated statements of operations from the date of acquisition through the
date of sale, as discontinued operations.
In January 1998, the Company acquired all of the outstanding stock of Books
Now, Inc. ("Books Now"), a book reseller, in exchange for a maximum of 362,500
shares of the Company's common stock. One hundred thousand shares were issued
at closing and 262,500 shares are subject to a three-year earn-out contingency
based upon achieving certain financial performance objectives. The acquisition
was accounted for as a purchase. Books Now's results of operations are included
in the accompanying consolidated statements of operations since the date of
acquisition. In May, 1998, the Company acquired all of the outstanding stock of
WeatherLabs, Inc., a provider of weather and weather-related information and
products on the Internet, in exchange for up to 777,220 shares of the Company's
common stock. 253,260 shares were issued at closing, and an additional 523,960
shares may be issued upon the attainment by WeatherLabs of certain financial
performance targets. The acquisition was accounted for as a purchase. Because
the transaction was not consummated until May, 1998, WeatherLabs' results of
operations are not yet included in the accompanying consolidated statements of
operations of the Company.
The Company has entered into a Stock Exchange Agreement with Digital
Courier International, Inc., a Nevada corporation ("Digital Courier"), dated as
of March 17, 1998 (the "Exchange Agreement"). Pursuant to the Exchange
Agreement, the Company has agreed to issue 4,659,080 shares of its common stock
to the shareholders of Digital Courier. This acquisition will be accounted for
as a purchase and the Company anticipates that approximately $11.7 million of
the total purchase price of approximately $13 million will be allocated to in
process research and development and will be expensed in the period the
acquisition is consummated. Digital Courier is a Java-based Internet and
wireless communications software development company originally incorporated as
Digital Courier Technologies, Inc. on July 23, 1996. For the year ended
December 31, 1997, Digital Courier had no revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997, AND NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH NINE MONTHS ENDED MARCH
31, 1997
Net Sales
Net sales for the three months ended March 31, 1998 were $385,671. The
Books Now operations accounted for $141,160 of these net sales and a one time
sale of a turn-key Internet computer system accounted for $240,854. Net sales
from WorldNow Online during the three months ended March 31, 1998 were minimal.
There were no net sales from continuing operations during the three months ended
March 31, 1997.
Net sales for the nine months ended March 31, 1998 were $405,158. The
Books Now operations accounted for $141,160 of net sales and a one time sale of
a turn-key Internet computer system accounted for $240,854. Net sales from
WorldNow Online during the nine months ended March 31, 1998 were minimal. There
were no net sales
26
<PAGE>
from continuing operations during the nine months ended March 31, 1997.
COST OF SALES
Cost of sales for the computer online operations during the three months
ended March 31, 1998 were $258,144, or 66.9% of computer online marketing sales.
Cost of sales for the computer online operations during the nine months ended
March 31, 1998 were $323,201, or 79.8% of computer online marketing sales. Cost
of sales as a percentage of sales was less during the three months ended March
31, 1998 than during the nine months ended March 31, 1998 due to higher markups
on the sale of a turn-key Internet computer system. There were no sales or
related cost of sales for the comparable periods in 1997.
OPERATING EXPENSES
General and administrative expense increased 188.9% to $1,122,273 during
the three months ended March 31, 1998 from $388,405 during the three months
ended March 31, 1997. The increase in general and administrative expense was
due to the addition of administrative and support staff, depreciation expense,
as well as increased related facilities costs, associated with WorldNow Online.
General and administrative expense increased 274.1% to $2,881,136 during
the nine months ended March 31, 1998 from $770,072 during the nine months ended
March 31, 1997. The increase in general and administrative expense was due to
the addition of administrative and support staff, depreciation expense, as well
as increased related facilities costs, associated with WorldNow Online.
Selling expense decreased 44.7% to $188,861 during the three months ended
March 31, 1998 from $341,400 during the three months ended March 31, 1997. The
decrease in selling expense was due to reductions in the sales and marketing
staff of WorldNow Online
Selling expense decreased 8.3% to $1,167,222 during the nine months ended
March 31, 1998 from $1,272,853 during the nine months ended March 31, 1997. The
decrease in selling expense was due to reductions in the sales and marketing
staff of WorldNow Online.
Research and development expense decreased 56.8% to $454,218 during the
three months ended March 31, 1998 from $1,050,463 during the three months ended
March 31, 1997. Research and development expense decreased due to reduced
levels of activity required for the development of WorldNow Online. To be
competitive, the Company must continue to enhance and improve the
responsiveness, functionality, features and content of the WorldNow online main
web site.
DISCONTINUED OPERATIONS
Research and development costs decreased 39.7% to $1,301,285 during the
nine months ended March 31, 1998 from $2,158,057 during the nine months ended
March 31, 1997. 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.
During the three months ended March 31, 1998, the Company sold its direct
mail marketing and Internet service operations for pretax gains of $7,031,548
and $372,657, respectively. During the three months ended March 31, 1998, the
direct mail marketing operations incurred a pretax loss of $80,877 as compared
to a pre-tax profit of $193,441 during the three months ended March 31, 1997.
During the three months ended March 31, 1998, the Internet service operations
incurred a pretax loss of $33,117 as compared to a pretax loss of $1,895,546
during the three months ended March 31, 1997. The Internet service operations
loss incurred during the three months ended March 31, 1997 included a charge of
$1,674,721 for acquired in-process research and development.
During the nine months ended March 31, 1998, the Company sold its direct
mail marketing and Internet service operations for pretax gains of $7,031,548
and $372,657, respectively. During the nine months ended March 31, 1998, the
pretax profit from the direct mail marketing operations was $178,204 as compared
to a pre-tax profit
27
<PAGE>
of $421,875 during the nine months ended March 31, 1997. During the nine months
ended March 31, 1998, the Internet service operations incurred a pretax loss of
$425,078, as compared to a pre-tax loss of $1,895,546 during the nine months
ended March 31, 1997. The Internet service operations loss incurred during the
nine months ended March 31, 1997 included a charge of $1,674,721 for acquired
in-process research and development.
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
Net Sales
Net sales for the year ended June 30, 1997 were $8,812. There were no net
sales from continuing operations during the year ended June 30, 1996.
COST OF SALES
Cost of sales for the computer online operations for the year ended June
30, 1997 were $492. There were no sales or related cost of sales for the year
ended June 30, 1996.
OPERATING EXPENSES
Research and development expense increased 178.7% to $4,364,252 during the
year ended June 30, 1997 from $1,565,718 during the year ended June 30, 1996.
Research and development expense increased due to accelerated levels of activity
required for the development of WorldNow Online.
General and administrative expense increased 104.4% to $1,400,916 during
the year ended June 30, 1997 from $685,528 during the year ended June 30, 1996.
The increase in general and administrative expense was due to the addition of
administrative and support staff, as well as increased related facilities costs,
associated with WorldNow Online.
Selling expense for the year ended June 30, 1997 was $1,897,664. The
Company did not incur any selling expense during the year ended June 30, 1996
related to continuing operations, because the WorldNow Online main web site was
in its early development stages and was not at the point where net sales could
be attained.
DISCONTINUED OPERATIONS
During March 1998, the Company sold its direct mail marketing and Internet
service operations, therefore, their results of operations are presented as
discontinued operations. During the year ended June 30, 1997, pretax income from
the direct mail marketing operations was $480,701 as compared to $245,331 for
the year ended June 30, 1996. During the year ended June 30, 1997, the Internet
service operations incurred a pretax loss of $2,662,666. There were no Internet
service operations during the year ended June 30, 1996.
YEAR ENDED JUNE 30, 1996 COMPARED WITH THE YEAR ENDED JUNE 30, 1995
NET SALES
There were no net sales for the years ended June 30, 1996 and 1995 from
continuing operations.
COST OF SALES
There were no cost of sales for the years ended June 30, 1996 and 1995 from
continuing operations.
OPERATING EXPENSES
Research and development expense increased 179.1% to $1,565,718 during the
year ended June 30, 1996 from $560,915 during the year ended June 30, 1995.
Research and development expense increased due to accelerated levels of activity
required for the development of WorldNow Online.
28
<PAGE>
General and administrative expense related to continuing operations
increased 1,120% to $685,528 during the year ended June 30, 1996 from $56,199
during the year ended June 30, 1995. The increase in general and administrative
expense was due to hiring the initial administrative and support staff, as well
as increased facilities costs for the administrative and support staffs,
associated with WorldNow Online.
The Company did not incur any selling expense related to continuing
operations during the years ended June 30, 1996 and 1995, because the WorldNow
Online main web site was in its early development stages and was not at the
point where net sales could be attained.
DISCONTINUED OPERATIONS
During March 1998, the Company sold its direct mail marketing and Internet
service operations, therefore, their results of operations are presented as
discontinued operations. During the year ended June 30, 1996, pretax income from
the direct mail marketing operations was $245,331 as compared to $353,817 for
the year ended June 30, 1995. There were no Internet service operations during
the years ended June 30, 1996 and 1995.
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 in additional working
capital. The Company was required to place $250,000 in escrow upon signing this
agreement.
In March 1998, the Company sold the net assets of DataMark Systems, Inc.,
its direct mail marketing subsidiary. To date, the Company has received
$6,857,300 from the sale of these net assets and will receive an additional
$800,000 in June 1999.
In April 1998, the Company purchased 1,800,000 shares of its common stock
held by a former officer of the Company in exchange for $1,500,000 in cash.
On June 1, 1998, the Company entered into a thirty-nine month Interactive
Marketing Agreement with America Online, Inc. ("AOL"), wherein the Company has
agreed to pay AOL $12,000,000. The Company is scheduled to make cash payments
to AOL of $1,200,000 upon execution of the agreement in June 1998, $4,000,000
prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and $2,800,000 prior
to January 1, 2000.
AOL has exercised its option under to the contract and has received 955,414
shares of the Company's common stock. The issuance of this stock will result in
a non-cash charge to the Company's earnings during the year ended June 30, 1998
of approximately $7,200,000.
Operating activities used $5,271,723 during the nine months ended March 31,
1998 compared to $3,415,405 during the nine months ended March 31, 1997. The
increase in cash used by operating activities during the nine months ended March
31, 1998 as compared to 1997 was primarily attributable to increased research
and development and general and administrative expenditures associated with
WorldNow Online.
Operating activities used $6,334,660 during the year ended June 30, 1997
compared to $1,385,567 during the year ended June 30, 1996. The increase in
cash used by operating activities during the year ended June 30, 1997 as
compared to 1996 was primarily attributable to increased research and
development, general and administrative and selling costs associated with
WorldNow Online.
Cash used in investing activities was $1,531,476 and $3,283,234 during the
nine months ended March 31, 1998 and 1997, respectively. During the nine months
ended March 31, 1998, the Company's investing activities
29
<PAGE>
included the investment in CommTouch, Ltd. of $750,000 and the acquisition of
equipment for $802,414. During the nine months ended March 31, 1997, the Company
acquired $2,675,116 of equipment and invested $608,118 in net long-term assets
of discontinued operations.
Cash used in investing activities was $3,697,694 and $2,659,840 during the
years ended June 30, 1997 and 1996, respectively. During the year ended June
30, 1997, the Company's investing activities included the acquisition of
equipment for $3,188,360 and investment in $509,334 of net long-term assets of
discontinued operations. During the year ended June 30, 1996, the Company
acquired $2,589,212 of equipment and invested $70,628 in net long-term assets of
discontinued operations.
Cash provided by financing activities was $8,797,560 during the nine months
ended March 31, 1998 as compared to $1,786,354 during the nine months ended
March 31, 1997. The increase in cash provided was attributable to the net
receipt of $6,857,300 from the sale of the direct mail marketing net assets in
March 1998, $2,750,000 from the sale and leaseback agreement entered into in
October 1997 and $86,000 from loan proceeds. This increase in cash provided
during the nine months ended March 31, 1998 was offset in part by principal
repayments on the capital lease obligation and other notes payable totaling
$718,158 and the payment of $200,000 for the retirement of common stock owned by
a former officer of the Company's direct mail marketing subsidiary. During the
nine months ended March 31, 1997, the Company received $1,829,555 of net
proceeds from the issuance of common stock offset by $43,201 in principal
repayments on notes payable.
Cash provided by financing activities was $1,811,354 during the year ended
June 30, 1997 as compared to $17,165,806 during the year ended June 30, 1996.
The decrease in cash provided by financing activities during 1997 as compared to
1996 was primarily attributable to receipt of most of the proceeds of the March
96 Placement during fiscal year 1996.
Management projects that there will not be sufficient cash flows from
operating activities during the next twelve months to provide capital for the
Company to implement its marketing strategy for its divisions. As of March 31,
1998, the Company had $6,946,635 of cash. The Company is currently 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.
YEAR 2000 ISSUE
Beginning in October 1997, the Company initiated the review and assessment
of all its computerized hardware and internal-use software systems in order to
ensure that such systems will function properly in the year 2000 and beyond.
During the last 2 years, the Company's computerized information systems have
been substantially replaced and are believed to be Year 2000 compliant. It is
possible, however, that software programs acquired from third parties and
incorporated into other applications utilized by the Company may not be fully
Year 2000 compliant. The Company intends to continue testing, replacing, or
enhancing its internal applications through the end of 1999 to ensure that risks
related to such software are minimized. Management does not believe that costs
associated with Year 2000 compliance efforts will have a material impact on the
Company's financial results or operations.
Forward Looking Information
Statements regarding the Company's expectations as to future revenue from
its business strategy, and certain other statements presented herein, 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) the
Companyhas only generated minimal revenue from its Internet businesses, and have
not generated and may not generate the level of purchases, users or advertisers
anticipated, (ii) the costs to market the Company's Internet services.
30
<PAGE>
PROPRIETARY RIGHTS
The Company regards its patents, copyrights, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success, and the
Company relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States, and has obtained the
registration of a number of its trademarks, including "WorldNow" and "WorldNow
Online Network." Substantially all national content appearing in the Company's
online properties is licensed from third parties under short-term agreements.
EMPLOYEES
As of July 1, 1998, the Company had 32 full-time employees. The Company's
future success is substantially dependent on the performance of its management,
sales force, key technical personnel, and its continuing ability to attract and
retain highly qualified technical, sales and managerial personnel.
PROPERTIES
The Company is leasing from third parties modern office space in Salt Lake
City, Utah. These offices include a computer data center and general offices.
In August 1996, the Company moved its offices to 12,000 square feet of modern
office space in Salt Lake City, Utah. In May 1997, the Company acquired 11,000
square feet of additional modern office space in a neighboring building in Salt
Lake City. All facilities are leased from third parties. The new offices are
being leased under three to five year arrangements. Some leases contain options
to renew. The computer equipment and software development facilities remain in
the previous location. The Company also leases office space and space for a
data center in San Francisco in connection with its WeatherLabs operations.
These facilities are believed adequate for the Company's current needs. The
current total monthly rental for all facilities is $46,698. Some of the leases
are subject to annual increases for inflation adjustments.
The Company presently has approximately 11,000 share feet of office space in
Salt Lake City which it is attempting to sublease. There will be a charge to
earnings during the year ended June 30, 1998 of approximately $520,000 for the
costs of subleasing idle facilities and the future cost of idle facilities.
MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
On February 5, 1997, the Company's Common Stock began trading on the NASDAQ
National Market. Commencing in January 1995 and until the stock was listed on
the NASDAQ National Market, the Company's Common Stock was quoted on the OTC
Bulletin Board. During 1993 and 1994, there was no public market for the
securities of the Company's predecessor, and the Company is not aware of any
quotations for its securities during this period. In prior years, securities of
the Company's legal predecessor, Exchequer, were traded in the over-the-counter
market, and some sporadic unsolicited trading may have continued.
The following table reflects the high and low bid quotations reported by the
NASDAQ National Market or by the OTC Bulletin Board, as appropriate, for the
periods indicated. The quotes represent interdealer quotations, do not include
mark-up, mark-down or commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal Year Ending June 30, 1998
--------------------------------
<S> <C> <C>
April 1 to June 30, 1998 $ 9.97 $ 3.50
January 1 to March 31, 1998 $ 2.13 $ 5.00
October 1 to December 31, 1997 $ 2.44 $ 5.00
July 1 to September 30, 1997 $ 2.75 $ 5.88
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
Fiscal Year Ended June 30, 1997
-------------------------------
April 1 to June 30, 1997 $ 7.38 $ 2.75
January 1 to March 31, 1997 $11.00 $ 6.75
October 1 to December 31, 1996 $14.38 $ 7.00
July 1 to September 30, 1996 $16.00 $10.63
Fiscal Year Ended June 30, 1996
-------------------------------
April 1 to June 30, 1996 $21.38 $8.00
January 1 to March 31, 1996 $12.50 $8.00
October 1 to December 31, 1995 $ 7.50 $7.25
July 1 to September 30, 1995 $ 7.75 $3.75
</TABLE>
On August 5, 1998, the Common Stock was quoted on the NASDAQ National Market
at a closing price of $8.25.
As of August 3, 1998, there were approximately 656 holders of record of the
Company's Common Stock.
Dividend Policy
The Company has not paid any cash dividends since its inception. The Company
currently intends to retain future earnings in the operation and expansion of
its business and does not expect to pay any cash dividends in the foreseeable
future.
Changes in Securities
Since June 30, 1997, the Company sold the following securities without
registration under the Securities Act of 1933 (the "Act"):
In November 1997, the Company issued 20,000 shares of its common stock to Reed
Hansen in lieu of compensation.
In January 1998, the Company issued 100,000 shares of its common stock to the
former shareholders of Books Now, Inc. in connection with the acquisition of
Books Now, Inc.
In March 1998, the Company issued 136,364 shares of its common stock to Sven
Bensen, 40,909 shares to Arthur E. Benjamin and 24,545 shares to Thomas Dearden
under its Amended and Restated Stock Incentive Plan (the "Plan"). These shares
were issued under the provisions of the Plan, which permit the cashless exercise
of options. The Plan has been registered with the SEC on Form S-8.
In April 1998, the Company issued 13,151 shares of its common stock to Richard
Bentz and 4,939 shares to Edwin Patterson under its Plan. These shares were
issued under the provisions of the Plan which permit the cashless exercise of
options.
In May 1998, the Company issued 10,000 shares of its common stock to Mark
Johnson, a former employee, for cash consideration of $1.00 per share under its
Plan.
In May 1998, the Company issued 253,260 shares of its common stock to the
former shareholders of WeatherLabs, Inc. in connection with the acquisition of
WeatherLabs, Inc.
In June 1998, the Company issued 955,414 shares of its common stock to
American Online, Inc. in accordance with the Interactive Marketing Agreement
that the Company had signed with America Online, Inc.
All shares except those issued to the former shareholders of Books Now, Inc.
were issued on the exercise of options which had been previously granted to the
purchaser, and were issued pursuant to the Company's effective registration
statement on Form S-8. The issuance of shares to the shareholders of Books Now
was an offering not involving a public offering and was exempt from registration
pursuant to Section 4(2) of the Act.
32
<PAGE>
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which, in its belief,
could have a material adverse effect on the Company.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and reports of independent public accountants are
filed as part of this report on pages F-1 through F-47.
33
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
SUMMARY
Digital Courier International, Inc. ("Digital Courier") is a Java-based
Internet and wireless communications software development company. Digital
Courier designs and develops software solutions for electronic commerce,
supplying business solutions to specific vertical markets including financial
services, online point-of-sale (POS) transaction systems, and online
content/information development and distribution. The technology matrix is
directly leveraged across each of these markets to capitalize on the concept of
reusability and thus achieving a significant technological economy of scale that
is expected to bolster Digital Courier's bottom line.
Digital Courier develops platform and device independent software to
accommodate the Internet as well as mobile devices and second generation
consumer information appliances. This technology is developed using standards-
based software including CORBA and IIOP components, all of which is based on the
Java programming language. Digital Courier has entered into product licensing
agreements with Internet content developers to provide content generation and
distribution solutions that streamline electronic commerce. The revenue model
is based on both licensing fees and per-transaction usage fees. This adds
tremendous scalability to long-term revenue growth. Digital Courier was
incorporated in 1997 under the laws of the state of Nevada, and has since grown
to 14 employees and retains as many as 7 additional consulting technologists at
a given time. Digital Courier maintains offices in San Francisco's SOMA
district, including a datacenter located in South Beach, San Francisco.
BUSINESS OVERVIEW
Digital Courier's business objective is to create technology-centric
transaction management systems that displace strategic business processes and
legacy applications with cross-platform computing systems ranging from the
traditional to the new breed of hand-held, wireless information appliances.
Digital Courier combines original content with market-driven technology to
enhance, deliver, and manipulate mission critical information in real-time. It
also seeks to leverage transaction-driven revenue models for rapid deployment of
technologies and scalable business growth. Digital Courier utilizes platform
independent protocols and application progams interfaces ("API's") to deliver
solutions to any device across wired and wireless protocols. Key technologies
utilized by Digital Courier include the following: Java, CORBA, CDMA, GSM, XML,
SSL, SET 1.0/2.0 HDML, HTML, and DHTML. The architecture consists of Java-based
cross-functional technology infrastructure, using Virtual Screens architecture
for embedded and mobile devices, server-side Web model, and lightweight but
versatile applications utilizing a component-based architecture for modularity
and scalability.
PRODUCTS AND SERVICES
Digital Courier's product strategy revolves around exploiting core
competencies in multiple vertical markets along with original content to bring
next generation technology solutions to legacy-stricken industries.
ONLINE SOFTWARE PRODUCTS
Digital Courier has developed Internet-related software systems that have
centered on electronic commerce transaction processing, and online content
management & distribution. Digital Courier is currently developing a matrix of
Internet business engines for a new generation of online information services.
They include the following:
NETCLEARING
Internet Credit Card Processing Service
Digital Courier is developing credit card acquisition and processing
architecture to provide full service credit card clearing and merchant banking
services for business and financial institutions that need to conduct business
over the Internet. Currently, the market is in short supply of online credit
card merchant services and online credit card
34
<PAGE>
clearing functionality. Digital Courier is striving to fill that space with its
Java-based processing framework that will maintain a large number of merchant
accounts and interface directly with new acquiring/processing software from
Verifone, Inc. Digital Courier will attempt to partner with companies like
Verifone to be the primary Internet credit card service provider for all of
Digital Courier's customers and merchants wishing to process online. The primary
features of this service include:
PAYMENT SERVICES: hosting and integration. netClearing hosts and integrates
real-time payment solutions into any electronic commerce site. Merchants can
easily link to our branded payment servers to generate revenue from their sites.
REAL-TIME CREDIT CARD AUTHORIZATION. Merchants can accept or decline purchases
in real-time over the Internet. netClearing's front- and back-end servers let
merchants know if the customer has sufficient credit limit to make a purchase in
just a few seconds. This approach reduces fraud.
CREDIT CARD TRANSACTION CAPTURE. netClearing's capture takes the information for
the authorization and charges the amount to a customer's credit card. To
facilitate immediate shipping of a purchase upon authorization, netClearing can
provide either immediate or delayed capture of funds.
SETTLEMENT AND RECONCILIATION. netClearing moves the transaction from capture to
settlement. Captures and credits usually accumulate into a "batch" and are
settled as a group. When a batch is submitted, the merchant's payment-enabled
Web server connects with netClearing's gateway servers to finalize the
transactions and transfer monies to the merchant bank account.
MERCHANT REPORTING. netClearing's Point of Sale (POS) server gives the merchant
full reporting capabilities. The merchant can track sales, credits,
transactions, and chargebacks through a standard Web browser. In addition,
merchants can customize the reports to fit their needs.
WALLET SOFTWARE. netClearing provides interfaces for the upcoming wallet
software systems. Customer's are given the option of using a "software" credit
card located on their computer and issued by a bank. This provides further
security and reduced fraud risk. Additionally, Visa charges lower fees for
wallet transactions resulting in increased profit margins for merchants.
INTEGRATION SERVICES. netClearing provides a full API to merchants who would
like to build custom applications to take advantage of our Point of Sale server
software. Using CORBA technology, calls are made through the internet from the
merchants system to netClearing's server. This additional level of customization
is provided for more sophisticated merchants.
JTRADE
Online Trading Services
Digital Courier is developing an online futures and commodities trading
desk framework that will enable the business to offer a powerful financial
information service to a broad audience including brokerages, Internet portals,
online services, and financial institutions. The framework allows Digital
Courier to achieve near just-in-time development performance for each new module
it offers. By leveraging the process of Write-Once Run-Anywhere Java(TM)
development, Digital Courier is assembling the building blocks of such a
platform that accepts plug-in modules for new trading services including:
Detailed commodities weather forecasting services
Agricultural weather analytics
Long range crop and weather forecasting services
Futures and commodities quotes, analysis, and charting services
35
<PAGE>
JPOS
Point of Sale (POS) Online Transaction Service
Digital Courier has developed an object-oriented architecture for
facilitating online order entry for supply chain driven businesses. The Java-
based POS transaction service enables large corporations (especially
distributors) to efficiently buy product or service from its suppliers and sell
product and service to its customers from a single system interface in real-
time. The technology is specifically designed to take the cost out of the
supply chain by eliminating the time delay between transactions. Currently this
system has been deployed in components to McKesson Corporation, a Fortune 100
health care supply management firm.
FRAMEWORKONE
Content warehousing, packaging, and distribution
To achieve significant economies of scale in building parallel divisions of
the business, Digital Courier develops a software component infrastructure that
is leveraged in each business unit. Digital Courier has created the building
blocks that integrate a complete electronic commerce framework and transaction
processing engine with a content packaging and distribution architecture and
wireless communication module. The overall framework is then combined with a
business process to create cost-effective, end-to-end transaction driven
business solutions in the following areas:
Information Services
Online weather information products
Distributed POS services to handheld computing devices
Localized news, finance, entertainment, and
e-commerce agent-guided services
RESEARCH AND DEVELOPMENT
Located at Digital Courier's development centers in San Francisco, Digital
Courier conducts on-going research and software development in the following
areas to enhance the FrameworkOne technology:
Embedded systems framework for Java-based hand-held information devices
On-line financial market management systems
Java-based communications frameworks for enterprise systems deployment
2D/3D imaging and visualization systems for Java
Super-scalar symmetric transaction processing
Online user, institutional, and commercial profiling systems
CLIENT PROJECTS
Digital Courier also specializes in strategic business relationships with
large corporations to provide a packaged end-to-end solution. These
relationships are often enhanced with license agreements for commercial software
products that Digital Courier develops. The core competencies of Digital Courier
include:
- Java-based Internet software product development leadership
- Technology to business process modeling and problem identification
- Business and process analysis
- Strategic systems deployment for engaging the global enterprise
- Sustaining engineering services (on-going technology development
contracts)
- Service hosting; Managing client computing systems off-site
CUSTOMERS
Digital Courier has a growing client roster including many of the fastest
growing Fortune 500 companies.
36
<PAGE>
Digital Courier has provided a range of technology solutions from electronic
commerce to network infrastructure and Internet distribution strategies. Digital
Courier's client list includes Apple, Ford Motor Company Europe, IBM,
KnowledgeWare Inc., Lotus Development Corp., McKesson Corporation, Merrill
Lynch, Metric PLC, Sybase, and WeatherLabs.
INDUSTRY PARTNERS
Digital Courier develops applications that leverage the industry's leading
technologies from the most influential online companies. Some of the Digital
Courier's key relationships include Apple Computer, IBM, JavaSoft, Netscape,
Nokia, SkyTel, and Visigenic.
COMPETITION
The markets served by Digital Courier are moderately competitive. The
transaction-based business model is relatively unique compared to other
businesses that traditionally base their online revenue strategies on page view
volume and advertising revenue sharing. Digital Courier believes that its
ability to compete successfully depends upon a number factors, including
performance, reliability, and security of its transaction processing
infrastructure, continued ability to provide end-to-end point of sale processing
over the Internet, its ability to maintain and expand its channels of
distribution, its continued expertise in proprietary and third-party
technologies, the timing of introductions of new services by Digital Courier and
its competitors, and the pricing policies of its competitors and suppliers.
Digital Courier sees competition for its financial services and transaction
processing from two key market segments:
FINANCIAL SERVICES
JTrade
Digital Courier's current and prospective competitors in the online trading
sector include a host of consumer oriented Internet trading services. These
companies include Etrade, Discover Brokerage Direct, Suretrade, Ameritrade,
Datek, and DLJDirect. However, the market focus for Digital Courier is
commercially and institutionally focused. The entire suite of online financial
services are targeted to be private labeled to retail banks, discount brokerage
firms, full service brokerage firms, and investment banks around the world.
This will allow the financial institutions to add these online services to their
portfolios of consumer offerings directly. Presently, the competition is
exclusively consumer oriented, and competition could arise should any of these
companies shift their business model towards financial institutions. Digital
Courier can today provide infrastructure technology to the entire online
brokerage marketplace, including competing brokerages. This is the result of
creating component based business engines that can easily be integrated into
third party financial institutions and services.
netClearing and jPOS
The transaction processing services do not yet face direct competition
online. Digital Courier has carefully constructed its service offering to
greatly exceed the offerings of other e-commerce service companies. Digital
Courier provides a packaged front office and back-office solution for Internet
credit card processing, which includes the merchant banking services, the
transaction processing, and the settlement. This unique combination sets
Digital Courier apart from software vendors developing complex Internet commerce
products, such as OpenMarket, Microsoft, and Netscape. In fact, these vendors'
products will easily integrate with Digital Courier's technology. Formidable
competition exists in the front-office service marketplace, including ICOMS, an
Internet credit card processing service that facilitates end to end Internet
credit card processing services, but routes the clearing and settlement (the
back office services) to third-party organizations. Combined with a third-party
clearing system, firms like ICOMS, as well as small number of retail banks
including Wells Fargo Bank, can compete with Digital Courier's full service
offering albeit a less convenient and less cost effective approach to that of
Digital Courier. Digital Courier plans to market its service to the broader
retail banking industry, circumventing competition by offering a more cost-
effective solution.
37
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning each of
Digital Courier's directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
R.J. Pittman 28 Chief Executive Officer
Deborah Todd 49 Senior Vice President / Operations
Daniel Duart 40 Director of Human Resources
Claire Kurmel 28 Director of Design and Communications
Ric Tener 54 Financial Controller
</TABLE>
EMPLOYEES
As of July 1, 1998, Digital Courier had 14 full time employees and 4
contract employees. Of these, 12 were principally engaged in product
development, 3 were principally engaged in management, and 3 were engaged in the
operations, sales, and marketing group. Digital Courier's future success is
based on its ability to retain and expand its top caliber team of software
engineers, product managers, business development managers, and corporate
executives.
PROPERTIES
Digital Courier currently occupies approximately 10,000 square feet in a
modern office building in downtown San Francisco, California, under a lease that
expires on December 15, 2002. The lease has a 5-year renewal option at the
point of expiration. Digital Courier also leases a technology center of
approximately 1,800 square feet in South Beach, San Francisco to house its
Internet connectivity equipment and additional conference and meeting rooms.
LEGAL PROCEEDINGS
Digital Courier is not party to, nor is any of its property the subject of,
any material pending legal proceedings.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AUTHORIZE THE
ISSUANCE OF UP TO 4,659,080 SHARES OF COMMON STOCK IN CONNECTION WITH THE
ACQUISITION OF DIGITAL COURIER INTERNATIONAL, INC.
38
<PAGE>
RISK FACTORS
Each DMH Stockholder should carefully consider and evaluate the following
factors, among others, before voting.
RISK FACTORS REGARDING THE ACQUISITION
Uncertainty Relating to Integration. The Digital Courier Acquisition
involves the integration of two companies that have previously operated
independently. The successful combination of the two companies will require
significant effort from each company, including the coordination of their
research and development, utilization and successful commercialization of in-
process research and development, integration of the companies' product
offerings, coordination of their sales and marketing efforts and business
development efforts. Following the Digital Courier Acquisition, in order to
maintain and increase profitability, DMH will need to integrate and streamline
overlapping functions successfully. Costs generally associated with this type
of integration that may be incurred by DMH include the integration of product
lines, sales force cross-training and market positioning of products. While
these costs have not been currently identified, any such costs may have an
adverse effect on operating results in the periods in which they are incurred.
Each of DMH and Digital Courier has different systems and procedures in many
operational areas that must be rationalized and integrated. There may be
substantial difficulties associated with integrating two separate companies, and
there can be no assurance that such integration will be accomplished smoothly,
expeditiously or successfully. The integration of certain operations following
the Digital Courier Acquisition will require the reduction of management
resources that may distract attention from normal operations. The business of
DMH may also be disrupted by employee uncertainty and lack of focus during such
integration. Failure to quickly and effectively accomplish the integration of
the operations of DMH and Digital Courier could have a material adverse effect
on the consolidated business, financial condition and results of operations of
DMH. Moreover, uncertainty in the marketplace or customer concern regarding the
impact of the Digital Courier Acquisition and related transactions could have a
material adverse effect on the consolidated business, financial condition and
results of operations of DMH.
Effect of the Acquisition on Customers and Existing Agreements. Certain of
DMH's and Digital Courier's existing customers may view the Digital Courier
Acquisition as disadvantageous to them. As a consequence, the future
relationship with these customers could be adversely affected. The Digital
Courier Acquisition will require the consent of certain parties who have entered
into contracts with Digital Courier. There can be no assurance that such
consents will be given and, if not given, that such contracts will not
terminate.
Retention of Employees. The success of DMH and Digital Courier will be
dependent in part on the retention and integration of management, technical,
marketing, sales and customer support personnel. There can be no assurance that
the companies will be able to retain such personnel or that the companies will
be able to attract, hire and retain replacements for employees that leave
following consummation of the Digital Courier Acquisition. The failure to
attract, hire, retain and integrate such skilled employees could have a material
adverse effect on the business, operating results and financial condition of DMH
and Digital Courier.
Effect of Acquisition of Customers. Certain of DMH's existing customers
may view themselves as competitors of the combined entity formed by the Digital
Courier Acquisition, and therefore determine that the Digital Courier
Acquisition is competitively disadvantageous to them. As a consequence, the
combined entity's relationship with these customers could be adversely affected.
Potential Dilutive Effect to Stockholders. Although the companies believe
that beneficial synergies will result from the Digital Courier Acquisition,
there can be no assurance that the combining of the two companies' businesses,
even if achieved in an efficient, effective and timely manner, will result in
combined results of operations and financial condition superior to what would
have been achieved by each company independently, or as to the period of time
required to achieve such result. The issuance of DMH Common Stock in connection
with the Digital Courier Acquisition may have the effect of reducing DMH's net
income per share from levels otherwise expected and could reduce the market
price of the DMH Common Stock unless revenue growth or cost savings and other
business synergies sufficient to offset the effect of such issuance can be
achieved.
39
<PAGE>
RISK FACTORS REGARDING DMH
Limited Operating History; Anticipated Losses. The Company's websites has
only been online since June 1997, and did not commence generating advertising
revenues until August 1997. Accordingly, the Company has a limited operating
history upon which an evaluation of the Company can be based, and its prospects
are subject to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products and
services, including the Web-based advertising market. Specifically, such risks
include, without limitation, the rejection of the Company's services by Web
consumers and/or advertisers, the inability of the Company to maintain and
increase the levels of traffic on their websites, the development of equal or
superior services or products by competitors, the failure of the market to adopt
the Web as an advertising medium, the failure to successfully sell Web-based
advertising through the Company's recently developed internal sales force,
potential reductions in market prices for Web-based advertising, the inability
of the Company to effectively integrate the technology and operations of any
other acquired businesses or technologies with its operations, and the inability
to identify, attract, retain and motivate qualified personnel. There can be no
assurance that the Company will be successful in addressing such risks. As of
March 31, 1998, the Company had an accumulated deficit of $10,992,417. For the
year ended June 30, 1997 and the nine months ended March 31, 1998, the Company
incurred a loss of $9,340,816 and $5,260,609, respectively, after removing the
effect of the gain on the sale of the DMS Assets. The limited operating history
of the Company and the uncertain nature of the markets addressed by the Company
make the prediction of future results of operations difficult or impossible.
The Company believes that period to period comparisons of its operating results
are not meaningful and that the results for any period should not be relied upon
as an indication of future performance. As a result of these factors, there can
be no assurance that the Company will not incur significant losses on a
quarterly and annual basis for the foreseeable future.
Fluctuations In Quarterly Operating Results. As a result of the Company's
limited operating history, the Company does not have historical financial data
for a significant number of periods on which to base planned operating expenses.
Although the Company expects that advertising revenue on its websites will
eventually be greater than revenue from direct mail, there can be no assurance
in this regard. Moreover, the sale of advertisements on the Web is an emerging
market that is difficult to forecast accurately. The Company's expense levels
are based in part on its expectations concerning future revenue and to a large
extent are fixed. Quarterly revenues and operating results will depend
substantially upon the advertising revenues received within the quarter, which
are difficult to forecast accurately. Accordingly, the cancellation or deferral
of an even small number of advertising contracts, could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall, and any significant shortfall in revenue
in relation to the Company's expectations would have an immediate adverse effect
on the Company's business, operating results and financial condition. The
Company has high fixed costs and expenses relating to the development of the
Websites. To the extent that such expenses are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition will be materially and adversely affected.
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of usage of the Internet, demand for
Internet advertising, seasonal trends in Internet usage and advertising
placements, the level of user traffic on the Company's websites, the advertising
budgeting cycles of individual advertisers, the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new products or services by the Company or its
competitors, pricing changes for Web-based advertising, technical difficulties
with respect to the use of the Company's websites or other media properties
developed by the Company, incurrence of costs relating to acquisitions, general
economic conditions and economic conditions specific to the Internet and online
media. As a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing, service or marketing
decisions or business combinations that could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company also expects to experience seasonality in its business, with user
traffic on the Company's websites being lower during the summer and year-end
vacation and holiday periods, when usage of the Web and the Company's services
typically decline. Additionally, seasonality may also affect the amount of
customer advertising dollars placed with the Company in the first and third
calendar quarters as advertisers historically spend less during these quarters.
40
<PAGE>
Due to all of the foregoing factors, in future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected.
Dependence On Continued Growth In Use Of The Internet. The Company's
future success is substantially dependent upon continued growth in the use of
the Internet and the Web in order to support the sale of advertising on the
Company's websites. Rapid growth in the use of and interest in the Internet and
the Web is a recent phenomenon. There can be no assurance that communication or
commerce over the Internet will become widespread or that extensive content will
continue to be provided over the Internet. The Internet may not prove to be a
viable commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development and commercialization of performance
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by such potential
growth or that the performance or reliability of the Web will not be adversely
affected by this continued growth. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Web and the Company's online
media properties. If use of the Internet does not continue to grow, or if the
Internet infrastructure does not effectively support growth that may occur, the
Company's business, operating results and financial condition would be
materially and adversely affected.
Developing Market; Unproven Acceptance Of The Company's Products And
Business Strategy. The markets for the Company's products and media properties
have only recently begun to develop, are rapidly evolving and are characterized
by an increasing number of market entrants who have introduced or developed
information navigation products and services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for advertising on
the Internet is new and evolving, it is difficult to predict the future growth
rate, if any, and size of this market. There can be no assurance either that
the market for advertising on the Internet will develop or that demand content
and promotional advertising will emerge or become sustainable. The Company's
ability to successfully sell advertising on its co-branded websites depends
substantially on use of the Company's websites. If use of the Company's
websites fail to continue to grow, the Company's ability to sell advertising
would be materially and adversely affected. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's websites do not achieve or sustain market acceptance, the
Company's business, operating results and financial condition will be materially
and adversely affected.
Risks Associated With Brand Development. The Company believes that
establishing and maintaining the "Books Now", "WeatherLabs" and "Videos Now"
brands is a critical aspect of its efforts to attract and expand its Internet
audience and that the importance of brands recognition will increase due to the
growing number of Internet sites and the relatively low barriers to entry.
Promotion and enhancement of these brands will depend largely on the Company's
success in providing high quality products and services, which cannot be
assured. If consumers do not perceive the Company's existing websites to be of
high quality, or if the Company introduces new features and services or enters
into new business ventures that are not favorably received by consumers, the
Company will be unsuccessful in promoting and maintaining its brands, and will
risk diluting its brands and decreasing the attractiveness of its audiences to
advertisers. Furthermore, in order to attract and retain Internet users and to
promote and maintain these brands in response to competitive pressures, the
Company may find it necessary to increase substantially its financial commitment
to creating and maintaining a distinct brands loyalty among its consumers. If
the Company is unable to provide high quality features and services or otherwise
fails to promote and maintain its brands, or if the Company incurs excessive
expenses in an attempt to improve its features and services or promote and
maintain its brands, the Company's business, operating results and financial
condition will be materially and adversely affected.
Reliance On Advertising Revenues And Uncertain Adoption Of The Web As An
Advertising Medium. The Company anticipates deriving a substantial part of its
revenues from the sale of advertisements on its Web pages under short-term
contracts, and expects to continue to do so for the foreseeable future. Most of
the Company's
41
<PAGE>
advertising customers will likely have only limited experience with the Web as
an advertising medium, have not devoted a significant portion of their
advertising expenditures to Web- based advertising and may not find such
advertising to be effective for promoting their products and services relative
to traditional print and broadcast media. The Company's ability to generate
significant advertising revenues will depend upon, among other things,
advertisers' acceptance of the Web as an effective and sustainable advertising
medium, the development of a large base of users of the Company's services
possessing demographic characteristics attractive to advertisers, and the
ability of the Company to develop and update effective advertising delivery and
measurement systems. No standards have yet been widely accepted for the
measurement of the effectiveness of Web-based advertising, and there can be no
assurance that such standards will develop sufficiently to support Web-based
advertising as a significant advertising medium. Certain advertising filter
software programs are available that limit or remove advertising from an
Internet user's desktop. Such software, if generally adopted by users, may have
a materially adverse effect upon the viability of advertising on the Internet.
The Company also recently completed the transition from a third-party
advertising sales agent to internal advertising sales personnel, which involves
additional risks and uncertainties, including (among others) risks associated
with the recruitment, retention, management, training and motivation of sales
personnel. As a result of these factors, there can be no assurance that the
Company will sustain or increase current advertising sales levels. Failure to do
so will have a material adverse effect on the Company's business, operating
results and financial position.
In addition, there is intense competition in the sale of advertising on the
Internet, including competition from other Internet navigational tools as well
as other high-traffic sites, which has resulted in a wide range of rates quoted
by different vendors for a variety of advertising services, which makes it
difficult to project future levels of Internet advertising revenues that will be
realized generally or by any specific company. Competition among current and
future suppliers of Internet navigational services or Web sites, as well as
competition with other traditional media for advertising placements, could
result in significant price competition and reductions in advertising revenues.
There also can be no assurance that the Company's advertising customers will
accept the internal and third-party measurements of impressions received by
advertisements on the Company's websites, the Company's online media properties,
or that such measurements will not contain errors.
Substantial Dependence Upon Third Parties. The Company depends
substantially upon third parties for several critical elements of its business
including, among others, telecommunications, technology and infrastructure,
development of targeted content for local websites, distribution activities and
advertising sales. The Company believes that there are other third party
providers who can provide the same services as those providers currently used.
Technology And Infrastructure. The Company depends substantially upon its
own computer equipment and its maintenance and technical support to ensure
accurate and rapid presentation of content and advertising to the Company's
customers. Any failure by the Company to effectively maintain such equipment
and provide such information could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, any
termination of telecom agreements with Sprint, or Sprint's failure to renew the
Company's agreement upon expiration could result in substantial additional costs
to the Company in developing or licensing replacement telecom capacity, and
could result in a loss of levels of use of the Company's navigational services.
Enhancement Of The Company's Main Sites. To remain competitive, the
Company must continue to enhance and improve the responsiveness, functionality,
features and content of the Company's main sites. There can be no assurance
that the Company will be able to successfully maintain competitive user response
time or implement new features and functions, such as greater levels of user
personalization, localized content filter and information delivery through
"push" methods, which will involve the development of increasingly complex
technologies.
Furthermore, enhancements of or improvements to the Company's websites may
contain undetected errors that require significant design modifications,
resulting in a loss of customer confidence and user support and a decrease in
the value of the Company's brand name recognition. Any failure of the Company
to effectively improve its websites, or failure to achieve market acceptance,
could adversely affect the Company's business, results of operations and
financial condition.
42
<PAGE>
Technological Change. The market for Internet products and services is
characterized by rapid technological developments, evolving industry standards
and customer demands, and frequent new product introductions and enhancements.
These market characteristics are exacerbated by the emerging nature of this
market and the fact that many companies are expected to introduce new Internet
products and services in the near future. The Company's future success will
depend in significant part on its ability to continually improve the
performance, features and reliability of the Company's websites in response to
both evolving demands of the marketplace and competitive product offerings, and
there can be no assurance that the Company will be successful in doing so. In
addition, the widespread adoption of new Web functionality through developments
such as the Java programming language and increasingly personalized information
filtering and delivery could require fundamental changes in the Company's
services and could fundamentally affect the nature, viability and measurability
of Web-based advertising, which could adversely affect the Company's business,
operating results and financial condition.
Management Of Potential Growth. The process of managing advertising within
large, potentially high traffic Web sites such as the Company's websites will
become an increasingly important and complex task. To the extent that any
extended failure of the Company's advertising management system results in
incorrect advertising insertions, the Company may be exposed to "make good"
obligations with its advertising customers, which, by displacing advertising
inventory, could defer advertising revenues and thereby have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to effectively manage
the expansion of its operations, that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that Company
management will be able to achieve the rapid execution necessary to fully
exploit the market opportunity for the Company's products and media properties.
Any inability to effectively manage growth could have a material adverse effect
on the Company's business, operating results and financial condition.
Risk Of Capacity Constraints And Systems Failures. A key element of the
Company's strategy is to generate a high volume of use of its websites.
Accordingly, the performance of the Company's technology is critical to the
Company's reputation, its ability to attract advertisers to the Company's Web
sites and to achieve market acceptance of these products and media properties.
Any system failure that causes interruption or an increase in response time of
the Company's websites could result in less traffic to the Company's websites
and, if sustained or repeated, could reduce the attractiveness of the Company's
websites to advertisers. An increase in the volume of traffic to the Company's
websites could strain the capacity of the software or hardware deployed by the
Company, which could lead to slower response time or system failures, and
adversely affect the number of impressions received by advertising and thus the
Company's advertising revenues. In addition, as the number of affiliated Web
pages and users increase, there can be no assurance that the Company's
infrastructure will be able to scale accordingly. The Company is also dependent
upon its own technology and link to the Internet. Any disruption in Internet
access or any failure of the Company's technology to handle higher volumes of
user traffic could have a material adverse effect on the Company's business,
operating results and financial condition. Furthermore, the Company is
dependent on hardware suppliers for prompt delivery, installation and service of
servers and other equipment used to deliver the Company's products and services.
The Company's operations are dependent in part upon its ability to protect
its operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events. The
Company does not presently have redundant, multiple site capacity in the event
of any such occurrence. Despite the implementation of network security measures
by the Company, its servers are vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering with the Company's computer
systems. The occurrence of any of these events could result in interruptions,
delays or cessations in service to users of the Company's websites, which could
have a material adverse effect on the Company's business, operating results and
financial condition.
Integration Of Potential Acquisitions. During fiscal 1997, the Company
acquired SISNA. During fiscal 1998, the Company has acquired Books Now, Inc.
and WeatherLabs, Inc., and has evaluated several other potential acquisitions.
As part of its business strategy the Company expects to enter into further
business combinations and/or make significant investments in, complementary
companies, products or technologies. Any such transactions would be accompanied
by the risks commonly encountered in such transactions. Such risks include,
among other things, the difficulty of assimilating the operations and personnel
of the acquired companies, the potential disruption of the Company's ongoing
business, the inability of management to maximize the financial and strategic
position of the
43
<PAGE>
Company through the successful incorporation of acquired technology or content
and rights into the Company's products and media properties, the difficulties of
integrating personnel of acquired entities, additional expenses associated with
amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies, the impairment of relationships
with employees and customers as a result of any integration of new management
personnel, and the potential unknown liabilities associated with acquired
businesses. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions.
Trademarks And Proprietary Rights. The Company regards its copyrights,
trademarks, trade dress, trade secrets and similar intellectual property as
critical to its success, and the Company relies upon trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
its employees, customers, partners and others to protect its proprietary rights.
The Company pursues the registration of its trademarks in the United States, and
has applied for the registration of certain of its trademarks. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's copyrights, trademarks, trade dress and similar proprietary rights.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
The Company anticipates that it may be subject to legal proceedings and
claims in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by the Company and its licensees. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. The Company is not aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
effect on the Company's financial position or results of operations.
Dependence On Key Personnel. The Company's performance is substantially
dependent on the performance of its senior management and key technical
personnel. In particular, the Company's success depends substantially on the
continued efforts of its senior management team, which currently is composed of
a small number of individuals who only recently joined the Company. The Company
does not carry key person life insurance on any of its senior management
personnel. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, operating
results and financial condition of the Company.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results and financial condition.
Government Regulation And Legal Uncertainties. The Company is not
currently subject to direct regulation by any government agency in the United
States, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. Due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. For example, the Company may be subject
to the provisions of the Communications Decency Act (the "CDA"). Although the
constitutionality of the CDA, the manner in which the CDA will be interpreted
and enforced and its effect on the Company's operations cannot be determined, it
is possible that the CDA could expose the Company to substantial liability. The
CDA could also dampen the growth in use of the Web generally and decrease the
acceptance of the Web as a communications and commercial medium, and could,
thereby, have a material adverse effect on the Company's business, results of
operations and financial condition. A number of other countries also have
enacted or may enact laws that regulate Internet content. The adoption of such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products and media properties. Such laws
and regulations also could increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, operating results
and financial condition. Moreover, the applicability to the Internet of the
existing laws governing issues such as property ownership, defamation, obscenity
and personal privacy is uncertain, and the Company may be subject to claims that
its services violate such
44
<PAGE>
laws. Any such new legislation or regulation or the application of existing laws
and regulations to the Internet could have a material adverse effect on the
Company's business, operating results and financial condition.
Liability For Information Services. Because materials may be downloaded by
the online or Internet services operated or facilitated by the Company and may
be subsequently distributed to others, there is a potential that claims will be
made against the Company for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature and content
of such materials. Such claims have been brought, and sometimes successfully
pressed against online services in the past. In addition, the Company could be
exposed to liability with respect to the listings that may be accessible through
the Company's websites, or through content and materials that may be posted by
users in classifieds, bulletin board and chat room services offered by the
Company. It is also possible that if any information provided through the
Company's services, such as stock quotes, analyst estimates or other trading
information, contains errors, third parties could make claims against the
Company for losses incurred in reliance on such information. Also, to the
extent that the Company provides users with information relating to purchases of
goods and services, the Company or its operating subsidiaries could face claims
relating to injuries or other damages arising from such goods and services.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability or legal defense expenses that are not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on the
Company's business, operating results and financial condition.
Concentration Of Stock Ownership. As of June 30, 1998, the present
directors, executive officers, greater than 5% stockholders and their respective
affiliates beneficially owned approximately 45% of the outstanding Common Stock
of the Company. As a result of their ownership, the directors, executive
officers, greater than 5% stockholders and their respective affiliates
collectively are able to control all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company.
Volatility Of Stock Price. The trading price of the Company's Common Stock
has been and may continue to be subject to wide fluctuations in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new affiliations and services by
the Company or its competitors, changes in financial estimates and
recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news reports relating to trends in the Company's markets. In
addition, the stock market in general, and the market prices for Internet-
related companies in particular, have experienced extreme volatility that often
has been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the trading price of the
Company's Common Stock, regardless of the Company's operating performance.
Antitakeover Effect Of Certain Charter Provisions. The Board of Directors
has the authority to issue up to 2,500,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock may be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no present
plans to issue shares of Preferred Stock.
45
<PAGE>
PROPOSAL NO. 2
AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF
THE COMPANY TO "DIGITAL COURIER TECHNOLOGIES, INC."
GENERAL
The Company agreed in the sale of DMS to Focus that it would change its name
to not include the word "DataMark." On March 6, 1998, the Board, determining it
to be in the best interests of the Company to change the name of the Company to
Digital Courier Technologies, Inc. if the Proposed Sale is consummated,
authorized the preparation and filing of an Amended and Restated Certificate of
Incorporation, subject to consummation of the Proposed Sale. If the
stockholders approve this Proposal No. 2 and the Proposed Sale is consummated,
the Company will file the Amended and Restated Certificate of Incorporation.
The Amended and Restated Certificate of Incorporation, prepared to (a) effect a
change of the name of the Company to Digital Courier Technologies, Inc. and (b)
to restate the Company's existing Certificate of Incorporation, as amended, into
a single document, is attached as Annex II to this Proxy Statement and
incorporated herein by reference. Other than the name change, the remaining
provisions of the Certificate of Incorporation of the Company, as currently in
effect, will not be changed as a result of the approval of the Amended and
Restated Certificate of Incorporation.
VOTE REQUIRED
Approval of the Amended and Restated Certificate of Incorporation requires the
affirmative vote of the holders of a majority of the Company's issued and
outstanding shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND THE
COMPANY'S CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY TO
"DIGITAL COURIER TECHNOLOGIES, INC."
46
<PAGE>
PROPOSAL NO. 3
RATIFICATION OF SALE OF ASSETS BY DATAMARK SYSTEMS
GENERAL
On March 5, 1998, DMS, a wholly-owned subsidiary of the Company, sold all of
its assets (the "DMS Asset Sale") to Focus Direct, Inc., a Texas corporation
("Focus"), pursuant to an Asset Purchase Agreement (the "DMS Agreement"). In
addition, pursuant to the DMS Agreement, DataMark Printing, Inc. ("DMP"),
DataMark Lists, Inc. ("DML") and WorldNow Online Network, Inc. ("WNOW"), all
wholly-owned subsidiaries of the Company, sold to Focus certain of their assets
which had been used by DMS in connection with its direct mail business. The
consideration paid by Focus consisted of $6.9 million in cash at closing, and
$800,000, to be adjusted for certain items, which is due and payable on June 30,
1999.
The Board of Directors of the Company, as sole shareholder of DMS, has
approved the DMS Asset Sale. The Company is requesting that its stockholders
ratify the DMS Asset Sale.
REASONS FOR SALE
For the past several years, the Company's management has operated divisions in
different industries, namely the direct mail industry and the online services
industry. Given the limited capital resources of the Company, the Board of
Directors has frequently discussed whether management should focus its efforts
and expand in a single industry. The Board, over a period of six months,
carefully examined acquisition opportunities in both the direct mail industry
and the online services industry. After discussion regarding price, return on
investment, and stockholder value, it was decided that the Company's prospects
in the Internet and online industry are more advantageous for the Company's
stockholders and the Company's share value than in the direct mail industry.
During the course of these discussions by the Board, Focus Direct, Inc. made an
unsolicited offer to acquire the assets of DMS (constituting all of the direct
mail assets). The Board consequently entered into serious negotiations regarding
price and terms.
The sale of the assets of DMS will allow the Company to satisfy its goals and
objectives of focusing the energies of management on a single industry and a
more focused business strategy. Moreover, the price offered was at a multiple of
earnings in the high range of comparable direct marketing companies sold during
the last year. It was concluded that the cash from the strategic divestiture of
the direct mail business, excluding the $1.5 million used to facilitate the
Evans Stock Repurchase set forth herein, would capitalize and fund the Internet
strategy of the Company for an extended period of time without a dilutive
effect. Although the Company had been discussing raising working capital during
fiscal 1998 through a private placement or public offering, given the trading
price of the Company's shares on Nasdaq, the opportunity to sell the assets of
DMS at a high multiple of historical earnings was viewed by the Board as a
better way to add stockholder value without dilution.
BUSINESS ACTIVITIES FOLLOWING SALE
Since the divestiture of DMS and the focus by management on a single industry,
the trading price of the Company's Common Stock on the Nasdaq National Market
has increased. As the Company has made public announcements of developments in
the Internet and online services industries, interest in the Company's
technology-centric strategy has increased, as evidenced by increased share
trading volume and trading prices. The Company has, subsequent to the
divestiture of DMS, acquired WeatherLabs, Inc., a provider of sophisticated
weather services and products over the Internet in May 1998, and has entered
into an acquisition agreement with Digital Courier, an Internet software
company. See Proposal No. 1. The Company believes that its Internet focus will
provide greater return on investment to the Company's stockholders than the
direct mail business.
RECOMMENDATION OF THE BOARD OF DIRECTORS
In reaching its conclusion, the Board considered a number of factors,
including the following:
. Management of the Company had been operating businesses in two distinct
industries;
. The Board believed management would be more effective if focused on a
single industry and strategy;
47
<PAGE>
. The Board carefully analyzed acquisition and expansion opportunities in
both the direct mail and the online services industries;
. The price offered for the assets of DMS was in the high range of
comparable acquisition opportunities and recent private sales;
. The Board concluded that, given the background of management, a greater
return on investment and stockholder value could be achieved in the
Internet industry than in the direct mail industry;
. Several attractive and synergistic acquisition opportunities in the
Internet industry had come to the attention of the Board;
. The Company needed working capital, and the DMS Asset Sale provided
capital without the dilutive effect to stockholders that an issuance of
stock in a private placement or public offering would have created;
. While the historical earnings of DMS had been steadily increasing, the
Company was approaching a saturation level in its direct mail niche, and
future growth was expected to be at a lower rate; the unsolicited offer
for the DMS assets created an opportunity to maximize stockholder value
from the direct mail business.
The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive, but includes all material factors
considered by the Board. The Board did not attempt to quantify or otherwise
assign relative weights to the specific factors it considered or determine that
any factor was of particular importance. A determination of various weightings
would, in the view of the Board, be impractical. Rather, the Board viewed its
position and recommendations as being based on the totality of the information
presented to, and considered by, the Board. In addition, individual members of
the Board may have given different weight to different factors. The Board
reserved the right to consider unsolicited offers to the extent it deemed
appropriate to satisfy its duties to stockholders.
All directors of the Company voted in favor of the DMS Divestiture.
USE OF PROCEEDS
The net proceeds from the DMS Asset Sale have been and will be used by the
Company (i) to repurchase 1,800,000 shares of the Company's Common Stock held
by Mr. Evans, the former Chief Executive Officer and Chairman of the Board of
the Company, and (ii) for working capital and for general corporate purposes,
including, but not limited to, strategic acquisitions and joint ventures.
Pending the ultimate uses as set forth above, the net proceeds will be
invested in government securities or in short-term, investment-grade interest
bearing securities, or a combination thereof.
ACCOUNTING TREATMENT/FEDERAL INCOME TAX CONSEQUENCES
The DMS Asset Sale will not have any materially negative federal income tax
consequences to the Company's stockholders due to the Company's previously
recorded valuation allowance for deferred tax assets resulting from tax net
operating loss carryforwards. The Company recognized a gain from disposal of
discontinued operations equal to the Net Proceeds (equal to the sum of the
consideration received less expenses of the DMS Asset Sale) less the net book
value of the assets sold and liabilities assumed. For tax purposes, the gain
will be equal to the Net Proceeds of the sale less the tax basis of the assets
sold and the liabilities assumed.
FOCUS DIRECT, INC.
Focus Direct, Inc. ("Focus") is a provider of products and services in the
direct mail industry. Focus is located in San Antonio, Texas.
48
<PAGE>
THE ASSET PURCHASE AGREEMENT
The Company, DMS, DataMark Printing, Inc., DataMark Lists, Inc., WorldNow
Online Network, Inc. and Focus are parties to the Asset Purchase Agreement. The
following is a brief summary of certain material provisions of the Asset
Purchase Agreement not summarized elsewhere in this Proxy Statement. The
summary is qualified in its entirety by reference to the complete text of the
Asset Purchase Agreement, which is incorporated by reference in its entirety and
attached to this Proxy Statement as Annex III. Terms that are not otherwise
defined in this summary or elsewhere in this Proxy Statement have the meaning
set forth in the Asset Purchase Agreement. All stockholders are urged to read
the Asset Purchase Agreement in its entirety.
PURCHASE PRICE
Upon the terms and subject to the conditions set forth in the Asset Purchase
Agreement, Focus delivered to the Company on March 5, 1998, a cash payment of
$6,900,000 and is obligated to deliver to the Company an additional $800,000 on
June 30, 1999 (the "Purchase Price"). The Purchase Price was adjusted, however,
through a post-closing purchase price adjustment by the amount that the Net
Tangible Assets as of the Closing Date differed from the Net Tangible Assets as
of November 1, 1997, which totaled $154,434. Moreover, because of certain
reserves taken for anticipated bonus payments to management of DMS, which
bonuses may or may not be earned, additional cash may be released to the Company
following the completion of DMS's fiscal year ending June 30, 1998. There can
be no assurance that such releases will occur.
ACQUIRED DMS ASSETS AND DMS ASSUMED LIABILITIES
DMS Assets: The DMS Assets purchased by Focus (defined in the Asset Purchase
Agreement as the "Acquired Assets") generally included all of the operating
assets of DMS (excluding cash), including, but not limited to: (a) all
furniture, furnishings, fixtures, machinery, equipment, and vehicles, as well as
leasehold improvements, which are located at DMS, DataMark Printing, Inc.,
DataMark Lists, Inc., and WorldNow On-Line Network, Inc.'s facilities in Salt
Lake City, Utah, Murray, Utah, Kansas City, Kansas, and Atlanta, Georgia
(collectively, the "Facilities"); (b) inventory, parts, supplies and incidentals
which are located at the Facilities; (c) all trade accounts receivable of DMH,
DataMark Printing, Inc., DataMark Lists, Inc., and WorldNow On-Line Network,
Inc. arising in connection with the Business as defined in the Asset Purchase
Agreement; (d) all credits, pre-paid expenses and other items, security
deposits, unbilled costs and fees; (e) all right, title and interest to
intellectual property and other intangible property associated with the
business, including, without limitation, customer lists, databases and other
goodwill, trade secrets, methods, inventions and other know-how and patents,
trademarks, service marks, tradenames and copyrights; (f) all rights under
material contracts as defined in the Asset Purchase Agreement; (g) all books,
records, manuals and other materials relating to or used in connection with the
assets or business; (h) all licenses, permits, authorizations and approvals of
governmental or other regulatory authorities which relate to the assets or
business; (i) all rights, claims and actions arising out of occurrences before
and after the Closing Date; which relate to, or arise from the assets or
business; and (j) all assets and properties reflected on certain financial
statements, except those assets and properties which have been disposed of by
DMS, DataMark Printing, Inc., DataMark Lists, Inc., or WorldNow On-Line Network,
Inc. in the ordinary course of the business after the date of such certain
financial statements. The DMS Assets were transferred and assigned free and
clear of any and all liens and encumbrances, except for the Assumed Liabilities
described below.
The DMS Assets specifically excluded, and DMS retained, the following Retained
Assets: (a) all cash and cash equivalents, other than petty cash; (b) corporate
seals, minute books, stock books and other records relating to the corporate
organization of DMS, DataMark Printing, Inc., DataMark Lists, Inc., and WorldNow
On-Line Network, Inc.; and (c) certain assets, properties and rights disclosed
in the Asset Purchase Agreement.
Assumed Liabilities: On March 5, 1998, Focus assumed liability for all trade
and other accounts payable reflected on the Closing Date Balance Sheet, certain
accrued liabilities reflected on the Closing Date Balance Sheet and most
contracts of DMS (the "Assumed Liabilities"). The Assumed Liabilities include,
but are not limited to: (a) all accounts payable of DMS, DataMark Printing,
Inc., DataMark Lists, Inc., and WorldNow On-Line Network, Inc. arising in the
ordinary course of the business; (b) obligations under the Material Contracts,
as defined in the Asset Purchase Agreement, accruing from the Closing Date; and
(c) the Assumed Employee Bonuses (as defined in the Asset Purchase Agreement).
Except as otherwise provided in the Asset Purchase Agreement, Focus did not
assume
49
<PAGE>
any other of DMS's, DataMark Printing, Inc.'s, DataMark Lists, Inc.'s and
WorldNow On-Line Network, Inc.'s liabilities of any nature, currently existing
or incurred in the future, including without limitation, pre-closing
liabilities, liabilities related to income or franchise taxes, non-compliance
with laws or regulations, environmental matters, employee matters, employee
plans, liabilities, claims and obligations under any contracts or agreements
which are not Assumed Contracts, liabilities or claims relating to any
litigation involving the Company, product liabilities or product warranties.
At the Closing, DMS assigned, and Focus assumed, certain contracts identified
on a schedule to the Asset Purchase Agreement (the "Assumed Contracts"). Focus
will perform all the obligations, and realize all the benefits, under the
Assumed Contracts.
THE CLOSING
The closing (the "Closing") of the DMS Asset Sale took place on March 5, 1998.
REPRESENTATIONS AND WARRANTIES; SURVIVAL
In the Asset Purchase Agreement, each of the parties made certain
representations and warranties to the other. Except as set forth below, the
representations and warranties and other provisions of the Asset Purchase
Agreement survive Closing. The Asset Purchase Agreement attached hereto as
Annex I sets forth all of the representations and warranties and covenants of
the parties thereto.
INDEMNIFICATION
The Asset Purchase Agreement provides that Focus will indemnify DMS and the
Company for certain losses due to Focus' (i) failure to assume, pay, perform or
discharge the Assumed Liabilities; (ii) breach of the Asset Purchase Agreement;
or (iii) the conduct of, or conditions existing with respect to, the Business
after the Closing. The Asset Purchase Agreement provides that DMS will
indemnify Focus for losses due to DMS's (i) failure to assume, pay, perform or
discharge the Retained Liabilities; (ii) breach of the Purchase Agreement; or
(iii) the conduct of, or conditions existing with respect to, the Business prior
to Closing.
THE BOARD OF DIRECTORS BELIEVES THAT THE SALE OF THE DMS ASSETS TO BE IN THE
BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS HAS APPROVED THE SALE AND RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS
VOTE FOR THE RATIFICATION OF THE SALE OF ASSETS BY DATAMARK SYSTEMS, INC.
50
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
RELATED TO
PROPOSAL NUMBER 3 RATIFICATION OF SALE OF ASSETS OF DATAMARK SYSTEMS
The following unaudited pro forma condensed consolidated financial data is
based upon the historical consolidated financial statements of DataMark Holding,
Inc. and subsidiaries ("DataMark") as adjusted to give effect to the sale of
certain net assets associated with its direct mail advertising business (see
Proposal No. 3) as if the sale (which occurred on March 5, 1998) had occurred on
December 31, 1997 for purposes of the unaudited pro forma condensed consolidated
balance sheet, and as of July 1, 1996 for purposes of the unaudited pro forma
condensed consolidated statements of operations for the year ended June 30, 1997
and for the six months ended December 31, 1997.
The pro forma adjustments are based upon information set out in the asset
purchase agreement and information from the Company's books and records that
management of the Company believes are reasonable and accurate. The unaudited
pro forma condensed consolidated balance sheet as of December 31, 1997 and the
unaudited pro forma condensed consolidated statements of operations for the year
ended June 30, 1997 and for the six months ended December 31, 1997, are not
necessarily indicative of the results of operations of DataMark, or its
financial position, had the sale actually occurred on December 31, 1997 or July
1, 1996. The unaudited pro forma results of operations of DataMark for the six
months ended December 31, 1997 are not necessarily indicative of the results of
operations that may be generated for the entire fiscal 1998 year. The unaudited
pro forma adjustments are described in the accompanying notes to unaudited pro
forma condensed consolidated financial data.
This unaudited pro forma condensed consolidated financial data should be read
in conjunction with the consolidated financial statements of DataMark and the
related notes thereto, included herein for the fiscal year ended June 30, 1997
and included in the Company's Quarterly Report on Form 10-Q for the six months
ended December 31, 1997.
51
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
DataMark Adjustments Pro Forma
---------- ----------- ---------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 2,417,125 $ 6,900,000 (a) $ 9,317,125
Trade accounts receivable, net 940,024 (854,522) (b) 85,502
Inventory 218,697 (126,698) (b) 91,999
Other current assets 245,815 (3,756) (b) 242,059
------------ ----------- --- -----------
Total current assets 3,821,661 5,915,024 9,736,685
------------ ----------- -----------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,036,403 (273,731) (b) 5,762,672
Furniture, fixtures and leasehold
improvements 859,878 (122,232) (b) 737,646
Printing equipment 681,111 (681,111) (b) -
Vehicles 11,466 (11,466) (b) -
------------ ----------- --- -----------
7,588,858 (1,088,540) 6,500,318
Less accumulated depreciation
and amortization (1,813,468) 517,707 (b) (1,295,761)
------------ ----------- --- -----------
Net property and equipment 5,775,390 (570,833) 5,204,557
------------ ----------- -----------
INVESTMENT 750,000 - 750,000
OTHER ASSETS 51,139 800,000 (a) 851,139
------------ ----------- -----------
Total assets $ 10,398,190 $ 6,144,191 $16,542,381
============ =========== ===========
CURRENT LIABILITIES:
Accounts payable $ 1,044,969 $ (605,408) (b) $ 439,561
Current portion of capital lease
obligation 866,816 - 866,816
Accrued liabilities 616,079 (173,269) (b) 442,810
Notes payable 17,597 - 17,597
Other current liabilities 75,000 - 75,000
------------ ----------- -----------
Total current liabilities 2,620,461 (778,677) 1,841,784
------------ ----------- -----------
CAPITAL LEASE OBLIGATION, net of current
portion 1,658,495 - 1,658,495
------------ ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 861 - 861
Additional paid-in capital 22,736,779 - 22,736,779
Accumulated deficit (16,618,406) 6,922,868 (c) (9,695,538)
------------ ----------- -----------
Total stockholders' equity 6,119,234 6,922,868 13,042,102
------------ ----------- -----------
Total liabilities and stockholders' equity $ 10,398,190 $ 6,144,191 $16,542,381
============ =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
52
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
DataMark Adjustments Pro Forma
---------- ----------- ---------
NET SALES:
<S> <C> <C> <C>
Direct mail marketing $ 6,448,156 $(6,448,156) (e) $ -
Computer online marketing 350,654 - 350,654
----------- ----------- ------------
Total net sales 6,798,810 (6,448,156) 350,654
----------- ----------- ------------
COST OF SALES:
Postage 2,419,652 (2,419,652) (e) -
Materials and printing 2,133,448 (2,133,448) (e) -
Computer online operations 436,306 - 436,306
----------- ----------- ------------
Total cost of sales 4,989,406 (4,553,100) 436,306
----------- ----------- ------------
GROSS MARGIN (DEFICIT) 1,809,404 (1,895,056) (85,652)
----------- ----------- ------------
OPERATING EXPENSES:
Research and development 6,357,157 (263,716) (e) 6,093,441
General and administrative 3,026,323 (978,750) (e) 2,047,573
Selling 2, 258,978 (177,272) (e) 2,081,706
----------- ----------- --- ------------
Total operating expenses 11,642,458 (1,419,738) 10,222,720
----------- ----------- ------------
LOSS FROM OPERATIONS (9,833,054) (475,318) (10,308,372)
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest and other income 501,733 501,733
Interest expense (9,495) 540 (e) (8,955)
----------- ----------- ------------
Other income, net 492,238 540 492,778
----------- ----------- ------------
NET LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (9,340,816) (474,778) (9,815,594)
BENEFIT FROM INCOME TAXES - 2,581,475 (d) 2,581,475
----------- ----------- ------------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS (9,340,816) 2,106,697 (7,234,119)
DISCONTINUED OPERATIONS:
Gain on sale of direct mail marketing operations,
net of income taxes of $2,581,475 - 4,302,459 (d) 4,302,459
----------- ----------- ------------
NET LOSS $(9,340,816) $ 6,409,156 $ (2,931,660)
=========== =========== ============
NET LOSS PER COMMON SHARE (Basic
and Diluted):
Continuing Operations $(1.12) $(0.87)
Net loss $(1.12) $(0.35)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,309,467 8,309,467
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
53
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
DataMark Adjustments Pro Forma
---------- ----------- ---------
NET SALES:
<S> <C> <C> <C>
Direct mail marketing $ 5,479,759 $(5,479,759) (e) $ -
Computer online marketing 431,200 - 431,200
----------- ------------ ------------
Total net sales 5,910,959 (5,479,759) 431,200
----------- ------------ ------------
COST OF SALES:
Postage 2,187,574 (2,187,574) (e) -
Materials and printing 1,623,661 (1,623,661) (e) -
Computer online operations 342,141 - 342,141
----------- ------------ ------------
Total cost of sales 4,153,376 (3,811,235) 342,141
----------- ------------ ------------
GROSS MARGIN 1,757,583 (1,668,524) 89,059
----------- ------------ ------------
OPERATING EXPENSES:
General and administrative 3,092,560 (809,206) (e) 2,283,354
Selling 1,576,522 (562,094) (e) 1,014,428
Research and development 847,067 - 847,067
----------- ------------ ------------
Total operating expenses 5,516,149 (1,371,300) 4,144,849
----------- ------------ ------------
LOSS FROM OPERATIONS (3,758,566) (297,224) (4,055,790)
----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 91,121 (24,804) (e) 66,317
Interest expense (61,822) - (61,822)
----------- ------------ ------------
Other income, net 29,299 (24,804) 4,495
----------- ------------ ------------
NET LOSS $ 3,729,267) $ (322,028) $( 4,051,295)
=========== ============ ============
NET LOSS PER COMMON SHARE (Basic
and Diluted) $ (0.43) $ (0.47)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,605,767 8,605,767
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
data.
54
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
Description Of The Transaction
- ------------------------------
On March 5, 1998, DataMark Systems, Inc. ("DMS"), a wholly owned subsidiary of
DataMark Holding, Inc. (the "Company") sold its direct mail marketing business
to Focus Direct, Inc., a Texas corporation. Pursuant to an Asset Purchase
Agreement, Focus Direct, Inc. purchased all assets, properties, rights, claims
and goodwill, of every kind, character and description, tangible and intangible,
real and personal, wherever located of DMS, DataMark Printing, Inc.
("Printing"), DataMark Lists, Inc. ("Lists") and WorldNow Online Network, Inc.
(all wholly owned subsidiaries of the Company) used in DMS's direct mail
marketing business. Focus Direct, Inc. also agreed to assume certain
liabilities of DMS, Printing, and Lists. Focus Direct, Inc. is not affiliated
with the Company.
Pursuant to the Asset Purchase Agreement, Focus Direct, Inc. agreed to pay the
Company $7,700,000 for the above described assets. Focus Direct, Inc. paid the
Company $6,900,000 in cash at closing and will pay the additional $800,000 on or
about June 30, 1999. The total purchase price is to be adjusted for the
difference between the assets acquired and liabilities assumed at November 30,
1997 and those as of the date of closing.
The foregoing discussion is qualified in its entirety by reference to the
Asset Purchase Agreement, a copy of which is attached hereto as Annex III and
incorporated herein by reference.
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited pro forma condensed consolidated balance sheet has
been prepared assuming that the net asset sale occurred on December 31, 1997.
The unaudited pro forma condensed consolidated statements of operations have
been prepared assuming that the net asset sale occurred on July 1, 1996, the
first day of the Company's most recent fiscal year, excluding the gain on sale
that would have been realized on July 1, 1996 (See Note 2(a)).
(2) PRO FORMA ADJUSTMENTS
---------------------
(a) Adjustment to record the total amount to be received from the sale of net
assets as follows:
<TABLE>
<S> <C>
Total sales price $7,700,000
Less: Payment deferred
until June 1999 800,000
----------
Net cash received
at closing $6,900,000
==========
</TABLE>
(b) Adjustments to eliminate net assets sold in accordance with the asset
purchase agreement.
(c) Adjustment to record the gain from the sale of net assets as if sale had
occurred on December 31, 1997 calculated as follows:
<TABLE>
<S> <C>
Total sales price $7,700,000
Less: Pro forma net assets
sold at December 31, 1997 (777,132)
----------
Net gain on sale $6,922,868
==========
</TABLE>
The gain from the sale has not been reduced for income taxes due to the
Company's previously recorded valuation allowance for deferred tax assets
resulting from tax net operating loss carryforwards.
55
<PAGE>
(d) The pro forma net loss does not reflect the gain from the sale of net
assets as if sale had occurred on July 1, 1996 calculated as follows:
<TABLE>
<S> <C>
Total sales price $7,700,000
Less: Pro forma net assets
sold at July 1, 1996 (816,066)
----------
6,883,934
Less: Estimated income taxes
at 37.5 percent (2,581,475)
----------
Net gain on sale $4,302,459
==========
</TABLE>
(e) Adjustments to eliminate sales and expenses related to the Company's direct
mail marketing operations. All overhead included in the eliminated
expenses were those expenses incurred only for the benefit of DataMark
Systems, Inc.
56
<PAGE>
PROPOSAL NO. 4
RATIFICATION OF REPURCHASE OF SHARES
GENERAL
On March 5, 1998, the Company entered into a Stock Repurchase Agreement (the
"Repurchase Agreement") with Mr. Evans, the former CEO and Chairman of the Board
of the Company, which was amended on April 28, 1998 (the "Repurchase
Agreement"). Pursuant to the Repurchase Agreement, the Company agreed to
purchase 1,800,000 shares of the Company's common stock held by Mr. Evans (the
"Evans Shares") for $1,500,000. Additionally, the Company entered into a
Confidentiality and Noncompetition Agreement (the "Evans Noncompete Agreement")
with Mr. Evans, pursuant to which Mr. Evans, for consideration consisting of
$25,000, has agreed, among other things, not to compete with the Company,
solicit employees from the Company, or use proprietary information of the
Company for a period of three years.
THE REPURCHASE
Mr. Evans formed the Company as a direct mail company in 1988. As the direct
mail business expanded and new management was added, the Company began to
explore business opportunities in the online industry. As the Company's
activities and expenditures in the online industry and eventually the Internet
industry increased, management was stretched between two industries and business
models. As the Company deliberated whether to focus on one industry or continue
to expand in two industries, Mr. Evans began to express concern over the
increasing expenditures in the Internet industry. In November, 1997, when the
Board of Directors voted to continue investing in the WorldNow business model,
despite the lack of any revenues, Mr. Evans made an offer to the Board of
Directors to sell substantially all of his stock in the Company at a price
substantially lower than the Company's trading price on Nasdaq. The price
offered by Mr. Evans represented a substantial gain to Mr. Evans, whose basis in
the shares as a founder was very low. At the same time, the price reflected a
substantial discount to the trading price of the Company's common stock on
Nasdaq.
Over the course of the next several months, the Board and Mr. Evans negotiated
the price and terms of a possible repurchase of Mr. Evans' shares. On March 1,
1998, the Company and Mr. Evans entered into a Stock Repurchase Agreement,
pursuant to which the Company agreed to repurchase 2,050,000 shares of common
stock from Mr. Evans for a purchase price of $2,000,000, or $0.98 per share. On
such date, the closing price of the Company's common stock on Nasdaq was $2.875.
The 2,050,000 Shares and the $2,000,000 were placed in escrow, pending
stockholder approval.
On April 28, 1998, the Company entered into an Amended Stock Repurchase
Agreement, pursuant to which the Company agreed to purchase 1,800,000 shares of
the Company's common stock from Mr. Evans (the "Evans Shares") for $1,500,000,
or $0.83 per share. On such date, the closing price of the Company's common
stock on Nasdaq was $4.375. Because of the favorable price to the Company, the
parties terminated the escrow and closed the transaction.
REASONS FOR THE TRANSACTION
The Board unanimously approved the Repurchase Agreement and believes that the
repurchase of the Evans Shares was beneficial to the Company and its
stockholders for the following reasons:
. The price offered by Mr. Evans represented a substantial discount to the
market price of the Company's Common Stock.
. The price offered by Mr. Evans represented a substantial discount to the
historic low trading price of the Company's Common Stock on the Nasdaq
National Market.
. Although the price was at a discount to market, it represented a
significant gain for Mr. Evans, whose basis in the Evans Shares as a
founder of the Company was low, creating a "win/win" arrangement.
. The Evans Repurchase and the resignation by Mr. Evans as an officer has
allowed management of the Company to focus on a single industry, namely the
Internet industry, without internal dissension.
57
<PAGE>
. The acquisition of the Evans Shares has enabled the Company to acquire
WeatherLabs, Inc. through the issuance of shares.
. The acquisition of the Evans Shares has partially enabled the Company to
acquire Digital Courier through the issuance of shares, pending approval by
the Company's shareholders.
RECOMMENDATION OF BOARD
The Board recommends a vote for the proposal to ratify the repurchase of
1,800,000 shares of Common Stock from Mr. Evans.
ACCOUNTING TREATMENT/FEDERAL INCOME TAX CONSEQUENCES
The repurchased shares will be held in treasury and therefore reduce the
Company's equity by $1,500,000.
REPURCHASE AGREEMENT
The Company and Chad Evans are parties to the Repurchase Agreement. The
following is a brief summary of certain provisions of the Repurchase Agreement.
This description is qualified in its entirety by reference to the complete text
of the Repurchase Agreement, a copy of which is attached to this Proxy Statement
as Annex IV and is incorporated herein by reference. Terms that are not
otherwise defined in this summary or elsewhere in this Proxy Statement have the
meaning set forth in the Repurchase Agreement. All stockholders are urged to
read the Repurchase Agreement in its entirety.
PURCHASE PRICE
Upon the terms and subject to the conditions set forth in the Repurchase
Agreement dated March 5, 1998, the Company agreed to purchase 2,050,000 shares
of the Company's common stock held by Mr. Evans for a total purchase price of
$2,000,000 in cash. On March 5, 1998, Mr. Evans and the Company amended the
Repurchase Agreement whereby the purchase price was reduced to $1,500,000 in
exchange for 1,800,000 shares of the Company's common stock held by Mr. Evans
THE CLOSING
The Closing of the Evans Stock Purchase Agreement took place on March 5, 1998.
REPRESENTATIONS AND WARRANTIES
The Repurchase Agreement, as amended, contained no representations or
warranties by either the Company or Mr. Evans, except that Mr. Evans was the
sole beneficial and legal owner of the 1,800,000 shares of the Company's common
stock.
HOLD HARMLESS
The Repurchase Agreement provides that the parties will hold each other
harmless from any and all losses or liabilities of any kind whatsoever based on
Evans' actions or inactions as an officer, director or affiliate of the Company,
including but not limited to the entering into and performance under the terms
of the Repurchase Agreement. The Company agreed to indemnify Mr. Evans for any
loss or liability to the same extent and scope, including reimbursing Mr. Evans'
attorneys fees and costs in connection with any claim made against him.
By way of limitation on the duty of the parties to hold each other harmless
and on the duty of the Company to indemnify Mr. Evans, the extent of any such
duty shall be limited to the amount of the purchase price. Moreover, such duty
shall have a deductible of $50,000 per occurrence before any claim for
indemnification or hold harmless may be made under the Repurchase Agreement.
58
<PAGE>
CONFIDENTIALITY AND NON-COMPETITION
On March 5, 1998, the Company and Mr. Chad L. Evans entered into the Evans
Noncompete Agreement, as amended on April 29, 1998, in connection with the
Repurchase Agreement. The terms of the Evans Noncompete Agreement, as amended,
provide that until March 4, 2000, Evans shall not, on behalf of himself or any
other person, directly or indirectly, (a) solicit employment from, offer
employment to or employ any person who (i) is then currently an employee of the
Company or (ii) during the then preceding sixty (60) days terminated his or her
employment with the Company or any affiliate without the Company's consent, and
Evans shall not otherwise interfere, directly or indirectly, with the
relationship between the Company and any employee, except for three certain
current employees of the Company; (b) interfere with the relationship between
the Company and any customer, distributor, vendor or supplier of the Company;
(c) own, control, manage, operate, be employed by, participate or engage in, or
otherwise have an interest in, any business or enterprise which is engaged in
direct competition in the business that the Company is presently engaged in,
including E-Commerce, Internet Service Provider, On-Line Book Sales, On-Line
Broadcast Network Strategy and Web Hosting. However, Evans may own capital
stock or other securities of any corporation which is publicly owned or
regularly traded in the over-the-counter market or on any securities exchange,
provided, however, such investment does not exceed, directly or indirectly, 10%
of the issuer's outstanding securities in that class.
In exchange for Evans entering into the Evans Noncompete Agreement, the
Company paid Evans $25,000.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
REPURCHASE OF 1,800,000 SHARES OF COMMON STOCK FROM MR. EVANS.
59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding Common Stock of the
Company beneficially owned as of July 1, 1998 by: (i) each person known by the
Company to beneficially own 5% or more of the outstanding Common Stock, (ii)
each director and director nominee, (iii) each executive officer named in the
Summary Compensation Table, and (iv) all officers and directors as a group. As
of June 1, 1998, there were 7,295,825 shares of Common Stock outstanding and no
Preferred Stock outstanding.
<TABLE>
<CAPTION>
Amount of Percentage
Names and Addresses of Common of Voting
Principal Stockholders Shares* Securities
---------------------- ------- ----------
<S> <C> <C>
Ameica Online, Inc. 955,414 11.3%
22000 AOL Way
Dulles, Virginia 20166
Quantum Industrial Partners LDC 590,000 7.0%
Kaye Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
Officers and Directors
----------------------
1,313,489(1) 15.6%
James A. Egide
448 E. 6400 S., Suite 400
Salt Lake City, Utah 84107
Kenneth M. Woolley 397,000(2) 4.6%
448 E. 6400 S., Suite 400
Salt Lake City, Utah 84107
Stanton D. Jones 343,500(3) 4.0%
448 E. 6400 S., Suite 400
Salt Lake City, Utah 84107
Mitchell L. Edwards 320,308(4) 3.7%
448 E. 6400 S., Suite 400
Salt Lake City, Utah 84107
Raymond J. Pittman (5) 0.0%
187 Fremont Street
San Francisco, California 94105
Michael D. Bard
448 E. 6400 S., Suite 400 105,308(6) 1.2%
Salt Lake City, Utah 84107
All Directors and Executive Officers 2,479,605 27.0%
(6 persons)
</TABLE>
* Assumes exercise of all exercisable options held by listed security holders
which can be acquired within 60 days from July 31, 1998.
(1) Includes 25,000 shares which Mr. Egide may acquire on exercise of options.
Does not include 498,895 shares which will be issued upon the closing of the
Digital Courier Acquisition.
(2) Includes 225,000 shares which Mr. Woolley may acquire on exercise of
options.
(3) Includes 175,000 shares which Mr. Jones may acquire on exercise of options.
.
60
<PAGE>
(4) Includes 280,000 shares which Mr. Edwards may acquire on exercise of
options. Does not include 85,000 shares which may be acquired on exercise of
options which are not currently exercisable.
(5) Does not include 1,990,593 shares which will be issued upon the closing of
the Digital Courier Acquisition.
(6) Includes 65,000 shares which Mr. Bard may acquire on exercise of options..
The stockholders listed have sole voting and investment power, except as
otherwise noted.
COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met except as follows: Stanton Jones, Mitchell
Edwards, and Michael Bard were late in filing Form 4's which were due within 10
days following the end of the month in which options were granted.
CERTAIN TRANSACTIONS
During the year ended June 30, 1994, the Company made cash loans to two
officers totaling $46,000, which were settled during the year ended June 30,
1995, except for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1994, the Company had borrowed money from certain
officers. Additional borrowings of $50,000 and $129,500 were made during the
years ended June 30, 1996 and 1995, respectively. Principal payments on these
notes were $1,666, $199,500, and $2,152 during the years ended June 30, 1997,
1996 and 1995, respectively. The amounts due on these loans at June 30, 1997
and 1996 were $0 and $1,666, respectively.
During the year ended June 30, 1996, the Company borrowed $500,000 from a
bank to fund computer equipment purchases. Certain officers and stockholders
guaranteed the loan. In exchange for the guarantee, such persons received a
one-year option to purchase 25,000 shares of common stock at $5.00 per share.
During the year ended June 30, 1997, the Company negotiated services and
equipment purchase agreements with CasinoWorld Holdings, Ltd., Cybergames, Inc.,
Online Investments, Inc. and Barrons Online, Inc., companies in which Mr. Egide,
one of the Company's directors and stockholders has an ownership interest.
Under the agreements, the Company provided software development services, and
configured hardware and other computer equipment.
STOCKHOLDER PROPOSALS
Stockholder proposals to be presented at the 1999 Annual Meeting of
Stockholders must be received at the Company's executive offices at 448 E. 6400
S., Suite 400, Salt Lake City, UT, 84107, addressed to the attention of the
Secretary, by June 5, 1999 in order to be considered for inclusion in the Proxy
Statement and form of proxy relating to such meeting.
61
<PAGE>
OTHER BUSINESS
The Board of Directors knows of no other business which will be presented
for consideration at the Special Meeting other than as stated in the
accompanying Notice of Special Meeting of Stockholders. If, however, other
matters are properly brought before the Special Meeting, it is the intention of
the persons named in the accompanying form of Proxy to vote the shares
represented thereby on such matters in accordance with their best judgment and
in their discretion, and authority to do so is included in the Proxy.
62
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Title of Documents PAGE NO.
- ------------------ --------
<S> <C>
Reports of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31 1997 (audited) and March 31, 1998
(unaudited) F-3
Consolidated Statements of Operations for the Year Ended December 31, 1997 (audited),
the Three Months Ended March 31, 1998 (unaudited), and the Period from Inception
through March 31, 1998 (unaudited) F-5
Consolidated Statements of Stockholders' Equity for the Period from Inception through
March 31, 1998 F-6
Consolidated Statements of Cash Flows for the Year Ended December 31, 1997 (audited)
the Three Months Ended March 31, 1998 (unaudited), and the Period from Inception
through March 31, 1998 (unaudited) F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
AND FOR THE PERIODS THEN ENDED
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Courier International, Inc.:
We have audited the accompanying balance sheet of Digital Courier International,
Inc. (a Nevada corporation in the development stage and formerly Digital Courier
Technologies, Inc., a California corporation) as of December 31, 1997, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Courier International,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development-stage
enterprise with no significant operating results to date. The factors discussed
in Note 1 to the financial statements raise substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regards to
those matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
July 29, 1998
F-2
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $172,807 $13,936
Trade accounts receivable - 56,219
Other current assets 9,647 3,500
-------------------------------------------
Total current assets 182,454 73,655
-------------------------------------------
COMPUTER AND OFFICE EQUIPMENT 52,010 137,404
Less accumulated depreciation (4,647) (11,490)
-------------------------------------------
Net computer and office equipment 47,363 125,914
-------------------------------------------
OTHER ASSETS 20,000 20,500
-------------------------------------------
$249,817 $220,069
===========================================
</TABLE>
F-3
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
--------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 29,929 $ 235,314
Accrued liabilities 55,798 61,523
--------------------------------------------
Total current liabilities 85,727 296,837
--------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value; 10,000,000 shares authorized
669,500 and 933,879 shares outstanding, respectively
670 934
Additional paid-in capital 626,330 1,042,925
Receivables from sale of common stock (200,000) (25,000)
Deficit accumulated during the development stage (262,910) (1,095,627)
--------------------------------------------
Total stockholders' equity (deficit) 164,090 (76,768)
--------------------------------------------
$ 249,817 $ 220,069
============================================
</TABLE>
F-4
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Year Three Months Inception
Ended Ended (July 23, 1996)
December 31, March 31, through
1997 1998 March 31, 1998
-----------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
NET SALES $ - $ 96,895 $ 96,895
COST OF SALES - 39,432 39,432
--------- --------- -----------
Gross margin - 57,463 57,463
--------- --------- -----------
OPERATING EXPENSES:
General and administrative 159,032 451,319 611,351
Research and development 101,878 438,861 540,739
--------- --------- -----------
Total operating expenses 260,910 890,180 1,152,090
--------- --------- -----------
OPERATING LOSS BEFORE INCOME TAXES (260,910) (832,717) (1,094,627)
PROVISION FOR INCOME TAXES (1,000) - (1,000)
--------- --------- -----------
NET LOSS $(261,910) $(832,717) $(1,095,627)
========= ========= ===========
</TABLE>
F-5
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Receivables During the
Common Stock Paid-in from Sale of Development
Shares Amount Capital Common Stock Stage
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common shares to
founders of Digital Courier
Technologies, Inc. for services
in forming the corporation 501,000 $ 501 $ 499 $ - $ -
Net loss during the period from
inception (July 23, 1996)
through December 31, 1996 - - - - (1,000)
--------------------------------------------------------------------
BALANCE, December 31, 1996 501,000 501 499 - (1,000)
Cash contribution from founder - - 1,000 - -
Issuance of common shares for
cash and receivables at $1.50
per share in connection with
recapitalization 399,000 399 599,601 (200,000) -
Issuance of common shares for
services valued at $1.50 per
share 20,000 20 29,980 - -
Reacquisition and retirement of
common shares issued to a
founder in exchange for cash at
$.02 per share (250,500) (250) (4,750) - -
Net loss - - - - (261,910)
--------------------------------------------------------------------
BALANCE, December 31, 1997 669,500 670 626,330 (200,000) (262,910)
Issuance of common shares for
services valued at $1.50 per
share (unaudited) 277,906 278 416,581 - -
Cash payments on receivables from
sale of common stock (unaudited) - - - 175,000 -
Reacquisition and retirement of
shares previously issued for
services at no cost (unaudited) (13,527) (14) 14 - -
Net loss (unaudited) - - - - (832,717)
--------------------------------------------------------------------
BALANCE, March 31, 1998
(unaudited) 933,879 $ 934 $1,042,925 $ (25,000) $(1,095,627)
====================================================================
</TABLE>
F-6
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Period from
Year Three Months Inception
Ended Ended (July 23, 1996)
December 31, March 31, through
1997 1998 March 31, 1998
------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(261,910) $(832,717) $(1,095,627)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 4,647 6,843 11,490
Common stock issued for services 30,000 416,859 447,859
Changes in operating assets and liabilities -
Trade accounts receivable - (56,219) (56,219)
Other current assets (9,647) 6,147 (3,500)
Other assets (20,000) (500) (20,500)
Accounts payable 29,929 205,385 235,314
Accrued liabilities 55,798 5,725 61,523
--------------------------------------------------
Net cash used in operating activities (171,183) (248,477) (419,660)
--------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of computer and office equipment (52,010) (85,394) (137,404)
--------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and payments received
on receivables from the sale of common stock 401,000 175,000 576,000
Reacquisition of common stock for cash (5,000) - (5,000)
--------------------------------------------------
Net cash provided by financing activities 396,000 175,000 571,000
--------------------------------------------------
NET INCREASE (DECREASE) IN CASH 172,807 (158,871) 13,936
CASH AT BEGINNING OF PERIOD - 172,807 -
--------------------------------------------------
CASH AT END OF PERIOD $172,807 $13,936 $13,936
==================================================
</TABLE>
F-7
<PAGE>
DIGITAL COURIER INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES RELATED TO UNAUDITED PERIODS)
(1) DESCRIPTION OF THE COMPANY
Organization
Digital Courier International, Inc. ("DCII"), a Nevada corporation, was
incorporated May 28, 1997. Digital Courier Technologies, Inc. ("DCTI"), a
California corporation, was incorporated July 23, 1996. On June 12, 1997, DCII,
DCTI, the shareholders of DCTI and certain investors entered into a Formation
and Exchange Agreement (the "Formation Agreement") pursuant to which (i) the
shareholders of DCTI agreed to exchange the 200 outstanding shares of common
stock of DCTI for 501,000 shares of common stock of DCII; (ii) the investors
agreed to acquire 399,000 shares of common stock of DCII for $1,000,000,
contingent on the results of certain testing to be completed; and (iii) an
individual was to receive 20,000 shares of DCII common stock for services
rendered in connection with the formation of DCII and the negotiation of the
Formation Agreement (see Note 5). Upon completion of the testing, the
Formation Agreement was amended to reduce the amount to be paid by the investors
for the 399,000 shares of common stock of DCII to $600,000. Since the
shareholders of DCTI retained greater than 50 percent ownership of DCII, the
combination of DCII and DCTI has been accounted for as a recapitalization, with
DCTI being presented as the continuing accounting entity under the name of DCII.
The capital and shares of common stock of DCTI have been restated similar to a
reverse acquisition, in accordance with the Formation Agreement, and the
issuance of common shares by DCII to the investors has been recorded as a sale
of common stock. Prior to the recapitalization, DCTI's activities were limited
to the issuance of common shares to two founders for services rendered in
forming DCTI and the receipt of a capital contribution of $1,000 from one of the
founders. No operations had commenced. A balance sheet as of December 31, 1996
and a statement of operations for the period from inception (July 23, 1996)
through December 31, 1996 are not included in the accompanying financial
statements due to the limited transactions during the period. DCII and DCTI are
collectively referred to herein as the "Company".
Nature of Operations and Related Risks
The Company is a Java-based Internet and wireless communications software
development company in the development stage. The Company's strategy is to
design and develop software solutions for electronic commerce, supplying
business solutions to specific vertical markets including financial services,
online point-of-sale transaction systems, and online content/information
development and distribution. The Company's historical operations have
primarily consisted of research and development efforts associated with
developing software solutions for electronic commerce.
Through March 31, 1998, the Company had generated $96,895 in software consulting
revenues. Accordingly, the Company has a limited operating history upon which
an evaluation of the
F-8
<PAGE>
Company can be based, and its prospects are subject to the risks, expenses and
uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services. Specifically, such risks
include, without limitation, the performance, reliability and security of the
Company's transactions processing infrastructure, the continued ability to
provide end-to-end point of sales processing over the Internet, the ability to
maintain and expand the channels of distribution, the ability to maintain
continuing expertise in proprietary and third-party technologies, the timing of
introductions of new services, the pricing policies of the Company's competitors
and suppliers and the inability to identify, attract, retain and motivate
qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks or that the Company will achieve or sustain
profitability. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible.
As reflected in the accompanying financial statements, the Company incurred net
losses of $261,910 during the year ended December 31, 1997 and $832,717
(unaudited) during the three months ended March 31, 1998. The Company's
operating activities have used $171,183 of cash during the year ended December
31, 1997 and $248,477 (unaudited) during the three months ended March 31, 1998.
The Company expended $101,878 during the year ended December 31, 1997 and
$438,861 (unaudited) during the three months ended March 31, 1998 for
development efforts. As of December 31, 1997, the Company had $96,727 and
$(223,182) (unaudited) as of March 31, 1998 of working capital (deficit),
respectively. Subsequent to March 31, 1998, additional funding has been
obtained through loans from DataMark Holding, Inc., to fund the Company's
operations (see Note 6). Additional funding will be required before the
Company's operations achieve and sustain profitability. 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
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The factors discussed above raise substantial
doubt about the ability of the Company to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The accompanying unaudited balance sheet as of March 31, 1998, the statements of
operations, stockholders' equity (deficit) and cash flows for the three months
ended March 31, 1998 have been prepared on substantially the same basis as the
annual financial statements. In the opinion
F-9
<PAGE>
of management, the unaudited statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the results of
operations and cash flows for such periods.
Computer and Office Equipment
Computer and office equipment are stated at cost. Major additions and
improvements are capitalized, while minor repairs and maintenance costs are
expensed when incurred. Depreciation of computer and office equipment is
computed using primarily a straight-line method over the estimated useful lives
of the related assets of three years.
Depreciation expense was $4,647 for the year ended December 31, 1997 and $6,843
(unaudited) for the three months ended March 31, 1998.
When computer and office equipment are retired or otherwise disposed of, the
book value is removed from the asset and related accumulated depreciation
accounts, and the net gain or loss is included in the determination of net
income or loss.
Deferred Software Development Costs
The Company will capitalize computer software development costs upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software products is based upon the achievement of a detail
program design free of high-risk development issues. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in technology. It is reasonably possible
that those estimates of anticipated future gross revenues, the remaining
estimated economic lives of the products, or both will be reduced significantly
in the near term. Costs incurred prior to the establishment of technological
feasibility are expensed as research and development costs in the accompanying
statements of operations. As of December 31, 1997 and March 31, 1998, the
Company had not achieved technological feasibility with respect to any of its
software products.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying balance sheets for cash,
accounts receivable, and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments.
Revenue Recognition
Revenue from providing Internet consulting services is recognized as the
services are provided or pro rata over the service period. The Company defers
revenue paid in advance relating to future services. Future revenues from
licensing or selling computer software will be recognized in accordance with
Statement of Position ("SOP") 97-2.
F-10
<PAGE>
Research and Development
Research and development costs incurred in the development of the Company's
various transaction based electronic commerce products are expensed as incurred.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements that will result in taxable
or deductible amounts in future years when the reported amounts of the assets
and liabilities are recovered or settled. These deferred tax assets or
liabilities are measured using the enacted tax rates that will be in effect when
the differences are expected to reverse.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Boards issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Statement 133 is effective for fiscal years beginning after June 15, 1999.
The adoption of this statement is not expected to have a material effect on the
Company's financial statements as the Company is not currently involved in any
derivative instruments or hedging activities.
(3) INCOME TAXES
The components of the net deferred tax assets as of December 31, 1997 and March
31, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-----------------------------------------------
(Unaudited)
<S> <C> <C>
Net operating loss carryforwards $ 77,200 $ 308,700
Reserves and accrued liabilities 18,600 18,600
-----------------------------------------------
Total deferred tax assets 95,800 327,300
Valuation allowance (95,800) (327,300)
-----------------------------------------------
Net deferred tax asset $ - $ -
===============================================
</TABLE>
As of December 31, 1997 and March 31, 1998, the Company had net operating loss
carryforwards for federal income tax reporting purposes of approximately
$207,000 and $1,035,000 (unaudited), respectively. For federal income tax
purposes, utilization of these carryforwards is limited if the Company has had
more than a 50 percent change in ownership (as defined by the Internal Revenue
Code) or, under certain conditions, if such a change occurs in the future. The
tax net operating losses will expire beginning in 2012.
F-11
<PAGE>
No benefit for income taxes has been recorded during the year ended December 31,
1997 and the three months ended March 31, 1998. As discussed in Note 1, certain
risks exist with respect to the Company's future profitability that in
management's opinion make it more likely than not that the assets may not be
realized, and accordingly, a valuation allowance was recorded to reduce the net
deferred tax asset to zero. The income tax provision of $1,000 recorded during
the year ended December 31, 1997 represents the minimum state income taxes.
(4) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain facilities used in its operations. The approximate
aggregate commitments under noncancellable leases in effect at December 31,
1997 were as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998 $ 210,000
1999 210,000
2000 210,000
2001 210,000
2002 201,250
-----------------
$1,041,250
=================
</TABLE>
The Company incurred rent expense of $33,586 during the year ended December 31,
1997 and $74,719 (unaudited) during the three months ended March 31, 1998.
Legal Matters
The Company is a party to certain legal matters which it considers incidental to
its business activities. It is the opinion of management, after consultation
with legal counsel, that the ultimate disposition of these legal matters will
not have a material impact on the financial position, liquidity or results of
operations of the Company.
(5) CAPITAL TRANSACTIONS
Issuance of Stock Certificates
As of December 31, 1997 and March 31, 1998 (unaudited), the Company had not
issued any stock certificates with respect to the outstanding common stock. The
stock certificates will be issued in connection with the sale of the Company to
DataMark Holding, Inc. as described in Note 6. The accompanying financial
statements present the common shares issued and outstanding as if the stock
certificates had been issued.
Formation Agreement
As discussed in Note 1, DCTI was originally incorporated on July 23, 1996 and
the founders were issued 200 shares of common stock in exchange for services
rendered in forming DCTI.
F-12
<PAGE>
The 200 shares issued for incorporation services have been recorded at $1,000,
the estimated fair value of the services received. In May 1997, one of the
founders contributed $1,000 in cash to DCTI for working capital needs. On June
12, 1997, DCTI and DCII entered into the Formation Agreement pursuant to which
the founders of DCTI received 501,000 shares of common stock in exchange for the
200 outstanding shares of common stock of DCTI and certain investors agreed to
acquire 399,000 shares of common stock for $600,000 or approximately $1.50 per
share. As of December 31, 1997, the investors had paid $400,000 of the $600,000
commitment and an additional $175,000 (unaudited) was paid by March 31, 1998.
The Formation Agreement was accounted for as a recapitalization, with DCTI being
presented as the continuing accounting entity under the name of DCII. The shares
of common stock of DCTI have been restated to reflect the number of shares
issued in accordance with the Formation Agreement. The Formation Agreement also
provided for the issuance of 20,000 shares of common stock to an individual for
services. The 20,000 shares were valued at $1.50 per share and have been
expensed in the accompanying statements of operations.
In connection with the Formation Agreement, the shareholders entered into a
Shareholders Agreement that requires a supermajority (75 percent) of shareholder
votes to effect certain transactions, as defined, the election of certain
directors, and restricts the transfer of shares of common stock. The
shareholders also entered into non-competition and non-disclosure agreements.
Reacquisition of Common Shares
During the year ended December 31, 1997, the Company and one of the founders of
DCTI entered into an agreement pursuant to which the founder's employment with
the Company was terminated and the Company reacquired the 250,500 shares of
common stock held by the founder in exchange for $5,000.
Common Stock Issued for Services
In January 1998, the Company agreed to issue 277,906 (unaudited) shares of its
common stock to employees of the Company in exchange for services rendered.
Compensation expense totaling $416,859 (unaudited), based on value of $1.50 per
share, was recorded in connection with this common stock issuance.
In addition, during the three months ended March 31, 1998, the individual that
received 20,000 shares of common stock for services related to the Formation
Agreement transferred 13,527 shares back to the Company for no consideration.
(6) SUBSEQUENT EVENT
Sale of the Company to DataMark Holding, Inc.
The Company has entered into a Stock Exchange Agreement with DataMark Holding,
Inc., a Delaware corporation, dated as of March 17, 1998 (the "Exchange
Agreement"). Pursuant to the Exchange Agreement, the shareholders of the
Company will receive 4,659,080 shares of
F-13
<PAGE>
DataMark Holding, Inc. common stock in exchange for all of the Company's
outstanding shares.
F-14
<PAGE>
DATAMARK HOLDING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Title of Documents PAGE NO.
- ------------------ --------
<S> <C>
UNAUDITED FINANCIAL STATEMENTS
- ------------------------------
Condensed Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997 F-15
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 F-17
Condensed Consolidated Statements of Operations for the Nine Months Ended
March 31, 1998 and 1997 F-18
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1998 and 1997 F-19
Notes to Condensed Consolidated Financial Statements F-20
AUDITED FINANCIAL STATEMENTS
- ----------------------------
Reports of Independent Public Accountants F-24
Consolidated Balance Sheets as of June 30, 1997 and 1996 F-26
Consolidated Statements of Operations for the Years Ended June 30, 1997,
1996 and 1995 F-28
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995 F-30
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997,
1996 and 1995 F-31
Notes to Consolidated Financial Statements F-32
</TABLE>
F-15
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,946,635 $ 4,938,404
Trade accounts receivable 1,449 -
Inventory 10,291 -
Other current assets 516,302 74,742
Net current assets of discontinued operations - 105,739
------------ ------------
Total current assets 7,474,677 5,118,885
------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 5,992,855 5,210,607
Furniture, fixtures and leasehold
improvements 737,965 724,717
Vehicles - 29,059
------------ ------------
6,730,820 5,964,383
Less accumulated depreciation and
amortization (1,603,457) (510,307)
------------ ------------
Net property and equipment 5,127,363 5,454,076
------------ ------------
INVESTMENT IN COMMTOUCH. LTD. 750,000 -
------------ ------------
NET LONG-TERM ASSETS OF DISCONTINUED
OPERATIONS - 709,063
------------ ------------
OTHER ASSETS 1,243,220 38,636
------------ ------------
$14,595,260 $11,320,660
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-16
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------------------- ----------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligation $ 960,777 $ -
Accounts payable 166,493 1,086,474
Accrued liabilities 471,361 408,103
Other current liabilities 33,000 -
------------ ------------
Total current liabilities 1,631,631 1,494,577
------------ ------------
CAPITAL LEASE OBLIGATION, net of current portion 1,359,877 -
------------ ------------
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, 8,834,475 and 8,560,932
shares outstanding, respectively 883 856
Additional paid-in capital 22,595,286 22,714,366
Accumulated deficit (10,992,417) (12,889,139)
------------ ------------
Total stockholders' equity 11,603,752 9,826,083
------------ ------------
$ 14,595,260 $ 11,320,660
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-17
<PAGE>
.DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 385,671 $ -
COST OF SALES 258,144 -
----------- ----------
Gross margin 127,527 -
----------- ----------
OPERATING EXPENSES:
General and administrative 1,122,273 388,405
Research and development 454,218 1,050,463
Selling 188,861 341,400
----------- ----------
Total operating expenses 1,765,352 1,780,268
----------- ----------
LOSS FROM CONTINUING OPERATIONS (1,637,825) (1,780,268)
----------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 27,140 120,259
Interest expense (53,537) -
----------- ----------
Other income (expense), net (26,397) 120,259
----------- ----------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (1,664,222) (1,660,009)
INCOME TAX BENEFIT (Note 3) 2,733,829 -
----------- ----------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 1,069,607 (1,660,009)
----------- ----------
DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued direct mail marketing subsidiary
, net of income tax benefit (provision) of $30,329 and $72,540, respectively (50,548) 120,901
Gain on sale of direct mail marketing subsidiary, net of income tax provision of
$2,636,831 in 1998 4,394,717 -
Loss from operations of discontinued Internet service provider subsidiary, net of
income tax benefit of $12,419 and $72,540, respectively (20,698) (1,823,006)
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 in 1998 232,911 -
----------- ----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,556,382 (1,702,105)
----------- ----------
NET INCOME (LOSS) $ 5,625,989 $(3,362,114)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE (Note 4):
Income (loss) before discontinued operations:
Basic $ 0.12 $ (0.20)
Diluted $ 0.12 $ (0.20)
----------- ----------
Income (loss) from discontinued operations:
Basic $ 0.52 $ (0.20)
Diluted $ 0.52 $ (0.20)
----------- ----------
Net income (loss):
Basic $ 0.64 $ (0.40)
Diluted $ 0.64 $ (0.40)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 8,763,505 8,479,376
Diluted 8,832,086 8,479,376
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-18
<PAGE>
.DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 405,158 -
COST OF SALES 323,201 -
----------- ----------
Gross margin 81,957 -
----------- ----------
OPERATING EXPENSES:
General and administrative 2,881,136 770,072
Research and development 1,301,285 2,158,057
Selling 1,167,222 1,272,853
----------- ----------
Total operating expenses 5,349,643 4,200,982
----------- ----------
LOSS FROM CONTINUING OPERATIONS (5,267,686) (4,200,982)
----------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 115,823 410,440
Interest expense (108,746) (650)
----------- ----------
Other income, net 7,077 409,790
----------- ----------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (5,260,609) (3,791,192)
INCOME TAX BENEFIT (Note 3) 2,684,000 -
----------- ----------
LOSS BEFORE DISCONTINUED OPERATIONS (2,576,609) (3,791,192)
----------- ----------
DISCONTINUED OPERATIONS:
Income from operations of discontinued direct mail marketing subsidiary, net of
income tax provision of $66,827 and $158,203, respectively 111,377 263,672
Gain on sale of direct mail marketing subsidiary, net of income tax provision
of $2,636,831 in 1998 4,394,717 -
Loss from operations of discontinued Internet service provider subsidiary, net of
income tax benefit of $159,404 and $158,203, respectively (265,674) (1,737,343)
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 in 1998 232,911 -
----------- ----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,473,331 (1,473,671)
----------- ----------
NET INCOME (LOSS) $ 1,896,722 $(5,264,863)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE (Note 4):
Loss before discontinued operations:
Basic $ (0.30) $ (0.46)
Diluted $ (0.30) $ (0.46)
----------- ----------
Income (loss) from discontinued operations:
Basic $ 0.52 $ (0.18)
Diluted $ 0.51 $ (0.18)
----------- ----------
Net income (loss):
Basic $ 0.22 $ (0.64)
Diluted $ 0.21 $ (0.64)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 8,660,717 8,242,116
Diluted 8,862,132 8,242,116
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-19
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,896,722 $(5,264,863)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Gain on sale of direct mail marketing and Internet service operations (7,404,205) -
Depreciation and amortization 1,138,050 115,015
Acquired research and development - 1,674,721
Stock issued in lieu of compensation 61,250 -
Amortization of goodwill 26,932 -
Changes in operating assets and liabilities, net of
effect of acquisition and dispositions:
Trade accounts receivable 98,563 (2,207)
Inventory 193,886 -
Net current assets of discontinued operations - 73,592
Other current assets (282,348) (48,828)
Other assets (24,675) (33,331)
Accounts payable (805,328) 16,364
Accrued liabilities (203,570) 54,132
Other current liabilities 33,000 -
--------- ---------
Net cash used in operating activities (5,271,723) (3,415,405)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investment in CommTouch, Ltd. (750,000) -
Purchase of property and equipment (802,414) (2,675,116)
Increase in net long-term assets of discontinued operations - (608,118)
Proceeds from sale of equipment 20,938 -
--------- ---------
Net cash used in investing activities (1,531,476) (3,283,234)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of direct mail marketing and Internet services
operations 6,857,300 -
Net proceeds from the issuance of common stock and other
equity instruments 22,418 1,829,555
Net proceeds from sale and lease back of equipment 2,750,000 -
Principal payments on capital lease obligation (429,346) -
Principal payments on notes payable (288,812) (43,201)
Repurchase of common stock (200,000) -
Proceeds from borrowings 86,000 -
--------- ---------
Net cash provided by financing activities 8,797,560 1,786,354
--------- ---------
NET INCREASE (DECREASE ) IN CASH 1,994,361 (4,912,285)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,952,274 13,159,404
--------- ----------
CASH AND CASH EQIVALENTS AT END OF PERIOD $ 6,946,635 $ 8,247,119
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-20
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of March 31,
1998 and June 30, 1997 and for the three and nine months ended March 31, 1998
and 1997 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 nine months ended March 31, 1998 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 AND DISPOSITIONS
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. 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
In March 1998, the Company sold all of the outstanding shares of common
stock of Sisna to Sisna's former major shareholder, who, at the time, was a
director of the Company, in exchange for 35,000 shares of the Company's common
stock. As of the date of sale, Sisna had tangible assets including
approximately $55,000 of trade accounts receivable, $35,000 of prepaid expenses,
$48,000 of computer and office equipment and $10,000 of other assets and
liabilities including $33,000 of trade accounts payable, $102,000 of notes
payable, and $244,000 of other accrued liabilities.
The results of operations of Sisna are included in the accompanying
statements of operations from the acquisition date in January 1997 through the
sale date in March 1998 as discontinued operations.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. in exchange for 100,000 shares of the Company's common stock, in
a transaction that 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 $539,000. This amount was accounted for as goodwill
and is being amortized over a five year period on a straight line basis. The
tangible assets acquired consisted of approximately $22,000 of inventory and
$50,000 of computer and office equipment and the liabilities assumed consisted
of approximately $115,000 of trade accounts payable, $136,000 of notes payable
and $125,000 of other accrued liabilities.
The former shareholders of Books Now, Inc. may receive a maximum of 87,500
additional shares of the Company's common stock for each year for the next three
years based on achieving certain performance goals established in the exchange
agreement. The average of the bid and ask price for the Company's common stock
on the date of acquisition was $3.13.
The following pro forma information for the three and nine months ended
March 31, 1997 and the nine months ended March 31, 1998 presents the Company's
pro forma results of operations as if the acquisition of Books Now 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.
F-21
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Three Months Ended Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1997 March 31, 1998
------------------------ ----------------------- ----------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $ 103,185 $ 224,114 $ 632,017
Income (loss) from operations (1,838,630) (4,369,944) (5,423,779)
Net income (loss) (3,422,069) (5,437,232) 1,733,225
Basic net income (loss) per
Common share (0.40) (0.65) 0.20
Diluted net income (loss) per
Common share (0.40) (0.65) 0.19
</TABLE>
In March 1998, DataMark Systems, Inc. ("DMS"), a wholly-owned subsidiary of
the Company, sold its direct mail advertising net assets and business to Focus
Direct, Inc., a Texas corporation. Pursuant to an Asset Purchase Agreement,
Focus Direct, Inc. purchased all assets, properties, rights, claims and
goodwill, of every kind, character and description, tangible and intangible,
real and personal, wherever located of DMS, DataMark Printing, Inc.
("Printing"), DataMark Lists, Inc. ("Lists") and WorldNow Online Network, Inc.
(all wholly owned subsidiaries of the Company) used in DMS's direct mail
business. Focus Direct, Inc. also agreed to assume certain liabilities of DMS,
Printing, and Lists. Focus Direct, Inc. is not affiliated with the Company.
Pursuant to the Asset Purchase Agreement, Focus Direct, Inc. will pay the
Company $7,700,000 for the above described assets. Focus Direct, Inc. paid the
Company $6,900,000 in cash at closing and will pay the additional $800,000 by
June 30, 1999. The total purchase price was adjusted for the difference between
the assets acquired and liabilities assumed at November 30, 1997 and those as of
the date of closing.
This sale resulted in a gain of $7,031,548. The purchaser received tangible
assets of approximately $493,000 of trade accounts receivable, $179,000 of
inventory, $578,000 of furniture and equipment and $11,000 of other assets and
assumed liabilities of $592,000 of trade accounts payable and $321,000 of other
accrued liabilities.
NOTE 3 - INCOME TAXES
The income tax benefits for the three and nine months ended March 31,
1998 of $2,733,829 and $2, 684,000, respectively, result from the tax effect of
the gain on sale of direct mail marketing and Internet service operations being
offset with net operating loss carryforwards which were not previously recorded
by the Company.
NOTE 4 - NET INCOME (LOSS) PER COMMON 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 is 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. During periods in which the Company incurs a net loss, the inclusion
of the common stock equivalents would decrease the net loss per common share
and, therefore, are not considered.
F-22
<PAGE>
The calculation of the weighted average number of common shares
outstanding is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, 1998 March 31, 1998
-------------------------- -----------------------
<S> <C> <C>
Weighted average number of shares
for basic net income per common
share 8,763,505 8,759,900
Stock options (having a dilutive
effect) 68,581 201,415
------------- -------------
Weighted average number of shares
for diluted net income per common
share 8,832,086 8,961,315
========= =========
Three Months Ended Nine Months Ended
March 31, 1997 March 31, 1997
-------------------------- -----------------------
Weighted average number of shares
for basic net income per common
share 8,479,376 8,242,116
Stock options (having a dilutive
effect) - -
------------- -------------
Weighted average number of shares
for diluted net income per common
share 8,479,376 8,242,116
========= =========
</TABLE>
F-23
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996 AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 30, 1997
TOGETHER WITH REPORTS OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DataMark Holding, Inc.:
We have audited the accompanying consolidated balance sheets of DataMark
Holding, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DataMark Holding,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 3, 1998
F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
DataMark Holding, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended June 30, 1995 of
DataMark Holding, Inc. and subsidiaries. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
DataMark Holding, Inc. and subsidiaries for the year ended June 30, 1995, in
conformity with generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
October 5, 1995, except for Note 11, Sale of Direct Mail Advertising Business,
as to which the date is August 3, 1998
F-26
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 4,938,404 $13,159,404
Trade accounts receivable - 8,206
Net current assets of discontinued operations 105,739 287,780
Other current assets 74,742 -
-------------------------------------------
Total current assets 5,118,885 13,455,390
-------------------------------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 5,210,607 2,553,926
Furniture, fixtures and leasehold improvements 724,717 97,038
Vehicles 29,059 29,059
-------------------------------------------
5,964,383 2,680,023
Less accumulated depreciation and amortization (510,307) (112,241)
-------------------------------------------
Net property and equipment 5,454,076 2,567,782
-------------------------------------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 709,063 199,729
-------------------------------------------
OTHER ASSETS 38,636 -
-------------------------------------------
$11,320,660 $16,222,901
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,086,474 $ 497,575
Accrued liabilities 408,103 140,501
Notes payable - 43,201
------------------------------------------
Total current liabilities 1,494,577 681,277
-------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6 and 11)
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 856 808
Additional paid-in capital 22,714,366 20,585,276
Stock subscriptions receivable - (1,496,137)
Accumulated deficit (12,889,139) (3,548,323)
---------------------------------------
Total stockholders' equity 9,826,083 15,541,624
---------------------------------------
$ 11,320,660 $16,222,901
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 8,812 $ - $ -
COST OF SALES 492 - -
--------------------------------------------------------------------
Gross margin 8,320 - -
--------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 4,364,252 1,565,718 560,915
Selling 1,897,664 - -
General and administrative 1,400,916 685,528 56,199
Compensation expense related to issuance of options by
principal stockholder - 1,484,375 -
-----------------------------------------------------------------
Total operating expenses 7,662,832 3,735,621 617,114
-----------------------------------------------------------------
OPERATING LOSS (7,654,512) (3,735,621) (617,114)
-----------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and other income 496,365 95,408 -
Interest expense (704) (38,199) (973)
-----------------------------------------------------------------
Net other income (expense) 495,661 57,209 (973)
-----------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (7,158,851) (3,678,412) (618,087)
INCOME TAX BENEFIT - 91,999 132,681
-----------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (7,158,851) (3,586,413) (485,406)
-----------------------------------------------------------------
DISCONTINUED OPERATIONS:
Income from operations of discontinued direct mail
advertising subsidiary, net of income tax provision
of $180,263, $91,999 and $132,681, respectively 300,438 153,332 221,136
Loss from operations of discontinued Internet service
provider subsidiary, net of income tax benefit of
$180,263 (2,482,403) - -
-----------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (2,181,965) 153,332 221,136
-----------------------------------------------------------------
NET LOSS $ (9,340,816) $ (3,433,081) $ (264,270)
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C>
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.86) $ (0.61) $ (0.10)
Net loss:
Basic and diluted $ (1.12) $ (0.58) $ (0.06)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 8,309,467 5,917,491 4,713,028
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additional Stock Accumulated
Common Stock Paid-in Subscriptions Earnings
Shares Amount Capital Receivable (Deficit)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 4,365,045 $436 $ 326,746 $ - $ 149,028
Issuance of common stock for cash 223,622 23 168,477 - -
Net effect of merger with Exchequer I, Inc. 471,952 47 (26,262) - -
Issuance of common stock for notes
receivable 479,334 48 718,952 - -
Net loss - - - - (264,270)
----------------------------------------------------------------------
BALANCE, June 30, 1995 5,539,953 554 1,187,913 - (115,242)
Issuance of common stock for cash, net
of offering costs of $1,524,538 1,992,179 199 13,914,650 - -
Stock subscriptions, net of commissions
of $166,238 214,500 21 1,496,116 (1,496,137) -
Exercise of stock warrants 321,775 32 2,493,724 - -
Issuance of options by principal stockholder - - 1,484,375 - -
Exercise of stock options 17,000 2 8,498 - -
Net loss - - - - (3,433,081)
----------------------------------------------------------------------
BALANCE, June 30, 1996 8,085,407 808 20,585,276 (1,496,137) (3,548,323)
Exercise of stock options 102,400 10 78,405 - -
Collection of stock subscriptions receivable - - - 1,496,137 -
Exercise of stock warrants 36,125 4 279,965 - -
Issuance of common stock for computer
software 12,000 1 95,999 - -
Issuance of common stock in the
acquisition of Sisna 325,000 33 1,674,721 - -
Net loss - - - - (9,340,816)
----------------------------------------------------------------------
BALANCE, June 30, 1997 8,560,932 $856 $22,714,366 $ - $(12,889,139)
======================================================================
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$(9,340,816) $(3,433,081) $(264,270)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 398,066 86,828 25,413
Write-off of purchased research and development 1,674,721 - -
Compensation expense related to issuance of options by
principal stockholder - 1,484,375 -
Changes in operating assets and liabilities, net of effect
of acquisition-
Trade accounts receivable 8,206 (8,206) -
Net current assets of discontinued operations 182,041 (178,964) 241,612
Other current assets (74,742) 2,042 (2,042)
Other assets (38,636) 84,570 (84,570)
Accounts payable 588,899 443,813 53,762
Accrued liabilities 267,601 133,056 7,443
---------------------------------------------
Net cash used in operating activities (6,334,660) (1,385,567) (22,652)
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,188,360) (2,589,212) (90,811)
Increase in net long-term assets of discontinued operations (509,334) (70,628) (3,317)
---------------------------------------------
Net cash used in investing activities (3,697,694) (2,659,840) (94,128)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and other
contributed capital 358,418 16,417,105 142,285
Collection of receivables from sale of common stock 1,496,137 719,000 -
Proceeds from borrowings - 29,701 13,500
Principal payments on borrowings (43,201) - -
---------------------------------------------
Net cash provided by financing activities 1,811,354 17,165,806 155,785
---------------------------------------------
NET INCREASE (DECREASE) IN CASH (8,221,000) 13,120,399 39,005
CASH AT BEGINNING OF YEAR 13,159,404 39,005 -
---------------------------------------------
CASH AT END OF YEAR $ 4,938,404 $13,159,404 $ 39,005
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,495 $ 56,942 $ 22,333
Cash paid for income taxes - -
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Organization and Principles of Consolidation
DataMark Systems, Inc. ("Systems") was incorporated under the laws of the State
of Nevada on April 29, 1987. DataMark Printing, Inc. ("Printing") was
incorporated under the laws of the State of Utah on March 23, 1992. WorldNow
Online Network, Inc. ("WorldNow"), formerly DataMark Media, Inc., was
incorporated as a wholly owned subsidiary of Systems on October 3, 1994.
Systems negotiated a plan of reorganization and subscription agreement with the
shareholders of Printing (who were also greater than 80 percent shareholders of
Systems) whereby those shareholders transferred all of the outstanding shares of
common stock of Printing to Systems as an additional contribution to capital in
December 1994. No additional shares of common stock of Systems were issued in
the transaction. The business combination of Systems and Printing was accounted
for at historical cost in a manner similar to pooling-of-interests accounting.
Exchequer I, Inc. ("Exchequer"), a publicly held Delaware corporation, was
incorporated May 16, 1985. On January 11, 1995, Systems consummated a merger
agreement with Exchequer whereby Systems became a wholly owned subsidiary of
Exchequer, which changed its name to DataMark Holding, Inc. ("Holding"). The
shareholders of Systems received 2121.013 shares of Holding's common stock for
each share of Systems' common stock outstanding at the date of the merger.
Accordingly, the 2,132 shares of Systems' common stock were converted into
4,522,000 shares of Holding's common stock. The accompanying financial
statements have been restated to reflect the stock conversion for all periods
presented. The merger was accounted for as a reverse acquisition with Systems
being considered the acquiring company for accounting purposes. Prior to the
merger, Holding had no assets, $26,215 of liabilities and 471,952 shares of
common stock issued and outstanding. The reverse acquisition was accounted for
by recording the liabilities of Holding at the date of merger at their
historical cost, which approximated fair value. The operations of Holding have
been included in the accompanying consolidated financial statements from the
date of the merger. The operations of Holding were immaterial prior to the
merger; therefore, pro forma operating information is not presented.
As discussed in Note 3, on January 8, 1997, Holding acquired all of the
outstanding shares of common stock of Sisna, Inc. ("Sisna"). The acquisition of
Sisna was accounted for as a purchase with the results of operations of Sisna
being included in the accompanying consolidated financial statements from the
date of the acquisition. Additionally, as discussed in Note 11, subsequent to
June 30, 1997, Systems sold its direct mail advertising business to Focus
Direct, Inc. and Holding sold the shares of common stock of Sisna acquired in
January 1997 back to Sisna's former major shareholder. The accompanying
consolidated financial statements have been retroactively restated to present
the operations of the direct mail advertising business and Sisna's Internet
service operations as discontinued operations.
F-33
<PAGE>
Holding, Systems, Printing, WorldNow, and Sisna are collectively referred to
herein as the "Company". All significant intercompany accounts and transactions
have been eliminated in consolidation.
Nature of Operations and Related Risks
The Company's historical operations have primarily consisted of providing highly
targeted business to consumer advertising for its clients. During fiscal years
1997, 1996 and 1995, the medium for such targeted advertising was direct mail
and was being expanded to include an online network. As discussed in Note 11,
the direct mail advertising business has been sold subsequent to June 30, 1997
and the Company has entered into an agreement to sell a portion of the online
network.
In January 1997, the Company acquired Sisna, which operates as an Internet
service provider allowing its customers access to the Internet. Through a
network of franchisees, Sisna offers Internet access in 12 states. As discussed
in Note 11, Sisna was sold back to Sisna's former major shareholder subsequent
to June 30, 1997.
In fiscal 1994, the Company began developing an advertiser funded national
Internet service ("WorldNow Online") which was launched in the last quarter of
fiscal year 1997. The Company's strategy for WorldNow Online included the
creation of a national Internet-based network of local television stations.
WorldNow would provide free web hosting, web maintenance and other Internet
features, including national content and advertising, to the television
stations. In return, the stations would provide local content, ranging from
news, weather and sports, to entertainment, recreational and cultural events, as
well as free television advertising and promotions in order to drive local users
of the Internet to the WorldNow site. Both WorldNow and the stations' revenues
would be derived from local and national advertising as well as related commerce
conducted via the Internet. WorldNow went online in June 1997, and began
generating minimal advertising revenues in August 1997. As discussed in Note
11, in July 1998, the Company agreed to sell certain assets related to the
national Internet-based network of local television stations.
Subsequent to June 30, 1997, the Company has acquired Books Now, Inc.,
WeatherLabs, Inc., and is in the process of acquiring Digital Courier
International, Inc., a software development company in the development stage
(see Note 11). The Company's strategy is to be an Internet services company and
engage in e-commerce and provide Internet content development, packaging and
distribution for Internet portals and websites. In addition to e-commerce and
web hosting from its data center, the Company is creating virtual content and
commerce products that can be branded and used by existing Internet portals,
websites and Internet communities. Its main product offerings are Videos Now
(TM), WeatherLabs (TM) and Books Now (TM). The Company has a limited operating
history upon which an evaluation of the Company can be based, and its prospects
are subject to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products and
services. Specifically, such risks include, without limitation, the dependence
on continued growth in use of the Internet, the inability of the Company to
effectively integrate the technology and operations of acquired businesses or
technologies with its operations, the ability
F-34
<PAGE>
to maintain and expand the channels of distribution, the ability to maintain
continuing expertise in proprietary and third-party technologies, the timing of
introductions of new services, the pricing policies of the Company's competitors
and suppliers and the inability to identify, attract, retain and motivate
qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks or that the Company will achieve or sustain
profitability. The limited operating history of the Company's current operations
and the uncertain nature of the markets addressed by the Company make the
prediction of future results of operations difficult or impossible.
As reflected in the accompanying consolidated financial statements, the Company
has incurred net losses of $9,340,816, $3,433,081 and $264,270 and the Company's
operating activities have used $6,334,660, $1,385,567 and $22,652 of cash during
fiscal years 1997, 1996 and 1995, respectively. During fiscal years 1997, 1996
and 1995, the Company expended $4,364,252, $1,565,718 and $560,915 of direct
costs for the development of WorldNow Online. As of June 30, 1997, the Company
had $4,938,404 of cash and subsequent to June 30, 1997 additional cash was
obtained to fund operations from the sale and leaseback of certain equipment and
from the sale of the direct mail advertising business (see Note 11). Additional
funding will be required before the Company's continuing operations achieve and
sustain profitability. 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-35
<PAGE>
INVENTORY
Inventory associated with the discontinued operations is valued at the lower of
cost or market, with cost being determined using the first-in, first-out method.
Inventory included in net current assets of discontinued operations in the
accompanying consolidated balance sheets consists of the following as of June
30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------
<S> <C> <C>
Raw materials used in printing
$ 41,486 $52,555
Work in process direct mail
advertising products -
64,587
Completed direct mail
advertising products 11,206 30,417
Computer equipment to be resold
(see Note 10) 244,292 -
------------------------------------------------
$361,571 $82,972
================================================
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when
incurred. Depreciation and amortization of property and equipment are computed
using primarily an accelerated method over the estimated useful lives of the
related assets which are as follows:
<TABLE>
<S> <C>
Vehicles 5 years
Printing equipment 5 years
Computer and office equipment 5 - 7 years
Furniture, fixtures and leasehold
improvements 5 10 years
</TABLE>
Depreciation and amortization expense was $398,066, $86,828, and $25,413 for
fiscal years 1997, 1996 and 1995, respectively.
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net
income or loss.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated balance sheets
for cash, accounts receivable and accounts payable approximate fair values
because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's notes payable also
approximate fair value based on current rates for similar debt.
F-36
<PAGE>
Revenue Recognition
Revenue from marketing services and related product sales is recognized at the
time of mailing the products for the customers. Revenue from providing Internet
access is recognized as the services are provided or pro rata over the service
period. The Company defers revenue paid in advance relating to future services
and products not yet mailed.
Research and Development
Research and development costs incurred in the development of WorldNow Online
have been expensed as incurred.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. These deferred tax assets
or liabilities are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the fiscal year. Diluted net loss per common share ("Diluted EPS")
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net loss per common share.
Net loss per common share amounts have been restated for all periods presented
to reflect Basic and Diluted EPS in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share."
Supplemental Cash Flow Information
Noncash investing and financing activities consist of the following:
During fiscal year 1997, the Company acquired $96,000 of computer software in
exchange for 12,000 shares of common stock. As discussed in Note 3, the Company
acquired the common stock of Sisna in exchange for 325,000 shares of the
Company's common stock.
During fiscal year 1996, the Company received subscription agreements for the
purchase of 214,500 shares of common stock at $7.75 per share amounting to
$1,496,137, net of commissions of $166,238, for which payment had not been
received as of June 30, 1996 (see Note 7).
During fiscal year 1995, $50,000 of notes payable to a related party were offset
against a note receivable in the same amount from the same related party. Also
during fiscal year 1995, 479,334 shares of common stock were issued for
subscriptions receivable totaling $719,000.
F-37
<PAGE>
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company adopted SFAS No. 121 for fiscal year
1997, which had no impact on the Company's financial position or results of
operations.
In February 1997, the FASB released SFAS No. 128, "Earnings per Share." SFAS
No. 128 specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS"). SFAS No. 128 simplifies the standards for computing
EPS previously found in APB Opinion No. 15 and replaces the presentation for
primary EPS and fully diluted EPS. When the Company incurs a loss, common stock
equivalents are not included as they would be anti-dilutive. The Company has
adopted the provisions of SFAS No. 128 in the accompanying consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal year 1997 presentation.
(3) ACQUISITION OF SISNA
On January 8, 1997, Holding completed the acquisition of Sisna pursuant to an
Amended and Restated Agreement and Plan of Reorganization (the "Agreement").
Pursuant to the Agreement, Holding issued 325,000 shares of its common stock in
exchange for all of the issued and outstanding shares of Sisna. Of the shares
issued for Sisna, 25,000 shares were placed in escrow pending collection of
Sisna's 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 $1,674,721 and was allocated to purchased
research and development and expensed at the date of the acquisition. Sisna has
not been profitable since its inception. Management believes that the amount of
common stock issued for Sisna was fair and reasonable based on the expected
synergies to be achieved by combining Sisna with the Company and the technology
that was acquired. The tangible assets acquired consisted of $32,212 of trade
accounts receivable, $124,151 of inventory and $500,000 of computer and office
equipment. The liabilities assumed consisted of $10,550 of bank overdrafts,
$278,227 of accounts payable, $233,142 of notes payable and $134,444 of other
accrued liabilities.
In connection with the acquisition, the Company entered into three-year
employment agreements with four of Sisna's key employees and shareholders. The
employment agreements are renewed automatically for one or more successive one-
year terms, unless notice of non-renewal is given by either party, may be
terminated by the Company for cause, as defined, or may be terminated by the
Company without cause. If terminated without cause, the employees are entitled
to their regular base salary up to the end of the then current term and any
bonus owed pursuant to the employment agreements. The four employment
agreements provided for
F-38
<PAGE>
aggregate base annual compensation of $280,000. The employment agreements also
provided for aggregate bonuses of $500,000, which were paid as of the date of
the acquisition, and were earned by the employees as certain computer
installations were completed. The employment agreements also include
noncompetition provisions for periods extending three years after the
termination of employment with the Company. The employment agreement with one of
the employees was terminated in March 1997, which decreased the aggregate base
annual compensation by $100,000 per year.
As discussed in Note 11, Sisna was sold back to Sisna's former major shareholder
subsequent to June 30, 1997 and the employment agreements were terminated.
(4) NOTES PAYABLE
Notes payable, all of which are current, consisted of the following as of June
30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------
<S> <C> <C>
Line-of-credit agreement with a bank (assumed in Sisna acquisition and
included in net current assets of discontinued operations in the
accompanying consolidated balance sheets); interest at prime plus 2
percent (10.5 percent at June 30, 1997); secured by all inventory,
chattel paper, accounts and general intangibles; paid in full
subsequent to June 30, 1997
$100,000 $ -
Note payable to an individual (assumed in Sisna acquisition and
included in net current assets of discontinued operations in the
accompanying consolidated balance sheets); interest at 7.5 percent,
due on demand, unsecured
28,024 -
Other; paid in full in fiscal year 1997 - 43,201
----------------------------------------------
Total notes payable $128,024 $43,201
==============================================
</TABLE>
(5) INCOME TAXES
The components of the net deferred tax assets as of June 30, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 3,464,800 $ 790,300
Reserves and accrued liabilities 83,400 21,600
Other 22,000 -
-----------------------------------------------
Total deferred tax assets 3,570,200 811,900
Valuation allowance (3,570,200) (811,900)
-----------------------------------------------
Net deferred tax asset $ - $ -
===============================================
</TABLE>
F-39
<PAGE>
As of June 30, 1997, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $9,624,000. For federal
income tax purposes, utilization of these carryforwards is limited if the
Company has had more than a 50 percent change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a change occurs in
the future. The tax net operating losses will expire beginning in 2009.
No benefit for income taxes has been recorded during the year ended June 30,
1997. As discussed in Note 1, certain risks exist with respect to the Company's
future profitability, and accordingly, a valuation allowance was recorded to
offset the net deferred tax asset. The income tax benefits recorded for fiscal
years ended 1996 and 1995 of $91,999 and $132,681, respectively, were limited to
the income tax provision recorded on income from discontinued operations.
(6) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain facilities and equipment used in its operations. The
approximate aggregate commitments under noncancelable operating leases in effect
at June 30, 1997, were as follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1998 $ 706,287
1999 639,600
2000 531,632
2001 297,661
2002 124,503
----------
$2,299,683
==========
</TABLE>
The Company incurred rent expense of $472,572, $118,923, and $53,435, in
connection with these operating leases for fiscal years 1997, 1996 and 1995,
respectively.
Purchase Commitments
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services for WorldNow Online. This agreement was terminated and superceded by
an agreement effective July 15, 1997. The Company has agreed to a minimum
annual usage commitment of at least $500,000 over a three-year period beginning
six months after the products and services are installed by Sprint and available
for the Company's use. On March 31, 1997, the Company signed a one-year
agreement with Sprint TELECENTERs Inc. ("STI") whereby STI will provide inbound
customer telemarketing services to the Company. The minimum program cost is
$200,000.
F-40
<PAGE>
Subsequent to June 30, 1997, the Company has entered into a Series C Preferred
Share Purchase Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli
company, whereby the Company has agreed to invest $750,000 in CommTouch's Series
C Preferred Stock. One half of the investment was made on July 2, 1997 and the
other half was made on September 17, 1997. The Company also has an option to
make an additional $1,000,000 investment in CommTouch's Series C Preferred
Stock. CommTouch is engaged in the development, manufacture and marketing of
PC-based Internetworking software.
Legal Matters
The Company is a party to certain legal matters which it considers incidental to
its business activities. It is the opinion of management, after consultation
with legal counsel, that the ultimate disposition of these legal matters will
not have a material impact on the consolidated financial position, liquidity or
results of operations of the Company.
(7) CAPITAL TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $.0001 par
value preferred stock. As of June 30, 1997, no preferred stock was outstanding.
The Company's Board of Directors is authorized, without shareholder approval, to
fix the rights, preferences, privileges and restrictions of one or more series
of the authorized shares of preferred stock.
Common Stock Issuances and Other Transactions
Prior to the reverse merger of Systems and Holding discussed in Note 1, Systems'
Board of Directors authorized private sales of restricted shares of Systems'
common stock and other equity transactions. During fiscal year 1995, Systems
sold 156,955 (post merger) shares for $68,500 in cash at a price of
approximately $.44 per share. Subsequent to the merger, Holding sold 66,667
shares of common stock for $100,000 in cash at a price of $1.50 per share.
Also, as of June 30, 1995, the Company had received stock subscription
agreements from shareholders to purchase an additional 479,334 shares for
$719,000 at a price of $1.50 per share. The amounts due under the subscription
agreements were paid in fiscal year 1996.
During fiscal year 1996, the Company raised additional equity capital through
private placements of its common stock. Under the private placements, the
Company offered shares of restricted common stock at an offering price of $7.75
per share on a best efforts basis by the officers of the Company. The Company
engaged finders to introduce potential investors to the Company. The finders
received a 10 percent commission and warrants to purchase 250,000 shares of the
Company's common stock at a price of $7.75 per share. In connection with the
private offerings, the Company sold 1,992,179 shares of common stock for
$13,914,849 in proceeds, net of offering costs of $1,524,538, and received
subscriptions for an additional 214,500 shares of common stock. The proceeds
from the subscriptions of $1,496,137, net of offering costs of $166,238, were
received in fiscal year 1997. The Company also issued warrants to purchase up
to 377,900 shares of the Company's common stock at $7.75 per share to certain of
F-41
<PAGE>
the investors. During fiscal years 1997 and 1996, 36,125 and 321,775 of these
warrants to purchase shares of the Company's common stock were exercised,
respectively. The remaining warrants to purchase 20,000 shares of common stock
and the finders' warrants to purchase 250,000 shares of common stock are
outstanding and exercisable as of June 30, 1997.
The Company agreed with certain of the investors to use its best efforts to
register the shares purchased or subscribed and the warrants issued under the
Securities Act of 1933. The Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission (the "SEC") during fiscal year 1996
and it became effective in fiscal year 1997. The stock subscriptions receivable
of $1,496,137 as of June 30, 1996 were not due and payable to the Company until
the Form S-1 Registration Statement had been declared effective by the SEC.
As discussed in Note 3, during fiscal year 1997, the Company issued 325,000
shares of its common stock in connection with the acquisition of Sisna. Also,
the Company acquired certain computer software in exchange for 12,000 shares of
common stock.
(8) STOCK OPTIONS
In August 1993, Systems granted an option to an employee to purchase 150,592
(post merger) shares of common stock at $0.25 per share. These options expire
on June 30, 1999. During fiscal year 1996, the Company granted options to
purchase 470,000 additional shares of common stock, of which 100,000 options
were granted to officers who provided guarantees on certain debt of the Company.
The 100,000 options were exercisable at $5.00 per share and expired October 31,
1996. Subsequent to June 30, 1997, the Company's Board of Directors authorized
that the expiration date be extended to October 31, 1998 for options to purchase
75,000 shares of common stock. The extension of the expiration date will be
reflected as a new grant in fiscal year 1998. The remaining 370,000 options
granted in fiscal year 1996 were granted as consideration to certain individuals
who provided services related to the private stock offerings. These options are
exercisable at prices ranging from $7.75 to $9.00 per share for three years. As
of June 30, 1997, 505,592 of the above options were exercisable. In addition,
during the year ended June 30, 1997 the Company granted options to purchase
65,000 shares of common stock to an employee. The respective Boards of
Directors of Holding and Systems, determined that all options were granted at
fair value at the dates of grant.
The Company has established the Omnibus Stock Option Plan (the "Option Plan")
for employees and consultants. Options granted under the Option Plan may be
incentive stock options or nonqualified stock options. The maximum number of
common shares that may be issued under the Option Plan is 780,532. Options to
purchase 510,000, 175,000 and 634,946 shares were granted under the Option Plan
during fiscal years 1997, 1996 and 1995, respectively, and options to purchase
79,835 and 341,323 shares were forfeited or canceled during fiscal years 1997
and 1996, respectively. Total outstanding options under the Option Plan at June
30, 1997 were 779,388 of which 169,388 were exercisable. Generally, the
options granted under the Option Plan vest within three years of the date
granted. The options expire, if not exercised, from June 30, 1999 through June
1, 2002.
F-42
<PAGE>
The following is a summary of all stock options for fiscal years 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Options Outstanding
Number of Option Price
Shares Per Share
-------------------------------------------------
<S> <C> <C>
Balance at June 30, 1994 150,592 $ 0.25
Granted 634,946 0.50-1.00
-------------------------------------------------
Balance at June 30, 1995 785,538 0.25-1.00
Granted 645,000 5.00-9.00
Expired or canceled (341,323) .50-1.00
Exercised (17,000) .50
-------------------------------------------------
Balance at June 30, 1996 1,072,215 0.25-9.00
Granted 575,000 3.25-7.75
Expired or canceled (179,835) 0.50-5.00
Exercised (102,400) 0.50-1.00
-------------------------------------------------
Balance at June 30, 1997 1,364,980 $0.25-9.00
=================================================
</TABLE>
In June 1996, in connection with an employment agreement with an officer of
WorldNow, a principal stockholder granted an option to the officer to purchase
237,500 shares of restricted common stock from the principal stockholder at
$1.50 per share. As discussed in Note 7, during the year the Company sold
shares of restricted common stock in a private placement at $7.75 per share;
accordingly, the Company recognized $1,484,375 of compensation expense related
to this transaction during fiscal year 1996.
Two principal stockholders granted options to an employee during fiscal year
1995. The options allow the employee to purchase 150,000 shares of common stock
at $0.50 per share from the stockholders. The Company did not recognize
compensation expense from these options due to the market value of the common
stock being equal to the exercise price on the date the options were granted.
Stock-Based Compensation
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans as they relate to employees and directors. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma information
regarding net income (loss) as if the Company had accounted for its stock
options granted to employees and directors subsequent to June 30, 1995 under the
fair value method of SFAS No. 123. The fair value of these stock options was
estimated at the grant date using the Black-Scholes option pricing model with
the following assumptions: average risk-free interest rates of 6.47 and 5.86
percent in fiscal years 1997 and 1996, respectively, a dividend yield of 0
percent, a volatility factor of the expected common stock price of 77.8 percent
and a weighted average expected life of approximately 2.6 years for the stock
options. For purposes of the pro forma disclosures, the estimated fair value of
the stock options is
F-43
<PAGE>
amortized over the estimated life of the respective stock options. Following are
the pro forma disclosures and the related impact on net loss for the years ended
June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------
<S> <C> <C>
Net loss:
As reported $ (9,340,816) $(3,433,081)
Pro forma (10,378,303) (3,926,658)
Net loss per common share:
As reported (1.12) (0.58)
Pro forma (1.25) (0.66)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to June 30, 1995, and due to the nature and timing of option
grants, the resulting pro forma compensation cost may not be indicative of
future years.
(9) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of its
employees. All employees are eligible to participate and may elect to
contribute to the plan annually. The Company has no obligation to contribute
and did not contribute additional matching amounts to the Plan during any year
presented.
(10) RELATED-PARTY TRANSACTIONS
During fiscal year 1994, the Company made cash loans to two officers totaling
$46,000, which were settled during fiscal year 1995, except for $1,000 which was
settled during fiscal year 1997.
Prior to July 1, 1994, the Company had borrowed money from certain officers.
Additional borrowings of $50,000 and $129,500 were made during fiscal years 1996
and 1995, respectively. Principal payments on these notes were $1,666,
$199,500, and $2,152 during fiscal years 1997, 1996 and 1995, respectively. The
amounts due on these loans at June 30, 1997 and 1996 were $0 and $1,666,
respectively.
During fiscal year 1996, the Company borrowed $500,000 from a bank to fund
computer equipment purchases. Certain officers and shareholders guaranteed the
loan. In exchange for the guarantee, such persons received a one-year option to
purchase 25,000 shares of common stock at $5.00 per share (see Note 8).
During fiscal year 1997, the Company negotiated services and equipment purchase
agreements with CasinoWorld Holdings, Ltd. and Barrons Online, Inc., companies
in which one of the Company's directors and shareholders has an ownership
interest. Under the tentative agreements, the Company will provide software
development services, configured hardware and other computer equipment and
related facilities amounting to approximately $750,000. As of June 30, 1997,
the Company had acquired $244,292 of computer equipment to be resold in
connection with these arrangements which is included in net current assets of
discontinued operations in the accompanying June 30, 1997 consolidated balance
sheet.
F-44
<PAGE>
(11) SUBSEQUENT EVENTS
Sale and Leaseback of Equipment
In October 1997, the Company entered into a sale and three-year leaseback
agreement related to $3,000,000 of the Company's computer equipment. The
agreement provided that $250,000 of the proceeds be placed in escrow upon
signing the agreement. The equipment was sold at book value resulting in no
deferred gain of loss on the transaction.
Acquisition of Books Now, Inc.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
Inc., a seller of books through advertisements in magazines and over the
Internet. The shareholders of Books Now, Inc. received 100,000 shares of the
Company's common stock upon signing the agreement and can receive a maximum of
87,500 additional shares per year for the next three years based on performance
goals established in the agreement. The acquisition has been accounted for as a
purchase.
Sale of Direct Mail Advertising Business
In March 1998, Systems sold its direct mail advertising business to Focus
Direct, Inc. ("Focus Direct"), a Texas corporation. Pursuant to the asset
purchase agreement, Focus Direct purchased all assets, properties, rights,
claims and goodwill, of every kind, character and description, tangible and
intangible, real and personal wherever located of the Company used in the
Company's direct mail business. Focus Direct also agreed to assume certain
liabilities of the Company related to the direct mail business. Focus Direct is
not affiliated with the Company.
Pursuant to the agreement, Focus Direct, will pay the Company $7,700,000 for the
above described assets. Focus Direct paid the Company $6,900,000 at closing and
will pay the additional $800,000 by June 30, 1999. The total purchase price
will be adjusted for the difference between the assets acquired and liabilities
assumed at November 30, 1997 and those as of the date of closing. This sale
resulted in a gain of approximately $7,000,000. The purchaser acquired tangible
assets of approximately $490,000 of accounts receivable, $180,000 of inventory,
$580,000 of furniture and equipment, and $10,000 of other assets and assumed
liabilities of approximately $590,000 of accounts payable and $320,000 of other
accrued liabilities.
The operations of the direct mail advertising business, which accounted for 95
percent of the Company's revenues in fiscal year 1997 and all of the Company's
revenues prior to fiscal year 1997, have been reflected as discontinued
operations in the accompanying consolidated financial statements. The direct
mail revenues for fiscal years 1997, 1996 and 1995 amounted to $6,448,156,
$4,256,887, and $3,443,965, respectively.
F-45
<PAGE>
SALE OF SISNA, INC.
In March 1998, the Company sold the operations of Sisna (see Note 3) back to
Sisna's major shareholder, who was a director of the Company, in exchange for
35,000 shares of the Company's common stock. The purchaser of Sisna received
tangible assets of approximately $55,000 of accounts receivable, $35,000 of
prepaid expenses, $48,000 of computer and office equipment, and $10,000 of other
assets and assumed liabilities of approximately $33,000 of accounts payable,
$102,000 of notes payable, and $244,000 of other accrued liabilities.
The operations of Sisna have been reflected in the accompanying consolidated
financial statements from the acquisition date in January 1997 through the sale
in March 1998 as discontinued operations. The Sisna revenues during fiscal year
1997 were $341,842.
REPURCHASE OF SHARES OF COMMON STOCK
On April 28, 1998, the Company entered into an Amended Stock Repurchase
Agreement (the "Repurchase Agreement") with Mr. Chad L. Evans, the former CEO
and Chairman of the Board of the Company. Pursuant to the Repurchase Agreement,
the Company agreed to repurchase 1,800,000 shares of the Company's common stock
held by Mr. Evans for $1,500,000. Additionally, the Company entered into a
Confidentiality and Noncompetition Agreement with Mr. Evans, pursuant to which
Mr. Evans, for consideration consisting of $25,000, has agreed, among other
things, not to compete with the Company, solicit employees from the Company, or
use proprietary information of the Company for a period of three years.
ACQUISITION OF WEATHERLABS, INC.
In May 1998, the Company acquired all of the outstanding stock of WeatherLabs,
Inc., one of the leading providers of weather and weather-related information on
the Internet. The shareholders of WeatherLabs, Inc. received 253,260 shares of
the Company's common stock upon the signing of the agreement and can receive a
total of 523,940 additional shares over the next three years based on
performance goals established in the agreement. The acquisition has been
accounted for as a purchase.
ACQUISITION OF DIGITAL COURIER INTERNATIONAL, INC.
The Company has entered into a Stock Exchange Agreement with Digital Courier
International, Inc., a Nevada corporation ("Digital Courier"), dated as of March
17, 1998 (the "Exchange Agreement"). Pursuant to the Exchange Agreement, the
Company has agreed to issue 4,659,080 shares of its common stock to the
shareholders of Digital Courier. This acquisition will be accounted for as a
purchase and the Company anticipates that approximately $11.7 million of the
total purchase price of approximately $13 million will be allocated to in
process research and development and will be expensed in the period the
acquisition is consummated.
Digital Courier is a Java-based Internet and wireless communications software
development company originally incorporated as Digital Courier Technologies,
Inc. on July 23, 1996. For the year ended December 31, 1997, Digital Courier
had no revenues.
F-46
<PAGE>
INTERACTIVE MARKETING AGREEMENT WITH AMERICA ONLINE, INC.
On June 1, 1998, the Company entered into a thirty-nine month Interactive
Marketing Agreement with America Online, Inc. ("AOL"), wherein the Company has
agreed to pay AOL $12,000,000 in exchange for AOL promoting and distributing an
interactive site on the Internet. The Company is scheduled to make cash
payments to AOL of $1,200,000 upon execution of the agreement in June 1998,
$4,000,000 prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and
$2,800,000 prior to January 1, 2000.
In addition, AOL exercised an option under the contract to provide the Company
with an additional package of promotions and placements on the Internet and
received 955,414 shares of the Company's common stock.
AGREEMENT TO SELL CERTAIN ASSETS RELATED TO WORLDNOW
On July 15, 1998, the Company signed an agreement to sell certain assets related
to the Company's Internet-related business branded under the "WorldNow" and
"WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The
assets relate primarily to the national Internet-based network of local
television stations. Pursuant to the asset purchase agreement, Gannaway agreed
to pay $478,172, less certain amounts as defined, in installments over a one-
year period from the date of closing and agreed to pay earn-out payments of up
to $500,000. The earn-out payments are based on 10 percent of monthly revenues
actually received by the buyer in excess of $100,000 and are to be paid
quarterly. The purchaser acquired tangible assets of approximately $100,000 and
assumed no liabilities. The operations of WorldNow have been reflected in the
accompanying financial statements in loss from continuing operations.
F-47
<PAGE>
ANNEX I
STOCK EXCHANGE AGREEMENT
BY AND AMONG
DATAMARK HOLDING, INC.
a Delaware corporation,
AND
DIGITAL COURIER INTERNATIONAL, INC.
a Nevada Corporation,
AND
THE SHAREHOLDERS OF
DIGITAL COURIER INTERNATIONAL, INC.
March 17, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
Exchange of Shares..........................................................................
Delivery; Liabilities.......................................................................
Delivery of DMH Shares and Digital Courier Shares......................................
Contingent DMH Shares and Conditions of Distribution...................................
Liabilities............................................................................
Representations and Warranties of Seller....................................................
Ownership of Digital Courier Shares....................................................
Authority..............................................................................
No Litigation..........................................................................
Solvency...............................................................................
Securities Laws Compliance.............................................................
Representations and Warranties Concerning Digital Courier...................................
Organization, Standing and Qualification...............................................
Authority..............................................................................
Subsidiaries...........................................................................
Merger.................................................................................
Stock Transfer Books...................................................................
Corporate Records......................................................................
Corporate Records......................................................................
No Defaults............................................................................
No Conflict............................................................................
Consents and Approvals.................................................................
Related Party Transactions.............................................................
Safety Laws............................................................................
Environmental Compliance...............................................................
Compliance with Law....................................................................
Financial Statements...................................................................
Properties and Assets..................................................................
Accounts Receivable....................................................................
Equipment and Real Property Leases.....................................................
Intellectual Property..................................................................
Liens..................................................................................
Material Contracts.....................................................................
No Undisclosed Liabilities.............................................................
Litigation.............................................................................
Insurance..............................................................................
Taxes..................................................................................
Employment Contracts...................................................................
Personnel at Closing...................................................................
Invention and Assignment Agreement.....................................................
Employee Restrictions..................................................................
Labor Matters..........................................................................
Employee Benefit Plans.................................................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Adverse Change.........................................................................
Discrimination.........................................................................
Disputes and Charges...................................................................
Certain Payments.......................................................................
Accuracy of Information Furnished......................................................
Representations, Warranties and Agreements of Buyer.........................................
Organization, Standing and Qualification...............................................
Authority..............................................................................
Compliance with Law....................................................................
Availability of Documents..............................................................
Shares Purchased for Investment........................................................
DMH Shares.............................................................................
The Closing.................................................................................
Conditions of Buyer s and Sellers Performance...............................................
Buyer's Conditions.....................................................................
Seller's Conditions....................................................................
Indemnification.............................................................................
General Indemnification Obligation of Digital Courier and Seller.......................
General Indemnification Obligation of Buyer............................................
Time Limitation........................................................................
Insurance..............................................................................
Method of Asserting Claims, Etc........................................................
Defense................................................................................
Indemnifying Party Liability...........................................................
Payment................................................................................
Non-Disclosure and Non-Compete Covenants....................................................
Proprietary Information................................................................
Non-Compete Provisions.................................................................
Publicity..............................................................................
Miscellaneous Covenants of Sellers and Buyer................................................
No Share Purchases.....................................................................
Further Actions........................................................................
Substitution of Buyer Into Any Digital Courier Agreement...............................
Termination, Amendment, Change in Control...................................................
Pre-Closing............................................................................
Waiver
Legal Proceedings...........................................................................
Mediation..............................................................................
Exclusive Jurisdiction in Utah.........................................................
Miscellaneous...............................................................................
Attorneys' Fees........................................................................
Brokers and Finders....................................................................
Expenses...............................................................................
Survival...............................................................................
Severability...........................................................................
Notices................................................................................
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Entire Agreement.......................................................................
Counterparts...........................................................................
Binding Effect.........................................................................
Governing Law..........................................................................
Gender and Number, etc.................................................................
Successors and Assigns.................................................................
No Third Party Beneficiaries...........................................................
No Partnership or Joint Venture........................................................
Signatures..................................................................................
</TABLE>
3
<PAGE>
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT ("Agreement") is executed as of this 17th day
of March, 1998 by and among DATAMARK HOLDING, INC., a Delaware corporation
("Buyer" or "DMH"), DIGITAL COURIER INTERNATIONAL, INC., a Nevada corporation
("Digital Courier"), and the shareholders of Digital Courier, who are identified
on Exhibit A (each, a "Seller") (Digital Courier and each Seller are sometimes
referred to herein collectively as "Sellers").
RECITALS
WHEREAS, Buyer is a Delaware corporation which, through its subsidiaries,
provides Internet services and solutions to its individual and corporate
customers;
WHEREAS, Digital Courier is a privately-held Nevada corporation which
provides Internet services and solutions which are complementary to those
provided by DMH;
WHEREAS, the parties intend by this Agreement to provide for the
acquisition by Buyer of all of the issued and outstanding capital stock of
Digital Courier as set forth on Exhibit A (unless the context requires
otherwise, the capital stock of Digital Courier shall be referred to as the
"Digital Courier Shares"), in exchange for Four Million Five Hundred Fourteen
Thousand Eight Hundred Ninety-One (4,659,080) shares of common stock of DMH (the
"DMH Shares"); and
WHEREAS, the parties hereto intend to engage in a tax-free exchange of
shares in which the Digital Courier Shares will be exchanged for the DMH Shares
in a transaction which is intended to qualify as a reorganization within the
meaning of Section 368(a)(1)(B) of the Internal Revenue Code, as amended, such
that upon closing of the transaction, Digital Courier will be a wholly-owned
subsidiary of Buyer.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and obligations
set forth herein, it is agreed as follows:
1. EXCHANGE OF SHARES. Subject to the terms and conditions contained
herein, Buyer and each Seller agree to exchange, sell, transfer, convey and
assign to the other, the DMH Shares and the Digital Courier Shares,
respectively. The DMH Shares shall be allocated to Sellers as set forth on
Exhibit A attached hereto.
<PAGE>
2. DELIVERY; LIABILITIES.
(a) Delivery of DMH Shares and Digital Courier Shares. At Closing (as
-------------------------------------------------
defined in Section 6 hereof) (i) each Seller shall deliver to Buyer
certificates evidencing the Digital Courier Shares owned by such Seller
immediately prior to Closing, endorsed in blank, together with necessary
stock powers and otherwise in proper form for transfer, and (ii) Buyer
shall deliver to Sellers certificates representing 4,659,080 DMH Shares,
registered in the name of Sellers as set forth on Exhibit A. Neither party
shall be obligated to close the transaction unless the other party delivers
all shares it is obligated to deliver at Closing.
(b) Liabilities. Buyer shall not assume any state or federal tax
-----------
liability of Sellers. All shareholder notes payable or other amounts owed
by Digital Courier to Sellers shall be canceled prior to or at Closing.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS. To induce Buyer to enter
into this Agreement, each Seller severally represents and warrants to Buyer that
the following statements are true, correct and complete as of the date hereof,
and will be true, correct and complete as of the date of Closing.
(a) Ownership of Digital Courier Shares. Seller owns, beneficially
-----------------------------------
and of record, one hundred percent (100%) of the Digital Courier Shares set
forth across from Seller's name on Exhibit A hereto, free and clear of any
lien, security interest, pledge, claim, demand or encumbrance or
restriction of any kind or character whatsoever. The Digital Courier Shares
set forth on Exhibit A hereto, collectively, constitute one hundred percent
(100%) of the outstanding capital stock of Digital Courier.
(b) Authority. Seller now has and will have, at the Closing, full
---------
power, authority and legal right to exchange the Digital Courier Shares
owned by Seller with Buyer pursuant to this Agreement. This Agreement has
been duly and validly executed and delivered by, and is the valid and
binding obligation of, Seller.
(c) No Litigation. Seller is not involved in any suits or
-------------
proceedings at law or in equity, or before or by any governmental agency or
arbitrator, pending, or to the knowledge of Seller, threatened, anticipated
or contemplated, which in any way affect the consummation of the
transactions contemplated hereby or, if valid, would constitute or result
in a breach of any representation, warranty or agreement of Seller set
forth herein.
(d) Solvency. Seller is not bankrupt or insolvent nor has Seller
--------
assigned Seller's estate for the benefit of creditors, entered into any
scheme or arrangement with creditors, nor has Seller any present intention
to file a petition in bankruptcy, assign Seller's estate for the benefit of
creditors, or enter into any scheme or arrangement with creditors.
2
<PAGE>
(e) Securities Laws Compliance. Seller:
(i) has been represented by such legal and tax counsel and
others, each of whom has been personally selected by Seller, as Seller
has found necessary to consult concerning this transaction, and any
such representation has included an examination of applicable
documents, and an analysis of all tax, financial, and securities law
aspects. Seller, his counsel and advisors, and such other persons with
whom Seller has found it necessary to consult, have sufficient
knowledge and experience in business and financial matters to evaluate
the above information, and the merits and risks of the share exchange
contemplated by this Agreement, and to make an informed investment
decision with respect thereto;
(ii) prior to the date hereof, has had the opportunity to
ask questions of, and to receive answers from, Buyer and its
representatives, concerning the terms and conditions of the exchange
of the Digital Courier Shares for the DMH Shares and access to obtain
any information, documents, financial statements, records and books
relative to Buyer, the business of Buyer and an investment in Buyer.
All materials and information requested by Seller, Seller's counsel
and advisors, or others representing such Seller, including any
information requested to verify any information furnished to Seller,
have been made available and examined.
(iii) is acquiring the DMH Shares for Seller's own account
and not as a fiduciary for any other person and for investment
purposes only and not with a view to or for the transfer, assignment,
resale, or distribution thereof, in whole or in part. Seller
understands the meaning and legal consequences of the foregoing
representations and warranties.
(iv) understands that the DMH Shares have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act") nor pursuant to the provisions of the securities or
other laws of any applicable jurisdictions. Seller further understands
that the DMH Shares cannot be sold, assigned, pledged, transformed or
otherwise disposed of unless such shares are registered or an
exemption from registration is available, and that the DMH Shares will
bear a restrictive legend to that effect.
4. REPRESENTATIONS AND WARRANTIES CONCERNING DIGITAL COURIER. To further
induce Buyer to enter into this Agreement, Digital Courier and the Significant
Sellers (as set forth on Exhibit A) jointly and severally represent and warrant
to Buyer that the following statements concerning the affairs of Digital Courier
are true, correct and complete in all material respects as of the date hereof,
and will be true, correct and complete in all material respects as of the
Closing Date (as defined in Section 6) hereof.
(a) Organization, Standing and Qualification. Digital Courier is duly
----------------------------------------
organized, validly existing and in good standing under the laws of the
State of Nevada and is
3
<PAGE>
authorized and qualified to own and operate its properties and assets and
conduct its business as presently conducted in all jurisdictions where such
properties and assets are owned and operated and such business conducted.
Digital Courier has duly filed any and all certificates and reports
required to be filed to date by the laws of the State of Nevada and any
other applicable law. Digital Courier has all franchises, permits,
licenses, and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could materially
adversely affect the business, properties, prospects, or its financial
condition. Digital Courier is not in default in any material respect under
any of such franchises, permits, licenses or other similar authority.
(b) Authority. Digital Courier has, and will have at the Closing,
---------
full power, authority and legal right to enter into and perform this
Agreement. This Agreement has been duly and validly authorized, executed
and delivered by, and is a valid and binding obligation of, Digital
Courier.
(c) Capitalization. As of the date of Closing, the authorized
--------------
capital stock of Digital Courier consists of 10,000,000 shares of common
stock, of which _____ shares are issued and outstanding and no shares of
preferred stock, all as set forth in the attached Exhibit A, which
constitute all of the issued and outstanding shares of capital stock and
equity securities of Digital Courier. All of the outstanding shares of
common stock of Digital Courier were duly authorized and validly issued and
are fully paid and nonassessable. Digital Courier has no treasury shares.
There are no outstanding subscriptions, options, warrants, calls,
contracts, demands, commitments, convertible securities or other rights,
agreements or arrangements of any character or nature whatever relating to
the issuance of common stock or other securities of Digital Courier. No
holder of any security of Digital Courier is entitled to any preemptive or
similar rights to purchase any securities of Digital Courier.
(d) Subsidiaries. Digital Courier has no subsidiaries and no other
------------
investment in any entity. Digital Courier is not a participant in any joint
venture, partnership or other similar arrangement.
(e) Stock Transfer Books. The stock transfer books and stock ledgers
--------------------
of Digital Courier are in good order, complete in all material respects,
accurate and up-to-date, and with all necessary signatures, and set forth
all stock and securities issued, transferred and surrendered. No duplicate
certificate has been issued at any time heretofore. No transfer has been
made without surrender of the proper certificate duly endorsed. All
certificates so surrendered have been duly canceled and are attached to the
proper stubs with all necessary stock powers attached thereto.
(f) Corporate Records. The minute books and other corporate record
-----------------
books of Digital Courier, which have been delivered to Buyer, are in good
order, complete in all material respects, accurate, up-to-date, with all
necessary signatures and set forth all meetings and actions taken by the
stockholders or directors of Digital Courier furnished to anyone at any
time. The copies of Digital Courier's Articles of Incorporation and
4
<PAGE>
Bylaws which have been delivered to Buyer are complete and correct, as
amended, to the date of execution of this Agreement.
(g) No Defaults. Digital Courier is not in default under or in
-----------
violation of any provisions of its Articles of Incorporation or Bylaws.
Digital Courier is not in default under or in violation of any restriction,
lien, encumbrance, indenture, contract, lease, sublease, loan agreement,
note or other obligation or liability relating to Digital Courier's
business, except as set forth in Schedule 4(i) hereto.
(h) No Conflict. Neither the execution and delivery of this
-----------
Agreement nor consummation of the transactions contemplated hereby will
conflict with or result in a breach of or constitute a default under any
provision of the Articles of Incorporation or Bylaws of Digital Courier,
any law, rule, regulation, judgment, decree, order or other requirement
applicable to Digital Courier, or any restriction, lien, encumbrance,
indenture, contract, lease, sublease, loan agreement, note or other
obligation or liability to which Digital Courier is a party or by which it
is bound, or to which any of its assets are subject, or result in the
creation of any lien or encumbrance upon such assets, except as set forth
in Schedule 4(j) hereto.
(i) Consents and Approvals. Except as set forth in Schedule 4(k),
----------------------
the execution, delivery and performance of this Agreement by Significant
Sellers and the consummation of the transactions contemplated hereby do not
require Digital Courier or Significant Sellers to obtain any consent,
approval or action of, or make any filing with or give notice to any
corporation, person or firm or any public, governmental or judicial
authority except: (i) such as have been duly obtained or made, as the case
may be, and are in full force and effect on the date hereof, (ii) those
which the failure to obtain would have no material adverse effect on the
transactions contemplated hereby or on Digital Courier's business or
financial condition, and (iii) any filings required under the Securities
Act, or any applicable state securities laws.
(j) Related Party Transactions. Except as set forth in Schedule
--------------------------
4(l), no employee, officer, or director of Digital Courier or member of his
or her immediate family is indebted to Digital Courier, nor is Digital
Courier indebted (or committed to make loans or extend or guarantee credit)
to any of such individuals. To the best of Digital Courier's and
Significant Sellers' knowledge, no individual has any direct or indirect
ownership interest in any firm or corporation with which Digital Courier is
affiliated or with which Digital Courier has a business relationship, or
any firm or corporation that competes with Digital Courier, except that
employees, officers, or directors of Digital Courier and members of their
immediate families may own 5% or less of the outstanding stock of publicly
traded companies that may compete with Digital Courier. Except as set forth
in Schedule 4(l), no member of the immediate family of any officer or
director of Digital Courier is directly or indirectly interested in any
material contract with Digital Courier.
(k) Safety Laws. Digital Courier is not in material violation of any
-----------
applicable statute, law or regulation relating to occupational health and
safety (including, but not
5
<PAGE>
limited to OSHA and any similar state laws), and to Digital Courier's and
Significant Sellers' knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law or
regulation.
(l) Environmental Compliance
------------------------
(i) Definitions. As used in this Agreement:
(A) "Environmental Law" means any federal, state or local
law, statute, ordinance, or regulation pertaining to health,
industrial hygiene, or environmental conditions, including,
without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. (S)(S) 9601,
et seq.; the Resource Conservation and Recovery Act of 1976, 42
U.S.C. (S)(S) 6901, et seq.; the Toxic Substances Control Act
of 1976, 15 U.S.C. (S)(S) 2601, et seq.; the Superfund
Amendments and Reauthorization Act of 1986, Title III, 42
U.S.C. (S)(S) 11001, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. (S)(S) 1801, et seq.; the Clean
Air Act, 42 U.S.C. (S)(S) 7401, et seq.; the Federal Water
Pollution Control Act, 33 U.S.C. (S)(S) 1251, et seq.; the Safe
Drinking Water Act, 42 U.S.C. (S)(S) 300f, et seq.; the Solid
Waste Disposal Act, 42 U.S.C. (S)(S) 3251, et seq.; and any
other federal, state or local law, statute, ordinance, or
regulation now in effect which pertains to health, industrial
hygiene, or the regulation or protection of the environment,
including, without limitation, ambient air, soil, groundwater,
surface water, and/or land use.
(B) "Hazardous Substance" means any material, waste,
-------------------
substance, pollutant, or contaminant which has been designated,
classified or regulated as they may or could pose a risk of
injury or threat to health of the environment, including,
without limitation:
(1) Those substances included within the
definitions of "hazardous substance," "hazardous waste,"
"hazardous material," "toxic substance," "solid waste," or
"pollutant or contaminant" in, or otherwise regulated by any
Environmental Law;
(2) Those substances listed in the United States
Department of Transportation Hazardous Materials Table (49
CFR 172.101, including appendices and amendments thereto),
or by the Environmental Protection Agency (or any successor
agency) as hazardous substances (40 CFR Part 302 and
amendments thereto);
(3) Such other substances, materials, or wastes
which are or become regulated or classified as hazardous or
toxic under federal, state, or local laws or regulations;
and
6
<PAGE>
(4) Any material, waste, or substance which is
petroleum or refined petroleum products; asbestos in any
form; polychlorinated biphenyls; flammable explosives;
radioactive materials; or radon.
Any reference in this paragraph to statutory or regulatory
sections shall be deemed to include any amendments thereto and
any successor sections which cover the same environmental
matters.
(ii) Environmental Representations.
(A) To Significant Sellers' knowledge, all property owned,
leased or occupied by Digital Courier (the "PROPERTY") is free
from and has always been free from Hazardous Substances, and is
not now and has never been in violation of any Environmental Law.
Digital Courier has not caused or allowed the use, generation,
manufacture, production, treatment, storage, release, discharge,
or disposal of any Hazardous Substances on, under, or about the
Property, and has not caused or allowed the transportation to or
from the Property of any Hazardous Substance.
(B) To Significant Sellers' knowledge, there are not now
and have never been any buried or partially buried storage tanks
located on the Property.
(C) Digital Courier has received no warning, notice of
violation, administrative complaint, judicial complaint, or other
formal or informal notice alleging that conditions on the
Property or adjacent property are or have been in violation of
any Environmental Law, or informing Digital Courier or a
Significant Seller that the Property is subject to investigation
or inquiry regarding the presence of Hazardous Substances on or
about the Property or the potential violation of any
Environmental Law.
(D) Neither Digital Courier nor Significant Sellers are
aware of any facts or circumstances that could give rise to a
violation of any Environmental Law.
(E) To Significant Sellers' knowledge, no environmental
lien in favor of any governmental entity has attached to any of
the Property.
(iii) Remedial Work. If, as a result of acts or circumstances
occurring or existing prior to the Closing, any investigation, site
monitoring, containment, cleanup, removal, restoration or other
remedial work of any kind or nature (the "REMEDIAL WORK") is necessary
under any Environmental Law or any judicial or consent order, or by
any governmental or non-governmental entity or person
7
<PAGE>
because of, or in connection with, the violation of any Environmental
Law, or the current or future presence or release of a Hazardous
Substance in or into the air, soil, groundwater, or surface water at,
on, about, under or within the Property (or any portion thereof),
other than in compliance with applicable law, Seller will promptly
commence, or cause to be commenced, and thereafter diligently
prosecute to completion, all such Remedial Work unless Buyer elects to
perform the Remedial Work itself. All Remedial Work will be performed
by one or more contractors and/or consulting engineers, approved in
advance in writing by Buyer and under the supervision of one or more
consulting engineers approved in advance in writing by Buyer. All
costs and expenses of such Remedial Work, whether undertaken by Buyer
or Sellers, will be paid by Sellers including, without limitation, the
charges of such contractors and the consulting engineers, and Buyer's
reasonable fees and costs, including attorneys fees incurred in
connection with monitoring or review of such Remedial Work. Unless
Buyer has elected to perform the Remedial Work, if Sellers fail to
timely commence, or cause to be commenced, or fail to diligently
prosecute to completion, such Remedial Work, Buyer may, but will not
be required to, cause such Remedial Work to be performed and all costs
and expenses thereof, or incurred in connection therewith, shall be
paid by Sellers.
(o) Compliance with Law. Neither Digital Courier nor any of its
-------------------
directors, officers, fiduciaries, agents or employees is in material
violation of any applicable law, rule, regulation or requirement of any
governmental authority in any way relating to Digital Courier's business.
Consummation of the transactions contemplated hereby will not violate any
laws, rules, regulations or requirements applicable to Digital Courier of
any governmental authorities, nor will consummation of such transactions
require any license or permit or other action or permission in the nature
thereof, or any registration with, or consent of, any governmental
authority.
(p) Financial Statements. The financial statements of Digital Courier
--------------------
for the periods ending December 31, 1997 and February 28, 1998 (the
"Financial Statements") attached hereto as Schedule 4(p), are correct and
complete and fairly present in all material respects the financial
condition and the results of operations, changes in stockholders' equity,
and cash flow of Digital Courier as of the dates described therein, all in
accordance with generally accepted accounting principals ("GAAP")
consistently applied.
(q) Properties and Assets. The properties and assets presently owned
---------------------
by Digital Courier include all properties and assets of every kind, class
and description, real and personal, tangible and intangible, shown on the
books of or used in the business of Digital Courier necessary to the
conduct of its business as presently conducted. Except as set forth in
Schedule 4(q), Digital Courier has good and indefeasible title to and
possession of all such known properties and assets, free and clear of all
liens, claims, security interests, encumbrances, restrictions and rights,
title and interests in others.
8
<PAGE>
There are no existing agreements, options or commitments or rights with, to
or in any third party to acquire any of the properties or assets of Digital
Courier or any interest therein, except for those entered into in the
ordinary course of business and not materially adversely affecting the
properties, assets or rights of Digital Courier. The assets of Digital
Courier on the Closing Date shall include all of the assets described
hereinabove or otherwise reflected on the Financial Statements, adjusted
only for inventory and other assets acquired or disposed of in the ordinary
course of business after the date of the last Financial Statement and
before the Closing Date. The assets are structurally sound, are in good
operating condition and repaired and are adequate for the use to which they
are being put, and none of such assets is in need of repair except for
ordinary, routine maintenance and repairs that are not material in nature
or cost.
(r) Accounts Receivable. All accounts receivable of Digital Courier
-------------------
that are reflected on the latest Financial Statements (collectively, the
"Accounts Receivable") represent or will represent valid obligations
arising from sales actually made or services actually performed in the
ordinary course of business of Digital Courier. Unless paid prior to
Closing, the Accounts Receivable are or will be as of the Closing Date
current and collectible net of the respective reserves shown on the latest
Financial Statements or on the accounting records of Digital Courier,
provided to Buyer, as of the Closing (which reserves are adequate and
calculated consistent with past practice and, in the case of the reserves
as of Closing, will not represent a greater percentage of the Accounts
Receivable as of the Closing than the reserves reflected in the latest
Financial Statements and will not represent a material adverse change in
the composition of such Accounts Receivable in terms of aging). Subject to
such reserves, each of the Accounts Receivable either has been or will be
collected in full, without any set-off, within ninety days after the day on
which it first becomes due and payable. There is no contest, claim, or
right of set-off, other than returns in the ordinary course of business,
under any contract with any obligor of an Accounts Receivable relating to
the amount or validity of such Accounts Receivable. Schedule 4(r) contains
a complete and accurate list of all Accounts Receivable as of the date of
the latest Financial Statements, which list sets forth the aging of such
Accounts Receivable.
(s) Equipment and Real Property Leases. Digital Courier enjoys
----------------------------------
exclusive, peaceful and undisturbed possession under all equipment, real
property, personal property, or other leases to which it is a party. All
such leases are identified on the attached Schedule 4(s), are valid and
enforceable against Digital Courier in accordance with their terms, and no
party thereto is in default thereunder.
(t) Intellectual Property. In each case, except as set forth in
---------------------
Schedule 4(t); Digital Courier owns or has acquired by license or otherwise
all copyrights, rights of reproduction, trademarks, trade names, trademark
applications, service marks, patent applications, patents, and patent
license rights, all whether registered or unregistered as set forth on
Schedule 4(t). Digital Courier has full rights of use for all unregistered
trademarks and service marks in connection with the goods and services
identified by
9
<PAGE>
such marks and the use of such marks in connection with its goods and
services does not infringe on any third party rights. Digital Courier also
owns or has acquired by license or otherwise all U.S. or foreign,
inventions, franchises, discoveries, ideas, research, engineering, methods,
practices, processes, systems, formulae, designs, drawings, products,
projects, improvements, developments, know-how, and trade secrets which are
used in or necessary for the conduct of its business as presently conducted
(collectively the "Proprietary Rights"), without conflict or infringement
in any material respect of any patent, copyright, trade secret or other
lawful proprietary right of any other party, and subject to no restriction,
lien, encumbrance, right, title or interest in others, and no claim is
pending or, to the knowledge of Significant Sellers and Digital Courier,
threatened to the effect that the operations of Digital Courier infringe
upon or conflict with the asserted rights of any other person under any
Proprietary Right, and there is no reasonable basis for any such claim
(whether or not pending or threatened). No claim is pending or, to the
knowledge of Significant Sellers and Digital Courier, threatened to the
effect that any such Proprietary Rights owned or licensed by Digital
Courier, or which Digital Courier otherwise has the right to use, is
invalid or unenforceable by Digital Courier, and there is no reasonable
basis for any such claim (whether or not pending or threatened). To the
knowledge of Significant Sellers and Digital Courier, all technical
information developed by and belonging to Digital Courier which has not
been patented has been kept confidential, and if disseminated, such
information is subject to confidentiality agreements prepared or reviewed
by Digital Courier's outside legal counsel. All of the foregoing
Proprietary Rights that are not in the public domain stand solely in the
name of Digital Courier and not in the name of any stockholder, director,
officer, agent, partner or employee or anyone else known to Significant
Sellers, and none of the same have any right, title, interest, restriction,
lien or encumbrance therein or thereon or thereto. An accurate summary of
all licenses pertaining to the foregoing is included in Schedule 4(t). Full
and complete copies of said licenses have been heretofore delivered to
Buyer. Digital Courier has not granted or assigned to any other person or
entity any right to manufacture, have manufactured, assemble or sell the
products or proposed products or to provide the services or proposed
services of Digital Courier. All patents, copyrights, trademarks, service
marks and federal, state and foreign registrations thereof, are valid and
in full force and effect and are not subject to any taxes, maintenance
fees, or actions falling due within 90 days after the date hereof.
(u) Liens. Except as set forth on the attached Schedule 4(u), no one
-----
other than Digital Courier has any right, title, interest, lien, claim,
security interest, restriction or encumbrance in, on or to the businesses
conducted by, or the properties and assets of, Digital Courier.
(v) Material Contracts. Digital Courier does not have any material
------------------
obligation, contract, agreement, lease, sublease, commitment or
understanding of any kind, nature or description, oral or written, fixed or
contingent, due or to become due, other than as disclosed on Schedule 4(v).
10
<PAGE>
(w) No Undisclosed Liabilities. There are no material liabilities or
--------------------------
obligations of Digital Courier, including, without limitation, contingent
liabilities for the performance of any obligation, except for (i)
liabilities or obligations which are disclosed or fully provided for in the
Financial Statements, (ii) liabilities or obligations disclosed in this
Agreement or in any exhibit or schedule to this Agreement, and (iii)
liabilities not in excess of $2,500 in the aggregate.
(x) Litigation. There are no suits or proceedings at law or in
----------
equity, or before or by any governmental agency or arbitrator, pending, or
to the best knowledge of Digital Courier and Significant Sellers,
threatened against Digital Courier, which in any way materially affect
Digital Courier, and there are no unsatisfied or outstanding judgments,
orders, decrees or stipulations which in any way affect Digital Courier or
its properties or assets or to which it is or may become a party, except as
set forth in Schedule 4(x) hereto.
(y) Insurance. Schedule 4(y) sets forth a list of all property,
---------
liability and casualty insurance policies or binders or other insurance
held by or on behalf of Digital Courier. All such policies and binders or
other insurance are now fully in effect in accordance with their terms.
Schedule 4(y) also sets forth a list of all types and aggregate amounts of
losses and expenses of Digital Courier which are self-insured. Except as
shown on Schedule 4(y), all facilities (including, without limitation,
improvements) of Digital Courier are insurable at standard rates and no
notice has been received of improvements required to maintain such status.
(z) Taxes. Except as disclosed in Schedule 4(z) hereto, (i) Digital
-----
Courier has duly filed all federal, state, local and other tax returns and
reports required to be filed by Digital Courier on or prior to the date
hereof with respect to all taxes withheld by or imposed upon Digital
Courier; (ii) all such returns or reports reflect the liability for such
taxes of Digital Courier as computed therein for the periods indicated, and
all taxes shown on such returns or reports and all assessments received by
Digital Courier have been paid, or fully reserved for, to the extent that
such taxes have become due; (iii) there are no waivers or agreements by
Digital Courier for the extension of time for the assessment of such taxes;
(iv) there are no material questions of taxation which are, as at the date
hereof, the subject of dispute with any taxing authority; and, (v) with
respect to any period through the date hereof for which tax returns have
not yet been filed, or for which taxes are not yet due or owing, Digital
Courier has made adequate reserves, determined in accordance with GAAP, for
all liabilities for taxes as set forth in its Financial Statements. Digital
Courier is not presently the subject of any tax audit by any taxing
authority.
(aa) Employment Contracts. Digital Courier has no written contracts
--------------------
of employment with any of its shareholders, employees or sales
representatives, and no verbal contracts of employment which cannot be
terminated without default by Digital Courier on thirty (30) days notice.
(bb) Personnel at Closing. As of the date of Closing, the employees
--------------------
of Digital
11
<PAGE>
Courier shall only include the individuals as set forth on Schedule 4(bb).
(cc) Invention and Assignment Agreement. Each of the current
----------------------------------
employees and consultants of Digital Courier and any prior employees and/or
consultants of Digital Courier who have worked on the development of
intellectual property for Digital Courier, have signed, or will have signed
by Closing, an Invention and Confidential Information Agreement acceptable
to Buyer in the form attached hereto as Schedule 4(cc). Other than
Significant Sellers, no individual or entity has had access to Digital
Courier's Proprietary Information, other than Financial Information.
Significant Sellers, after reasonable investigation, are not aware that any
of Digital Courier's employees, officers or consultants are in violation
thereof.
(dd) Employee Restrictions. To Digital Courier's and Significant
---------------------
Sellers' knowledge, no employee of Digital Courier is subject to any
secrecy or non-competition agreement or any other agreement or restriction
of any kind that would impede in any way the ability of such employee to
carry out fully all activities of such employee in furtherance of the
business of Digital Courier.
(ee) Employee Benefit Plans. Schedule 4(ee) contains a complete and
----------------------
accurate list of all employee benefit plans (the "Employee Benefit Plans")
(A) sponsored by Digital Courier or its predecessors, (B) to which Digital
Courier contributes on behalf of its employees, (C) with respect to which
Digital Courier participates on behalf of its employees or (D) previously
sponsored or contributed to by Digital Courier or its predecessors on
behalf of its employees within the three years preceding the date hereof.
Each of the Employee Benefit Plans can be terminated or amended at will by
Digital Courier, with no unfunded liability to Digital Courier. No
unwritten amendment exists with respect to any Employee Benefit Plan.
(ff) Adverse Change. Since the date of the last Financial Statements
--------------
provided to Buyer, there has not been:
(i) any material adverse change in the properties, assets,
business, affairs, material contracts or prospects of Digital Courier
or, to the knowledge of Digital Courier and Significant Sellers, are
any such changes threatened, anticipated or contemplated;
(ii) any actual or, to the knowledge of Digital Courier and
Significant Sellers, threatened, anticipated or contemplated damage,
destruction, loss, conversion, termination, cancellation, default or
taking by eminent domain or other action by governmental authority,
which has materially affected the properties, assets, business,
affairs, contracts or prospects of Digital Courier;
(iii) any material and adverse dispute pending or, to the
knowledge of Significant Sellers, threatened, anticipated or
contemplated of any kind with any customer, supplier, source of
financing, employee, landlord, subtenant or licensee
12
<PAGE>
of Digital Courier, which has resulted in any material reduction in
the amount, or any change in the terms or conditions, of business with
any substantial customer, supplier or source of financing;
(iv) any pending or, to the knowledge of Significant Sellers,
threatened, anticipated or contemplated occurrence or situation of any
kind, nature or description peculiar to the business of Digital
Courier and materially and adversely affecting its properties, assets,
business, affairs or prospects; or
(v) any reduction of capital, redemption of stock or dividend
or distribution by Digital Courier.
(gg) Discrimination. Digital Courier has not received any written
--------------
claim of any unfair labor practice or illegal discrimination on the basis
of race, color, religion, sex, national origin, age or handicap in its
employment conditions or practices. To the knowledge of Digital Courier and
Significant Sellers, Digital Courier has not engaged in any unfair labor
practice or illegal discrimination on the basis of race, color, religion,
sex, national origin, age or handicap in its employment conditions or
practices.
(hh) Disputes and Charges. There are no existing or, to the knowledge
--------------------
of Digital Courier and Significant Sellers, threatened, disputes,
grievances, harassment charges, controversies or other employment or labor
troubles affecting Digital Courier.
(ii) Certain Payments. Neither Digital Courier nor any director,
----------------
officer, agent or employee of Digital Courier, or to the knowledge of
Digital Courier and to Significant Sellers, any other person associated
with or acting for or on behalf of Digital Courier, has directly or
indirectly (i) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any person or entity,
private or public, regardless of form, whether in money, property, or
services (A) to obtain favorable treatment in securing business, (B) to pay
for favorable treatment for business secured, (C) to obtain special
concessions or for special concessions already obtained, for or in respect
of Digital Courier, or (D) in violation of any legal rule or regulation,
(ii) established or maintained any fund or asset that has not been recorded
in the books and records of Digital Courier.
(jj) Accuracy of Information Furnished. Significant Sellers have not
---------------------------------
made any material misstatement of fact or omitted to state any material
fact necessary or desirable to make complete, accurate and not misleading
the representations, warranties and agreements set forth herein, or in any
Exhibit or Schedule attached hereto or certificate or other document
furnished in connection herewith.
5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF BUYER. As of the date
of this Agreement and as of Closing, Buyer represents and warrants to and agrees
with Sellers that:
(a) Organization, Standing and Qualification. Buyer is duly organized
----------------------------------------
and
13
<PAGE>
validly existing and in good standing under the laws of the State of
Delaware, and is authorized and qualified to own and operate its properties
and assets and conduct its business in all jurisdictions where such
properties and assets are owned and operated and such business is
conducted.
(b) Authority. Buyer has full right, power and authority to execute,
---------
deliver and perform the terms of this Agreement. This Agreement has been
duly authorized by Buyer and constitutes a binding obligation of Buyer,
enforceable in accordance with its terms.
(c) Compliance with Law. Neither the execution and delivery of this
-------------------
Agreement nor consummation of the transactions contemplated hereby will (i)
conflict with or result in a breach of or constitute a default under any
provision of Buyer's Certificate of Incorporation or Bylaws or any
indenture, loan agreement or other material obligation or liability to
which it is a party or by which it is bound or (ii) conflict with or
constitute a violation under any law, statute, judgment, order, decree or
regulation applicable to Buyer.
(d) Availability of Documents. Buyer has made available to Digital
-------------------------
Courier and Sellers, their counsel and advisors, copies of all requested
documents, including without limitation Buyer's most recent Form 10-K and
Forms 10-Q for the periods ended June 30, 1997, September 30, 1997 and
December 31, 1997.
(e) Shares Purchased for Investment. Buyer is acquiring the Digital
-------------------------------
Courier Shares for its own account for investment purposes and not with a
view to or in connection with, any distribution thereof within the meaning
of the Securities Act of 1933, as amended.
(f) DMH Shares. The DMH Shares distributed to Sellers are duly
----------
authorized, validly issued and are fully paid and non-assessable.
6. THE CLOSING. The closing of the exchange of the Digital Courier
Shares for the DMH Shares shall take place at the offices of Buyer on or before
May 31, 1998, or at such other time or place as shall be fixed by the mutual
consent of the parties. Said date of conveyance is herein called the "Closing,"
And the date of the Closing is herein called the "Closing Date."
7. CONDITIONS OF BUYER'S AND SELLER'S PERFORMANCE.
(a) Buyer's Conditions. The obligation of Buyer to consummate this
------------------
Agreement is subject to the satisfaction at the Closing, or waiver by Buyer
in writing, of each of the following conditions:
(i) Buyer, Seller and Digital Courier shall be in compliance
with all applicable laws, including without limitation, federal and
state securities laws;
(ii) No action or proceeding against Digital Courier shall have
been
14
<PAGE>
instituted before a court or other governmental body, or shall have
been threatened which, if successful, will prohibit the consummation
or require substantial rescission of the transactions contemplated by
this Agreement.
(iii) Since the date of the latest Financial Statements, there
shall have been no change in the financial condition, business or
properties of Digital Courier which adversely affects the conduct of
its business as presently being conducted or the condition, financial
or otherwise, of Digital Courier and no additional substantial
liabilities of Digital Courier shall have been incurred.
(iv) Buyer, Sellers, and Digital Courier shall have taken all
corporate and shareholder action necessary to authorize and consummate
the transactions contemplated by this Agreement.
(v) Buyer and Sellers shall have received assurances
satisfactory to each regarding the tax, accounting and legal aspects
of the proposed transaction.
(vi) Sellers shall have canceled any notes payable from
Digital Courier to Sellers, and Buyer shall be furnished with written
evidence thereof and any employee of Digital Courier shall have repaid
any notes issued to them by Digital Courier;
(vii) R. J. Pittman shall have executed an employment contract
in substantially the form set forth in Schedule 7(a)(vi);
(viii) At the Closing Date, no governmental agency or body, or
other person or entity, shall have instituted or threatened any action
to restrain or prohibit any of the transactions contemplated by this
Agreement;
(ix) The representations and warranties of Sellers and Digital
Courier contained in this Agreement or in any certificate or document
delivered to Buyer pursuant hereto shall be deemed to have been made
again at the Closing and shall then be true in all material respects;
Sellers and Digital Courier shall have performed and complied with all
agreements and conditions required by this Agreement to be performed
or complied with by them prior to or at the Closing; Sellers and
Digital Courier shall not be in default under any of the provisions of
this Agreement; and Buyer shall have been furnished with one or more
closing certificates of Sellers and Digital Courier dated as of the
Closing Date, in substantially the form of Schedule 7(a)(ix)
certifying (A) to the fulfillment of the foregoing conditions and the
due performance of such covenants and agreements, (B) that no material
change has occurred in Digital Courier's financial condition since the
date of the last Financial Statements provided to Buyer, (C) that the
representations and warranties set forth in this Agreement are true
and correct in all material respects as of Closing, and (D) that
neither Digital Courier nor Sellers are a party to any litigation or
has knowledge of any claim, brought or threatened,
15
<PAGE>
seeking to recover damages or to prevent Digital Courier from
continuing to use Digital Courier assets or to conduct business in the
manner as the same were used or conducted prior thereto;
(x) Buyer shall have received a legal opinion of counsel to
Sellers in the form set forth in Schedule 7(a)(x), dated as of the
Closing date;
(xi) Sellers shall deliver to Buyer at Closing certificates of
search of the Uniform Commercial Code for filings against Digital
Courier in form and substance satisfactory to Buyer. Such certificates
shall show searches of filings with respect to Digital Courier and all
names under which Digital Courier have conducted its business;
(xii) Buyer shall have received a certificate, issued by the
office of the Secretary of State of the State of Nevada as of a date
not more than five business days before the Closing, stating that
Digital Courier is in good standing in the State of Nevada;
(xiii) Buyer shall have received an incumbency certificate or
certificates, dated as of the Closing Date, certifying the incumbency
of all officers of Digital Courier who have executed this Agreement;
(xiv) Buyer shall have received written evidence of any and all
loan(s) of Digital Courier which are outstanding;
(xv) Sellers and Digital Courier shall have executed and
delivered this Agreement and such other documents, instruments,
certificates or agreements as shall be reasonably necessary to
consummate the transactions contemplated by this Agreement;
(xvi) All proceedings taken in connection with the transactions
contemplated herein and all instruments and documents required in
connection therewith or incident thereto shall be satisfactory in form
to legal counsel for Buyer;
(xvii) The representations and warranties of Sellers and Digital
Courier contained in this Agreement or in any closing certificate or
document delivered to Buyer pursuant hereto shall be deemed to have
been made again at the Closing and shall then be true in all material
respects; Sellers and Digital Courier shall have performed and
complied with all agreements and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing.
(b) Sellers' Conditions. The obligation of Sellers to consummate this
-------------------
Agreement is subject to the satisfaction at the Closing, or waiver by
Sellers in writing, of each of the following conditions:
16
<PAGE>
(i) Digital Courier's Board of Directors and shareholders
shall have approved the transactions contemplated by this Agreement;
(ii) Buyer, Sellers, and Digital Courier shall be in
compliance with all applicable laws, including without limitation,
federal and state securities laws;
(iii) No action of proceeding against Buyer shall have been
instituted before a court or other governmental body, or shall have
been threatened which, if successful, will prohibit the consummation
or require substantial rescission of the transactions contemplated by
this Agreement;
(iv) Buyer, Sellers, and Digital Courier shall have taken all
corporate and shareholder action necessary to authorize and consummate
the transactions contemplated by this Agreement;
(v) Buyer and Sellers shall have received assurances
satisfactory to each regarding the tax, accounting and legal aspects
of the proposed transaction.
(vi) Buyer shall have executed an employment Contract with R.
J. Pittman in substantially the form set forth in Schedule 7(a)(vi);
(vii) At the Closing Date, no governmental agency or body, or
other person or entity, shall have instituted or threatened any action
to restrain or prohibit any of the transactions contemplated by this
Agreement;
(viii) Digital Courier shall have received a certificate, issued
by the State of Delaware, Division of Corporations, as of a date not
more than five business days before the Closing, stating that Buyer is
in good standing in the State of Delaware;
(ix) Digital Courier shall have received an incumbency
certificate or certificates, dated as of the Closing date, certifying
the incumbency of all officers of Buyer who have executed this
Agreement;
(x) The representations and warranties of Buyer contained in
this Agreement or in any certificate or document delivered to Sellers
pursuant hereto shall be deemed to have been made again at the Closing
and shall then be true in all material respects; Buyer shall have
performed and complied with all agreements and conditions required by
this Agreement to be performed or complied with by it prior to or at
the Closing; Buyer shall not be in default under any of the provisions
of this Agreement; and Sellers shall have been furnished with one or
more closing certificates of Buyer dated as of the Closing date, in
substantially the form of 7(b)(xi) certifying (A) to the fulfillment
of the foregoing conditions and the due performance of such covenants
and agreements, (B) that the representations and warranties set forth
in this Agreement are true and correct
17
<PAGE>
in all material respects as of Closing, and (C) that Buyer is not a
party to any litigation or has knowledge of any claim, brought or
threatened, seeking to prevent Buyer from entering into this Agreement
or consummating the transactions contemplated hereby;
(xi) Buyer shall have executed and delivered this Agreement
and such other documents, instruments, certificates or agreements as
shall be reasonably necessary to consummate the transactions
contemplated by this Agreement;
(xii) All proceedings taken in connection with the transactions
contemplated herein and all instruments and documents required in
connection therewith or incident thereto shall be satisfactory in form
to legal counsel for Buyer;
(xiii) The representations and warranties of Buyer contained in
this Agreement or in any closing certificate or document delivered to
Sellers pursuant hereto shall be deemed to have been made again at the
Closing and shall then be true in all material respects; Buyer shall
have performed and complied with all agreements and conditions
required by this Agreement to be performed or complied with by it
prior to or at the Closing.
8. Indemnification.
(a) General Indemnification Obligation of Digital Courier and Sellers.
-----------------------------------------------------------------
Subject to the limitations hereinafter provided, from and after the
Closing, Digital Courier and Sellers will indemnify and hold harmless Buyer
and its successors and assigns (an "Indemnified Buyer Party") against and
in respect of:
(i) Damages. Any and all damages, losses, deficiencies,
liabilities, costs and expenses (collectively, "Damages") incurred or
suffered by the Indemnified Buyer Party that result from, relate to or
arise out of:
(A) Any and all liabilities and obligations of Digital
Courier of any nature whatsoever, in existence as of the
Closing, except for those liabilities and obligations of Digital
Courier disclosed in the schedules and Exhibits to this
Agreement;
(B) Any and all actions, suits, claims or legal,
administrative, arbitration, governmental or other proceedings
or investigations against an Indemnified Buyer Party that relate
to Seller or Digital Courier to the extent that the event giving
rise thereto occurred prior to the Closing or which result from
or arise out of any action or inaction prior to the Closing of
Sellers, Digital Courier, or any director, officer, employee,
agent, representative or subcontractor of Digital Courier,
except for those set forth in the schedules to this Agreement;
or
18
<PAGE>
(C) Any material misrepresentation, breach of warranty or
nonfulfillment of any agreement or covenant on the part of
Sellers under this Agreement, or from any misrepresentation in
or material omission from any certificate, schedule, statement,
document or instrument furnished to Buyer pursuant hereto
(collectively, a "misrepresentation or breach of warranty").
(ii) Actions. Any and all actions, suits, claims,
proceedings, investigations, demands, assessments, fines, judgments,
costs and other expenses (including, without limitation, reasonable
legal fees and expenses) (collectively, "Actions") incident to any of
the foregoing.
(b) General Indemnification Obligation of Buyers. Subject to the
--------------------------------------------
limitations hereinafter provided, from and after the Closing, Buyer will
reimburse, indemnify and hold harmless Digital Courier and Sellers and
their successors and assigns (an "Indemnified Digital Courier Party")
against and in respect of:
(i) Damages. Any and all Damages incurred or suffered by any
Indemnified Digital Courier Party that result from, relate to or arise
out of any material misrepresentation, breach of warranty or non-
fulfillment of any Agreement or covenant on the part of Buyer under
this Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument furnished to
Digital Courier or Sellers pursuant hereto or thereto; and
(ii) Actions. Any and all Actions incident to any of the
foregoing or to the enforcement of this Subsection 8(b).
(c) Time Limitation. It is the intention hereof that all obligations
---------------
of the parties to indemnify pursuant to this Section 8 shall terminate on
June 30, 1999 (the "Indemnification Termination Date") with respect to all
claims for Damages and Actions, except those for which a Claim Notice (as
defined below) has been received on or before the Indemnification
Termination Date.
(d) Insurance. Neither Buyer, Digital Courier, nor Seller shall be
---------
liable for any claim hereunder to the extent such claim is paid by any
insurer.
(e) Method of Asserting Claims, Etc. In the event that any claim or
--------------------------------
demand is asserted against or sought to be collected from an Indemnified
Buyer Party or Indemnified Digital Courier Party (an "Indemnified Party")
by a third party, the Indemnified Party shall promptly notify the party
from which indemnification is sought pursuant to Subsections 8(a) and 8(b)
above (the "Indemnifying Party") of such claim or demand, specifying the
nature of such claim or demand and the amount or the estimated amount
thereof to the extent then feasible (which estimate shall not be conclusive
of the
19
<PAGE>
final amount of such claim and demand) (the "Claim Notice"). The
Indemnifying Party shall have twenty (20) days from its receipt of the
Claim Notice (the "Notice Period") to notify the Indemnified Party, (i)
whether or not the Indemnifying Party disputes its liability to the
Indemnified Party hereunder with respect to such claim or demand and (ii)
notwithstanding any such dispute, whether or not the Indemnifying Party
desires, at its sole cost and expense, to defend the Indemnified Party
against such claim or demand.
(f) Defense. In the event that the Indemnifying Party notifies the
-------
Indemnified Party within the Notice Period that it desires to defend the
Indemnified Party against such claims or demand, then, provided: (i) that
the Indemnifying Party acknowledges that it is liable to indemnify the
Indemnified Party with respect to a particular claim; and (ii) the
Indemnifying Party has financial resources which are reasonably adequate to
pay the amount of the claim, except as hereinafter provided, the
Indemnifying Party shall have the right to defend the Indemnified Party by
appropriate proceedings, which proceedings shall be promptly settled or
prosecuted by the Indemnifying Party to a final conclusion in such a manner
as to avoid any risk of the Indemnified Party becoming subject to liability
with respect thereto. If any Indemnified Party desires to participate in,
but not control, any such defense or settlement, it may do so at its sole
cost and expense.
(g) Indemnifying Party Liability. If the Indemnifying Party elects
----------------------------
not to defend the Indemnified Party against such claim or demand, whether
by not giving the Indemnified Party timely notice as provided above or
otherwise, then the amount of any such claim or demand, or if the same be
defended by the Indemnifying Party or by the Indemnified Party (but no
Indemnified Party shall have any obligation to defend any such claim or
demand), then that portion thereof as to which such defense is
unsuccessful, in each case shall be conclusively deemed to be a liability
of the Indemnifying Party hereunder.
(h) Payment. Upon determination of liability hereunder, the
-------
appropriate party shall pay to the other, as the case may be, within twenty
(20) days after such determination, the amount of any claim for
indemnification made hereunder. Upon the payment in full of any claim
hereunder, the entity making payment shall be subrogated to the right of
the indemnified party against any person, firm or corporation with respect
to the subject matter of such claim.
9. NON-DISCLOSURE AND NON-COMPETE COVENANTS.
(a) Proprietary Information. Each Seller acknowledges that his or her
-----------------------
relationship with Digital Courier may have created or may hereafter create
a relationship of confidence and trust with respect to information of a
confidential or secret nature that may be disclosed to him by Digital
Courier that relates to the business of Digital Courier or to the business
of any affiliate, customer, or supplier of Digital Courier ("Proprietary
Information"). Such Proprietary Information includes, but is not limited
to, any information regarding inventions, marketing plans, product plans,
business strategies, financial information, forecasts, personnel
information, customer lists, software,
20
<PAGE>
hardware, processes, formulas, development or experimental work, work in
process, business, trade secrets, or any other secret or confidential
matter relating to the products, projects, programs, sales, customer lists,
price lists, or data, or business of Digital Courier which is not generally
known to the public. At all times hereafter, each Seller will keep all such
Proprietary Information in confidence and trust, and will not use or
disclose any of such Proprietary Information without the prior written
consent of Digital Courier, except as may be necessary to perform any
duties he may now or hereafter have as an employee of Digital Courier or
except as may be required by law. Each Seller further agrees that at the
Closing, and subsequently upon request of Digital Courier or at the time of
the termination of Seller's employment (if any) with Digital Courier, such
Seller will deliver to Digital Courier only, and shall not retain for his
own or others' use, any and all software programs, documents, and any other
material and all copies thereof relating to his work or Digital Courier's
products, projects, programs, or business of which Seller had knowledge, or
which contain any Proprietary Information.
(b) Non-Compete Provisions.
(i) Each Significant Seller hereby agrees that for the period
of his or her employment (if any) with Digital Courier, Buyer or any of its
affiliates, and for a period of two (2) years thereafter or after the date
hereof (whichever is later), he/she will not, directly or indirectly,
individually or in concert with others, as promoter, shareholder, officer,
director, employee, agent, representative, independent contractor or
otherwise:
(A) Within any jurisdiction or marketing area in which
Digital Courier or Buyer (or any subsidiary thereof) is doing
business, own, manage, operate or control any business of the
type and character engaged in and competitive with Digital
Courier, Buyer or any subsidiary thereof. For purposes of this
paragraph, ownership of securities of not in excess of five
percent (5%) of any class of securities of a public company
shall not be considered to be competition with Digital Courier,
Buyer or any subsidiary thereof;
(B) Within any jurisdiction or marketing area in which
Digital Courier or Buyer (or any subsidiary thereof) is doing
business, act as, or become employed as, an officer, director,
employee, consultant or agent of any business of the type and
character engaged in and competitive with Digital Courier,
Buyer, or any of its subsidiaries;
(C) Solicit the business of or sell any products to any
company located within any jurisdiction or marketing area in
which Digital Courier or Buyer (or any subsidiary thereof) is
doing business on behalf of any business of the type and
character engaged in and competitive with Digital Courier,
Buyer, or any of the subsidiaries, which is, as the date hereof,
a customer or client of Digital Courier, Buyer, or any other
subsidiaries, or was such a customer or client thereof within
two years prior to the date of this Agreement; or
21
<PAGE>
(D) Solicit the employment of, or hire, any full time
employee employed by Digital Courier, Buyer or their
subsidiaries.
(ii) As used in this Agreement, the term "affiliate" shall
mean any individual, joint venture, partnership, corporation, limited
liability company, or stockholder which controls, is controlled by, or
is under common control with, or the management and operations of
which are substantially influenced by, Buyer, or in which Buyer owns
any interest, as required by the context of this Agreement.
(iii) In addition to any other remedies available to Buyer
hereunder or otherwise, Buyer shall be entitled to seek injunctive
relief for breach of the foregoing covenant not to compete. In
addition, each Seller subject to this non-compete agreement, agrees to
reimburse Buyer for all costs reasonably incurred by Buyer in
enforcing or attempting to enforce Buyer's rights under this Agreement
with respect to a breach by such Seller of this noncompete provision,
including without limitation, reasonable attorneys' fees.
(iv) If it is determined by a court of competent jurisdiction
that the provisions of this Section are partially or totally invalid
or unenforceable because of the duration or scope hereof or because of
the scope of activities prohibited hereby, or for any other reason,
these provisions shall be deemed modified to the extent necessary to
render them valid and enforceable, or shall be exercised from this
Agreement, as circumstances may require, and the provisions of this
Agreement after such modification or deletion, shall be enforced to
the maximum extent and scope permitted by the laws of such
jurisdiction.
(v) The covenant not to compete found in this Section may be
superseded by a covenant not to compete found in any employment
contract with a Seller.
(c) Publicity. Sellers and Digital Courier agree not to disclose to
---------
any person or entity, without the prior written consent of Buyer, any of
the terms of this Agreement at any time prior to Closing and for a period
of ninety (90) days thereafter, except as may be necessary for the
performance of their obligations hereunder or the operation of Digital
Courier in the ordinary course of business. Digital Courier may not
disclose or publicize this transaction in a press release without the
written consent of Buyer. Buyer may disclose and publicize this transaction
in a press release as it determines in its sole discretion.
10. MISCELLANEOUS COVENANTS OF SELLERS AND BUYER.
(a) No Share Purchases. Sellers agree to not purchase any of the
------------------
shares of Buyer from any source whatsoever at any time after the date
hereof and prior to Closing.
22
<PAGE>
(b) Further Actions. Sellers warrant and agree from time to time
---------------
hereafter to execute whatever minutes of meetings or other instruments and
take whatever actions Buyer may reasonably deem necessary or desirable to
effect, or to carry out the intent and purposes of the transactions
contemplated hereby; provided, that all such actions will be at Buyer's
expense.
(c) Market Stand-Off Agreement. Sellers hereby agrees that, if
--------------------------
requested by Buyer and any underwriter of common stock (or other securities
of Buyer) in connection with a public offering of the securities of Buyer
pursuant to a registration statement filed with the United States
Securities and Exchange Commission, Sellers will not sell or otherwise
transfer or dispose of any shares of common stock of Buyer (or other
securities) held by Sellers during the period beginning seven (7) days
prior to and ending one hundred eighty (180) days following the date of the
final prospectus of Buyer as filed under the Securities Act of 1933.
Sellers further agrees to execute any Agreement requested by Buyer and such
underwriter with respect to this paragraph, in a form satisfactory to Buyer
and such underwriter. Buyer may impose "stop-transfer" instructions with
respect to the common stock (or other securities) subject to the foregoing
restriction until the end of such 180-day period.
(d) Substitution of Buyer Into Any Digital Courier Agreement. Prior
--------------------------------------------------------
to the Closing of this Agreement, Buyer shall have the right, in the place
of Digital Courier, to enter into any and all agreements, transactions or
other relationships that Digital Courier may enter into under any right
Digital Courier may possess.
11. TERMINATION, AMENDMENT
(a) Pre-Closing. This Agreement may be terminated by Buyer or Sellers
-----------
at any time prior to the time fixed for Closing in Section 6 hereof upon
written notice to the other parties:
(i) If the representations, warranties and agreements or
conditions of this Agreement to be complied with or performed by
Digital Courier or Sellers (in the case of Buyer) or Buyer (in the
case of Sellers) on or before the Closing shall not have then been
complied with or performed in some material respect and such material
noncompliance or nonperformance shall not have been waived by the
party giving notice of termination or shall not have been cured by the
defaulting party, or cure thereof commenced and diligently prosecuted
thereafter by such party within three (3) business days after written
notice of such material noncompliance or nonperformance is given by
the non-defaulting party;
(ii) If any governmental action is commenced to prevent the
consummation of the transactions contemplated hereby; or
(iii) By mutual consent of the parties.
23
<PAGE>
(b) Waiver. Any representations, warranties, agreements or conditions
------
of this Agreement may be waived at any time by the party entitled to the
benefit thereof by action taken and evidenced by a written waiver executed
by any such party.
12. LEGAL PROCEEDINGS
(a) Mediation. Any claim, dispute, or controversy between the parties
---------
arising in connection with or relating to this Agreement or the making,
performance or interpretation thereof shall, if not settled by negotiation,
be submitted to non-binding mediation under the Commercial Mediation Rules
of the American Arbitration Association then in effect. Any demand for
mediation shall be made in writing and served upon the other Party in the
same manner as otherwise provided for notice in this Agreement. The demand
shall set forth with reasonable specificity the basis of the dispute and
the performance or relief sought. The Parties shall, within thirty (30)
days of receipt of a demand to mediate, confer and select a mediator. The
mediation shall take place at a time and location in Salt Lake City, Utah
mutually agreeable to the Parties and the mediator, but not later than 60
days after a demand for mediation is received.
(b) Exclusive Jurisdiction in Utah. Any claim, dispute or controversy
------------------------------
not settled by mediation shall be resolved in the federal or state courts
in the State of Utah. The parties hereby irrevocably submit and agree that
they are exclusively subject to the jurisdiction of the state and federal
courts sitting in the State of Utah with respect to any suit, action or
proceeding brought against any party by any other party and arising out of
or relating to this Agreement, and that no court in a State other than Utah
shall have jurisdiction to hear any such suit, action or proceeding. Each
party agrees that, during the pendency of any such suit, action or
proceeding commenced in accordance with the provisions of this Section
12(b), it will only bring any counter-claims arising out of or relating to
this Agreement (whether or not related to the matter currently the subject
of litigation) in the court in which such suit, action or proceeding is
pending. Each party hereby irrevocably waives, to the fullest extent
permitted by law, any objection that it may now have or hereafter have to
the laying of the venue in Utah of any such suit, action or proceeding in
the court contemplated under this Section 12(b), and waives and agrees not
to assert any claim that any such suit, action or proceeding brought in any
such court has been brought in an inconvenient forum.
13. MISCELLANEOUS.
(a) Attorney's Fees. In any action or proceeding arising out of or
---------------
related to this Agreement, the prevailing party shall be entitled to its
reasonable attorney fees and related costs, including fees and costs
incurred prior to formal initiation of an action or proceeding, and
including fees and costs incurred for collecting or attempting to collect
any judgment or award.
(b) Brokers and Finders. Except as otherwise provided herein, each of
-------------------
the parties
24
<PAGE>
hereto represents and warrants that it has dealt with no broker or finder
in connection with any of the transactions contemplated by this Agreement.
In the event that any finder's fee or broker's commission shall become
payable by any party hereto as a result of such party's misrepresentation
or breach of warranty, such fee and commission shall be the sole and
exclusive responsibility and liability of such party with no right of
contribution by any other party. In the event that any finder's fee or
broker's commission shall become payable by any party, other than as set
forth herein, as a result of such party's misrepresentation or breach of
warranty, the breaching party shall indemnify, defend and hold all other
parties harmless in respect of all claims, losses, expenses and obligations
(including reasonable attorney's fees) to the extent that the same arise or
result from such finder's fee or broker's commission.
(c) Expenses. Each of the parties hereto will bear its own legal fees
--------
and other expenses in connection with the transactions contemplated by this
Agreement.
(d) Survival. Subject to Section 8 of this Agreement, all parties
--------
agree that the representations, warranties and agreements contained in this
Agreement shall survive the Closing and shall thereafter remain in full
force and effect.
(e) Severability. If any term or provision of this Agreement,
------------
including the exhibits hereto, or the application thereof to any person,
property or circumstances, shall to any extent be invalid or unenforceable,
the remainder of this Agreement, including the exhibits or the application
of such term or provision to persons, property or circumstances other than
those as to which it is invalid and unenforceable, shall not be affected
thereby, and each term and provision of this Agreement and the exhibits
shall be valid and enforced to the fullest extent permitted by law.
(f) Notices. Any notices, requests or consents hereunder shall be
-------
deemed given, and any instrument delivered, two days after they have been
mailed by first class mail, postage prepaid, or twelve hours after such
notice has been sent by telecopier or straight telegram, telegraphic
charges prepaid, or upon receipt if delivered personally, as follows:
To each Seller: At the addresses set forth in Exhibit A hereto
To Buyer: DataMark Holding, Inc.
440 East 6400 South, Suite 400
Salt Lake City, Utah 84107
Telecopier: (801) 268-2292
EXCEPT THAT ANY OF THE FOREGOING MAY FROM TIME TO TIME BY WRITTEN NOTICE TO
THE OTHERS DESIGNATE ANOTHER ADDRESS WHICH SHALL THEREUPON BECOME ITS EFFECTIVE
ADDRESS FOR THE PURPOSES OF THIS SECTION.
(g) Entire Agreement. This Agreement, including the exhibits,
----------------
schedules and documents referred to herein which are a part hereof,
contains the entire understanding of the parties hereto with respect to the
subject matter contained herein and may be amended
25
<PAGE>
only by a written instrument executed by Buyer, and by those Sellers who
are affected by any proposed amendment, or their respective successors or
assigns. There are no restrictions, promises, warranties, covenants, or
undertakings other than those expressly set forth or referred to herein.
Any Section headings or table of contents contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
(i) Binding Effect. This Agreement shall inure to the benefit of and
--------------
be binding upon Seller and Buyer and their respective successors, but shall
not inure to the benefit of anyone other than the parties signing this
Agreement and their respective successors.
(j) Governing Law. This Agreement shall be governed by the laws of
-------------
the State of Utah.
(k) Gender and Number, etc All words or terms used in this Agreement,
----------------------
regardless of the number or gender in which they are used, shall be deemed
to include any other number and any other gender as the context may
require. "Hereof," "herein," and "hereunder" and worlds of similar import
shall be construed to refer to this Agreement as a whole, and not to any
particular paragraph or provisions, unless expressly so stated.
(l) Successors and Assigns. This Agreement shall not be assignable by
----------------------
any party without the prior written consent of all other parties hereto.
Subject to the foregoing, this Agreement shall be binding upon and inure to
the benefit of the respective successors and assigns of the parties hereto.
(m) No Third Party Beneficiaries. Nothing herein expressed or
----------------------------
implied is intended to confer upon any person, other than the parties
hereto or their respective permitted assigns, successors, heirs and legal
representatives, any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
(n) No Partnership or Joint Venture. Notwithstanding anything to the
-------------------------------
contrary contained herein, nothing contained herein shall be construed as
creating a partnership or joint venture relationship between the parties
hereto, and the parties hereto shall be deemed to have made any elections
necessary under any applicable law, rule or regulation to prevent their
being considered or deemed to be a partnership or joint venture.
(o)
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
26
<PAGE>
BUYER:
DATAMARK HOLDING, INC.
a Delaware corporation
/s/ Mitchell Edwards
---------------------------------------------
By: Mitchell Edwards
Its: Executive Vice President
DIGITAL COURIER:
Digital Courier International, Inc.
a Nevada corporation
/s/ Raymond J. Pittman
---------------------------------------------
By: Raymond J. Pittman
Its: President and Chief Executive Officer
27
<PAGE>
ANNEX II
AMENDED AND RESTATED CERTIFICATE
OF
INCORPORATION
OF
DATAMARK HOLDING, INC.
(ORIGINALLY KNOWN AS EXCHEQUER, INC.
TO BE KNOWN HEREAFTER AS DIGITAL COURIER TECHNOLOGIES, INC.)
The following Amended Restated Certificate of Incorporation of DataMark Holding,
Inc. amends and restates the provisions of and supersedes the Certificate of
Incorporation filed with the Secretary of State of the State of Delaware on or
about April 8, 1985 in its entirety and any and all certificates of amendment
filed with the Secretary of State of the State of Delaware prior to July
________, 1998.
ARTICLE I
NAME
----
The name of the corporation hereby created shall be Digital Courier
Technologies, Inc.
ARTICLE II
DURATION
--------
The Corporation shall continue in existence perpetually unless sooner
dissolved according to law.
ARTICLE III
PURPOSES
--------
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
CAPITALIZATION
--------------
The total number of shares of stock of all classes which the Corporation
shall have authority to issue is Twenty Two Million Five Hundred Thousand
(22,500,000), of which Twenty Million (20,000,000) shares shall have the par
value of One Hundredth of One Cent ($.0001) each and shall be shares of common
stock (the "Common Stock"), and Two Million Five Hundred Thousand (2,500,000)
shares shall have the par value of One Hundredth of One Cent ($.0001) each and
shall be shares of preferred stock (the "Preferred Stock").
1
<PAGE>
ARTICLE V
CLASSES OF STOCK
----------------
A statement of the designations and the powers, preferences, and rights,
and the qualifications, limitations, or restrictions thereof, of the shares of
stock of each class which the Corporation shall be authorized to issue, is as
follows:
(a) Preferred Stock. Shares of preferred stock may be issued from time
----------------
to time in one or more series as may from time to time be determined by the
Board of Directors. Each series shall be distinctly designated. All shares of
any one series of the preferred stock shall be alike in every particular, except
that there may be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The powers, preferences, participating,
optional and other rights of each such series qualifications, limitations or
restrictions thereof, if any, may differ from those of any and all other series
at any time outstanding. Subject to the provisions of subparagraph (i) of
Paragraph (c) of this Article V, the Board of Directors of this Corporation is
hereby expressly granted authority to fix by resolution or resolutions adopted
prior to the issuance of any shares of each particular series of preferred
stock, the designation, powers, preferences and relative, participating,
optional and other rights and the qualifications, limitations and restrictions
thereof, if any, of such series, including, without limiting the generality of
the foregoing the following:
(i) The distinctive designation of , and the number of shares of
preferred stock which shall constitute, the series, which number may be
increased (except as otherwise fixed by the Board of Directors) or decreased
(but not below the number of shares thereof outstanding) from time to time by
action of the Board of Directors;
(ii) The rate and times at which, and the terms and conditions upon
which, dividends, if any, on shares of the series shall be paid, the extent of
preferences or relation, if any, of such dividends to the dividends payable on
any other class or classes of stock of this Corporation, or on any series of
preferred stock, and whether such dividends shall be cumulative or
noncumulative;
(iii) The right, if any, of the holders of shares of the series to
convert the same into, or exchange the same for any other series, or any other
class or classes of stock of this Corporation, and the terms and conditions of
such conversion or exchange;
(iv) Whether shares of the series shall be subject to redemption,
and the redemption price or prices, including, without limitation, a redemption
price or prices payable in shares of the Common Stock, cash or other property
and the time or times at which, and the terms and conditions upon which, shares
of the series may be redeemed;
(v) The rights, if any, of the holders of shares of the series upon
voluntary or involuntary liquidation merger, consolidation, distribution or sale
of assets, dissolution or winding up of this Corporation;
(vi) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for shares of the series; and
(vii) The voting powers, if any, of the holders of shares of the
series which may, without limiting the generality of the foregoing, include (A)
the right to more or less than one vote per share on any or all matters voted
upon by the shareholders and (B) the right to vote as a series by itself or
together without preferred stock as a class, upon such matters, under such
circumstances and upon such conditions as the Board of Directors may fix,
including, without limitation, the right, voting as a series by itself or
together with other series of preferred or together with all series of preferred
stock as a class, to elect one or more directors of this Corporation in the
event there shall have been a default in the payment of dividends on any one or
more series of preferred stock or under such other circumstances and upon such
conditions as the Board may determine.
2
<PAGE>
(b) Common Stock. The Common Stock shall be non-assessable and shall not
-------------
have cumulative voting rights or pre-emptive rights. In addition, the Common
Stock shall have the following powers, preferences, rights, qualifications,
limitations and restrictions.
(i) After the requirements with respect to preferential dividends
of preferred stock (fixed in accordance with the provisions of Paragraph (a) of
this Article V), if any, shall have been met and after this Corporation shall
comply with all the requirements, if any, with respect to the setting aside of
funds as sinking funds or redemption or purchase accounts (fixed in accordance
with provisions of Paragraph (a) of this Article V) and subject further to any
other conditions which may be fixed in accordance with the provisions of
paragraph (a) of this Article V, but not otherwise, the holders of Common Stock
shall be entitled to receive such dividends, if any, as may be declared from
time to time by the Board of Directors.
(ii) After distribution in full of the preferential amount (fixed in
accordance with the provisions of Paragraph (a) of this Article V), if any, to
be distributed to the holders of preferred stock in the event of a voluntary or
involuntary liquidation, distribution or sale of assets, dissolution or winding
up of this Corporation, the holders of the Common Stock shall be entitled to
receive all of the remaining assets of this Corporation, tangible and
intangible, of whatever kind available for distribution to stockholders, ratibly
in proportion to the number of shares of the Common Stock held by each;
(iii) Shares of the Common Stock may be issued from time to time as
the Board of Directors shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors;
(iv) No holder of any of the shares of any class or series of stock
or of options, warrants or other rights to purchase shares of any class or
series of stock or of other securities of the Corporation shall have any pre-
emptive right to purchase or subscribe for any unissued stock of any class or
series of any additional shares of any class or series to be issued by reason of
any increase of the authorized capital stock of the Corporation of any class or
series, or bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any class or
series, or carrying any rights to purchase stock of any class or series, but any
such unissued stock, additional authorized issue of shares of any class or
series of stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such person, firms, corporation or
associations, whether such holders or others, and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its sole
discretion.
(c) Other Provisions. The relative powers, preferences and rights of each
-----------------
series of preferred stock in relation to the powers, preferences and rights of
each other series of preferred stock shall, in each case, be as fixed from time
to time by the Board of Directors in the resolution or resolutions adopted
pursuant to authority granted in Paragraph (a) of this Article V, and the
consent by class or series vote or otherwise, of the holders of the preferred
stock of such of the series of preferred stock as are from time to time
outstanding shall not be required for the issuance by the Board of Directors of
any other series of preferred stock whether the powers, preferences and rights
of such other series shall be fixed by the Board of Directors as senior to, or
on a parity with the powers, preferences and rights of such outstanding series,
or any of them: provided, however, that the Board of Directors may provide in
such resolution or resolutions adopted with respect to any series of preferred
stock that the consent of the holders of a majority (or such greater proportion
as shall be therein fixed) of the outstanding shares of such series voting
thereon shall be required for the issuance of any or all other series of
preferred stock.
(ii) Subject to the provisions of subparagraph (i) of this
Paragraph, shares of any series of preferred stock may be issued from time to
time as the Board of Directors shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(iii) Shares of the Common Stock may be issued from time to time as
the Board of Directors shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
3
<PAGE>
(iv) No holder of any of the shares of any class or series of stock
or of options, warrants or other rights to purchase shares of any class or
series of stock or of other securities of the Corporation shall have any pre-
emptive right to purchase or subscribe for any unissued stock of any class or
series or any additional shares of any class or series to be issued by reason of
any increase of the authorized capital stock of the Corporation of any class or
series, or bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any class or
series, or carrying any rights to purchase stock of any class or series, but any
such unissued stock, additional authorized issue of shares of any class or
series of stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations or
associations, whether such holders or others, and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its sole
discretion.
ARTICLE VI
BYLAWS
------
In furtherance and not in limitation of the powers conferred by the
statute, the Board of Directors is expressly authorized to make, alter or repeal
the Bylaws of the Corporation.
ARTICLE VII
MEETINGS AND RECORDS
--------------------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. Elections of directors
need not be by written ballot unless the Bylaws of the Corporation so provide.
ARTICLE VIII
REGISTERED OFFICE AND AGENT
---------------------------
The address of its registered office in the State of Delaware is:
The Corporation Trust Co.
County of New Castle
1209 Orange Street
Wilmington, Delaware 19801
ARTICLE IX
REMOVAL OF DIRECTORS
--------------------
Any director of the Corporation may be removed for cause at any annual or
special meeting of the shareholders by the same vote as that required to elect a
director provided, that such director prior to his removal shall receive a copy
of the charges against him, delivered to him personally or by mail at his
address appearing on the records of the Corporation, at least thirty (30) days
prior to the meeting at which such removal is to be
4
<PAGE>
considered, and such director has an opportunity to be heard on such charges at
the meeting of shareholders of the Corporation at which the question of his
removal is to be considered.
ARTICLE X
INDEMNIFICATION OF OFFICERS AND DIRECTORS
-----------------------------------------
The Corporation shall indemnify any and all persons who may serve or who
have served at any time as director or officers, or who, at the request of the
Board of Directors of the Corporation, may serve, or at any time have served as
directors or officers of another corporation in which the Corporation at such
time owned or may own shares of stock, or which it was or may be a creditor, or
may own shares of stock, or which it was or may be a creditor, and the
respective heirs, administrators, successors, and assigns, against any and all
expenses, including amounts paid upon judgment, counsel fees, and amounts paid
in settlement (before or after suit is commenced), actually or necessarily by
such persons in connection with the defense or settlement of any claim, action,
suit, or proceeding in which they, or any of them, are made parties, or a party,
or which may be assessed against them or any of them, by reason of being or
having been directors or officers of the Corporation, or such other corporation,
except in relation to matters as to which any such director or officer of the
Corporation, or such other corporations, or former director or officer shall be
adjudged in any action, suit or proceeding to be liable for his own negligence
of misconduct in performance of his duties. Such indemnification shall be in
addition to any other rights to which those indemnified may be entitled under
any Law, by-law, agreement, vote of stockholders or otherwise.
ARTICLE XI
AMENDMENT
---------
Except as set forth herein and in the General Corporation Law of the State
of Delaware, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders are granted subject to this reservation.
ARTICLE XIII
OFFICERS' AND DIRECTORS' CONTRACTS
----------------------------------
No contract or other transactions between this Corporation and any other
firm or corporation shall be affected by the fact that a director or officer of
this Corporation has an interest in, or is a director or officer of such firm or
other corporation. Any officer or director, individually or with others, may be
a party to, or may have an interest in, any transaction of this Corporation or
any transaction in which this Corporation is a party or has an interest. Each
person who is now or may become an officer or director of this Corporation is
hereby relieved from liability that he might otherwise obtain in the event such
officer or director contracts with this Corporation for the benefit of himself
or any other firm or corporation in which he may have an interest, provided such
officer or director acts in good faith.
This Amended and Restated Certificate of Incorporation of the Corporation
was duly adopted in accordance with the provisions of Section 242 to the General
Corporation law of the State of Delaware.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO BE SIGNED BY ____________________, IT'S
___________________, THIS ______ DAY OF JULY, 1998.
5
<PAGE>
Name
By:
Its:
6
<PAGE>
ANNEX III
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is entered into as of
March 5, 1998, by and between FOCUS DIRECT, INC., a Texas corporation ("Buyer"),
DATAMARK SYSTEMS, INC., a Nevada corporation ("Systems"), DATAMARK PRINTING,
INC., a Utah corporation ("Printing"), DATAMARK LISTS, INC., a Utah corporation
("Lists"), and WORLDNOW ONLINE NETWORK, INC., a Nevada corporation ("WorldNow")
(Systems, Printing, Lists and WorldNow are referred to in this Agreement as
"Sellers").
W I T N E S S E T H :
WHEREAS, Systems operates a full-service direct mail marketing business
(the "Business"); Printing provides printing services to Systems in connection
with the Business; Lists brokers and manages customer lists, and owns certain
other intellectual property associated with the Business; and WorldNow is
engaged in a business other than the Business, but owns certain assets used in
connection with the Business;
WHEREAS, Systems, Printing, Lists and WorldNow are wholly owned
subsidiaries of DataMark Holding, Inc., a Delaware corporation ("Holding"); and
WHEREAS, this Agreement sets forth the terms and conditions upon which
Sellers are willing to sell and Buyer is willing to purchase all of Sellers'
assets which are used in connection with the Business.
NOW, THEREFORE, in consideration of the mutual promises of the parties, in
reliance on the representations, warranties, covenants and conditions
contained in this Agreement, and for other good and valuable consideration, the
parties agree as follows:
I. PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale of Assets. Subject to the terms and conditions of
---------------------------
this Agreement, Sellers shall sell, convey, assign, transfer and deliver to
Buyer, and Buyer shall purchase, at the Closing (as defined in Section 2.1), all
of Systems', Printing's and Lists' assets, properties, rights, claims and
goodwill, of every kind, character and description, tangible and intangible,
real and personal, wherever located and whether or not reflected on the books
and records of Systems, Printing or Lists, and all such other assets,
properties, rights, claims and goodwill of WorldNow which are used primarily in
the Business, including, without limitation, the following (collectively, the
"Assets"):
(a) subject to Section 1.2 regarding Excluded Assets, all furniture,
furnishings, fixtures, machinery, equipment (including printing equipment,
computers and office equipment), and vehicles, as well as leasehold
improvements, which (i) are located at Sellers' facilities in Salt Lake City,
Utah, Murray, Utah, Kansas City, Kansas and Atlanta, Georgia, which facilities
are described more particularly on Schedule 1.1(a) (the "Facilities") or (ii)
are listed on Exhibit A to the bill of sale referred to in Section 2.3(a);
(b) subject to Section 1.2 regarding Excluded Assets, all inventory,
parts, supplies (including office supplies) and incidentals which (i) are
located at the Facilities or (ii) are listed on Exhibit A to the bill of sale
referred to in Section 2.3(a);
1
<PAGE>
(c) all trade accounts receivable of Sellers arising in connection
with the Business "Accounts Receivable"), subject to Section 2.6;
(d) all credits, prepaid expenses and other items, security deposits
and unbilled costs and fees, of Sellers attributable to the Assets or Business;
(e) all right, title and interest of Sellers in and to intellectual
property and other intangible property associated with the Business, including,
without limitation, customer lists, data bases and other goodwill, trade
secrets, methods, inventions and other know-how, and patents, trademarks,
service marks, trade names (including the names "DATAMARK SYSTEMS," "DATAMARK
PRINTING" and "DATAMARK LISTS") and copyrights, whether registered or
unregistered, and any applications therefore;
(f) all rights of Sellers under the Material Contracts (as defined in
Section 3.12);
(g) all books, records, manuals and other materials (in any form or
medium) relating to, or used by Sellers in connection with, the Assets or
Business;
(h) all rights, claims and actions arising out of occurrences before
or after the Closing, which relate to, or arise from, the Assets or Business;
(i) all licenses, permits, authorizations and approvals of
governmental or other regulatory authorities which relate to the Assets or
Business; and
(j) all assets and properties reflected on the Latest Segment Balance
Sheet (as defined in Section 3.05), excepting only those assets and properties
which have been disposed of by Sellers in the ordinary course of the Business
after the date of the Latest Segment Balance Sheet.
1.2 Excluded Assets. Notwithstanding Section 1.1, this Agreement shall
---------------
not effect the transfer of, and the term "Assets" shall be deemed not to
include, the following:
(a) all cash and cash equivalents, other than petty cash, on hand at
the Closing;
(b) corporate seals, minute books, stock books and other records
relating to the corporate organization of Sellers; and
(c) the assets, properties and rights listed on Schedule 1.2.
1.3 Assumption of Liabilities. Subject to the terms and conditions of
--------------------------
this Agreement, at the Closing, Buyer shall assume and agree to pay, discharge
or perform, as appropriate, the following liabilities and obligations of Sellers
(the "Assumed Liabilities"):
(a) all accounts payable of Sellers arising in the ordinary course of
the Business ("Accounts Payable"), subject to Section 2.7;
(b) obligations under the Material Contracts accruing from the Closing
Date (Sellers acknowledge that Buyer is not assuming any liability, obligation
or commitment under any Material Contract arising prior to the Closing Date or
based on any act, omission or condition occurring or existing prior to the
Closing Date);
(c) the Assumed Employee Bonuses (as defined in Section 2.8).
2
<PAGE>
Except for the Assumed Liabilities, or as otherwise expressly contemplated
in this Agreement, Buyer shall not assume any, and the Assets shall be conveyed
free and clear of every, liability, obligation, commitment, option, charge,
lien, claim or encumbrance of every kind, contingent and fixed, known and
unknown.
1.4 Amount of Cash Purchase Price. In consideration for Sellers' sale of
-----------------------------
the Assets, in addition to Buyer's assumption of the Assumed Liabilities, Buyer
shall deliver to Sellers the following cash purchase price (the "Cash Purchase
Price"), payable in accordance with Section 1.5:
(a) $7,700,000;
(b) minus, $104,000, which Buyer shall apply to the Assumed Employee
Bonuses, any unearned portion of which shall be remitted to Sellers on or before
September 30, 1998;
(c) plus or minus, as appropriate, that amount by which the Accounts
Receivable, net of allowance for doubtful accounts (which allowance shall
include all Accounts Receivable invoiced more than 120 days prior to the
Closing), as of the Closing Date are greater than or less than the Accounts
Receivable, net of allowance for doubtful accounts, as of the date of the Latest
Segment Balance Sheet;
(d) plus or minus, as appropriate, that amount by which the Accounts
Payable as of the Closing Date are less than or greater than the Accounts
Payable as of the date of the Latest Segment Balance; and
(e) plus or minus, as appropriate, Sellers' and Buyer's pro rata
portion as of the Closing Date of all property, ad valorem and similar taxes
levied on the Assets (to the extent then determinable), all prepaid and deferred
expenses arising in the ordinary course of the Business; provided, however, that
upon receipt of reasonably satisfactory evidence of payment by Buyer, Sellers
shall promptly pay to Buyer any property, ad valorem and similar taxes levied on
the Assets in excess of the amounts used in determining such purchase price
adjustment (to the extent not retained pursuant to Section 1.6).
Sellers and Buyer shall cooperate to determine the appropriate adjustments to
the Cash Purchase Price pursuant to subsections (c), (d) and (e) above, within
20 days after the Closing Date.
1.5 Payment of Cash Purchase Price. The Cash Purchase Price shall be
-------------------------------
payable by wire transfer or other immediately available funds, as follows:
(a) $6,796,000 (the "Closing Payment") shall be paid at Closing (the
Closing Payment represents $7,700,000, less $104,000 for Assumed Employee
Bonuses, less $800,000 to be paid as set forth in subsections (c) and (d) below)
(b) the net amount due to Sellers, if any, as a result of the
adjustments set forth in Sections 1.4(c), (d) and (e) shall be paid by Buyer
within 30 days after the Closing Date; provided, however, that if such
adjustments result in a net amount due to Buyer, then Sellers shall refund to
Buyer such net amount due, within 30 days after the Closing Date;
(c) $100,000, less any amounts retained by Buyer pursuant to Section
1.6, shall be paid within five business days after the first anniversary of the
Closing Date; and
(d) $700,000 shall be paid within five business days after June 30,
1999.
1.6 Purchase Price Hold-Back. As set forth in Section 1.5, Buyer shall
------------------------
withhold $100,000 of the Cash Purchase Price. Such amount may be retained by
Buyer to the extent necessary to reimburse Buyer for the following:
3
<PAGE>
(a) payment by Buyer of Accounts Payable not set forth on the schedule
of Accounts Payable delivered by Sellers to Buyer on the Closing Date; Sellers
acknowledge that, although Buyer is not assuming liability for non-scheduled
Accounts Payable, Buyer may, in order to preserve its vendor and supplier
relationships, deem it necessary to pay such non-scheduled Accounts Payable (but
only after consultation with Sellers, giving due consideration for disputed
amounts);
(b) payment by Buyer of property, ad valorem and similar taxes in
excess of the amounts used in determining the purchase price adjustment pursuant
to Section 1.4(e);
(c) payment by Buyer of amounts, if any, which Buyer may be required
to pay as a result of Seller's failure to make filings or payments with respect
to Sellers' 401(k) plan; Sellers acknowledge, however, that Buyer is not
assuming Sellers' 401(k) plan or any liability thereunder;
(d) payment by Buyer of the purchase price (or unpaid portion thereof)
of the furniture and equipment listed on Schedule 1.6(d), which was ordered by
Sellers for the Business prior to Closing (Sellers acknowledge that Buyer may in
its sole discretion accept or reject any such assets and is not assuming
liability for the purchase price of any such rejected assets); and
(e) payment by Buyer of any other liability, obligation or commitment,
other than the Assumed Liabilities, with respect to the Assets or Business
arising prior to the Closing Date or based on any act, omission or condition
occurring or existing prior to the Closing Date.
All amounts withheld and which have not been retained by Buyer as set forth in
this Section 1.6, shall be paid to Sellers as provided in Section 1.5(b).
Buyer's rights to retain amounts under this Section 1.6 shall be in addition to,
and not in limitation of, any other offset rights Buyer may have pursuant to
this Agreement.
1.7 Allocation of Consideration. The Cash Purchase Price and the
-----------------------------
Assumed Liabilities shall be allocated among the Assets as set forth on Schedule
1.7. No party to this Agreement will take a position on any income tax return,
before any governmental agency or in any judicial proceeding that is
inconsistent with the terms of this Section 1.7.
1.8 Compliance with Bulk Sales Laws. Buyer and Sellers waive compliance
-------------------------------
with the bulk sales law and any other similar laws in any applicable
jurisdiction in connection with the transactions contemplated by this Agreement.
Sellers shall indemnify Buyer from, and hold it harmless against, any claims,
actions, liabilities, damages, losses, costs and expenses (including reasonable
attorneys' fees) resulting from or arising out of the parties' failure to comply
with any of such laws in respect of the transactions contemplated by this
Agreement.
II. CLOSING AND POST-CLOSING MATTERS
2.1 Time and Place. The consummation of the transactions contemplated by
--------------
this Agreement (the "Closing") shall take place on March 4, 1998, at 10 a.m.,
local time (the "Closing Date"), at the principal offices of Holding in Salt
Lake City, Utah, or such other time and place as Buyer and Sellers shall
mutually agree.
2.2 Buyer's Deliveries at Closing. At the Closing, Buyer shall deliver to
-----------------------------
Sellers the following:
(a) the Closing Payment, by wire transfer or delivery of other
immediately available funds;
(b) an undertaking, in the form of Exhibit 2.2(b), in which Buyer
assumes and agrees to pay, discharge or perform, as appropriate, the Assumed
Liabilities; and
(c) the other agreements, opinions, certificates and other documents
referred to in Article VII and elsewhere herein.
4
<PAGE>
2.3 Sellers' Deliveries at Closing. At the Closing, Sellers shall deliver
------------------------------
to Buyer the following:
(a) a bill of sale, in the form of Exhibit 2.3(a), and such other
instruments of conveyance, assignment and transfer, in form and substance
reasonably satisfactory to Buyer's counsel, as shall be effective to transfer
and assign to, and vest in, Buyer all of the Assets;
(b) the other agreements, opinions, certificates and other documents
referred to in Article VII and elsewhere herein.
In addition, Sellers shall take such other steps as may be necessary to put
Buyer in actual possession and operating control of the Assets.
2.4 Third Party Consents. To the extent that Sellers' rights under any
--------------------
agreement, commitment, plan, authorization or other Asset to be assigned to
Buyer hereunder may not be assigned without the consent of another person which
has not been obtained, this Agreement shall not constitute an agreement to
assign the same if an attempted assignment would constitute a breach thereof or
be unlawful, and Sellers, at their expense, shall use their best efforts to
obtain any such required consent as promptly as possible. If any such consent is
not obtained or if any attempted assignment would be ineffective or would impair
Buyer's rights under the Asset so that Buyer would not in effect acquire the
benefit of all such rights, Sellers shall, to the maximum extent permitted by
law and the Asset, act after the Closing as Buyer's agents in order to obtain
for it the benefits thereunder and shall cooperate, to the maximum extent
permitted by law and the Asset, with Buyer in any other reasonable arrangement
designed to provide such benefits to Buyer.
2.5 Sellers' Further Assurances. Sellers from time to time after the
-----------------------------
Closing shall execute, acknowledge and deliver to Buyer such other instruments
of conveyance and transfer and shall take such other actions and execute and
deliver such other documents, certificates and further assurances as Buyer may
reasonably request in order to vest more effectively in Buyer, or to put Buyer
more fully in possession of, the Assets, or to better enable Buyer to complete,
perform or discharge the Assumed Liabilities.
2.6 Accounts Receivable. Within 15 days after the Closing Date Sellers
-------------------
shall deliver to Buyer a schedule containing a complete and accurate list of all
Accounts Receivable as of the Closing Date. All proceeds from Accounts
Receivable collected by Buyer or Sellers during the 120-day period following the
Closing Date shall be retained by Buyer. During such period, Sellers shall
assist Buyer, as Buyer may request, in the collection of such Trade Receivables.
Without limiting the foregoing, 90 days after the Closing Date Buyer shall
provide a list to Sellers of all uncollected Trade Receivables, and Sellers
shall use their best efforts during the next 30 days to collect such amounts on
behalf of Buyer. Within 10 days after the 120-day period following the Closing
Date, upon Buyer's request, Sellers shall pay to Buyer an amount equal to all
uncollected Trade Receivables. Thereafter, any Trade Receivables collected by
Buyer shall be remitted to Sellers.
2.7 Accounts Payable. Within 15 days after the Closing Date Sellers
-----------------
shall deliver to Buyer a schedule containing a complete and accurate list of all
Accounts Payable as of the Closing Date. Sellers specifically acknowledge that
Buyer is not assuming any Accounts Payable other than those set forth on such
schedule and that the indemnification obligations of Sellers under this
Agreement shall extend to any Accounts Payable not set forth on such schedule.
2.8 Employment Matters. Effective as of the Closing Date, Buyer shall
-------------------
offer employment to those employees selected by Buyer who are employed by
Sellers principally in the operation of the Business, at wage and salary levels
and with employee benefits that are competitive within the industry. Sellers
shall use their best efforts to cause such employees selected by Buyer to accept
such employment with Buyer. All such employees hired by Buyer as of the Closing
Date shall be referred to in this Agreement as the "Continuing Employees."
5
<PAGE>
Except for the Assumed Employee Bonuses, Sellers shall pay, within 30 days after
the Closing Date, directly to each Continuing Employee that portion of all
compensation and benefits which has accrued on behalf of such employee (or is
attributable to expenses incurred by such employee) as of the Closing Date and
is payable under Sellers' plans and policies, and Buyer shall not be liable for
any such compensation or benefits. Except as specifically provided herein, Buyer
shall have no liability or obligation to any employee of Sellers (including
Continuing Employees) resulting from the transactions contemplated hereby,
including, without limitation, change of control payments or liabilities
incurred upon termination of employment by Sellers. Sellers specifically
acknowledge that the Assets to be transferred include Sellers' rights (including
rights of specific enforcement) under all proprietary and confidentiality
agreements and agreements regarding ownership of intellectual property to which
any Continuing Employee is a party.
Buyer has agreed to assume Sellers' liability for the pro rata portion of
bonuses deemed earned through the Closing Date by Sellers' employees under the
DataMark Annual Profit Bonus Program, as described in Schedule 3.18 (the
"DataMark Bonus Plan"). In order to enable Buyer to determine the amount of such
bonuses deemed earned, Sellers shall, within 60 days after the Closing Date,
deliver to Buyer financial information reporting operating results of the
Business for the period from July 1, 1997 through the Closing Date. Based on
such information, together with operating results of the Business from the
Closing Date through June 30, 1998, Buyer shall determine the total amount of
bonuses that would have been earned by Sellers' employees under the DataMark
Bonus Plan had Sellers operated the Business for such 12-month period. The pro
rata portion of such bonuses deemed earned through the Closing Date by Sellers'
employees (the "Assumed Employee Bonuses") shall equal the total amount of
bonuses that would have been earned for such 12-month period (as determined by
Buyer), multiplied by the number of months (including any partial month) elapsed
from July 1, 1997, through the Closing Date, divided by 12. On or before
September 30, 1998, Buyer shall refund to Sellers the amount, if any, by which
$104,000 exceeds the Assumed Employee Bonuses, and Buyer shall distribute the
Assumed Employee Bonuses to the Continuing Employees in such amounts and on such
bases as Buyer may determine.
2.9 Change of Sellers' Names. As soon as reasonably possible (taking
-------------------------
into consideration Delaware law and the rules and regulations of the SEC and
Nasdaq), but in no event later than 30 days after Closing, Systems, Printing and
Lists shall change their corporate names to names which do not contain the word
"DATAMARK" or any variation thereof. As soon as reasonably possible (taking into
consideration Delaware law and the rules and regulations of the SEC and Nasdaq),
but in no event later than December 31, 1998, Sellers shall cause Holding to
change its corporate name to a name which does not contain the word "DATAMARK"
or any variation thereof. Sellers shall cooperate with Buyer to permit Buyer to
qualify to do business under a corporate name containing the word "DATAMARK" in
each state in which Buyer requests. Except as provided herein, following the
respective dates on which Sellers' names and Holding's name have been changed,
Sellers shall not use or permit another to use, directly or indirectly, any name
containing the word "DATAMARK" or any variation thereof.
2.10 Right to Terminate DataMark Media Sublease. The Assets include the
------------------------------------------
DataMark Media Sublease covering approximately 4,908 net usable square fee of
space located at 488 East 6400 South, Suite 100, Murray, Utah, as described more
particularly on Schedule 1.1(a) (the "Sublease"). Sellers and Buyer shall each
have the option at any time during the term of the Sublease to terminate the
Sublease by giving written notice thereof to the other party at least 90 days
prior to the effective date of termination. On or before the effective date of
termination, Buyer shall remove all of its property from the premises and Buyer
shall have no further liability under the Sublease except for obligations
accruing from the Closing Date to the move-out date.
III. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Buyer as follows:
6
<PAGE>
3.1 Corporate Organization. Each Seller is a corporation duly
------------------------
organized, validly existing and in good standing under the laws of the state of
its incorporation, with full power and authority (corporate, governmental and
otherwise) to own and operate its properties and business as currently conducted
and as contemplated to be conducted. Each Seller is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction
where the conduct of the Business requires it to be so qualified. Schedule 3.1
sets forth, with respect to each Seller, the Seller's state of incorporation of
each jurisdiction where the conduct of the Business requires it to be qualified
as a foreign corporation. Sellers have delivered to Buyer true and complete
copies of Sellers' charter and bylaws.
3.2 Corporate Power; Authorization; Enforceable Obligations. The
------------------------------------------------------------
execution, delivery and performance of this Agreement by each Seller is within
such party's corporate power and authority, and has been duly authorized by all
requisite corporate action. This Agreement has been, and the other agreements,
documents and instruments required to be delivered by Sellers or Holding
pursuant to this Agreement (together with this Agreement, the "Sellers'
Documents") will be, duly executed and delivered on behalf of Sellers. This
Agreement constitutes, and the Sellers' Documents when executed and delivered
will constitute, the legal, valid and binding obligations of Sellers and
Holding, enforceable against them in accordance with their respective terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency or
other laws relating to or affecting creditors' rights generally and by general
equitable principles.
3.3 No Conflicts; Consents. The execution, delivery and performance of
-----------------------
the Sellers' Documents by Sellers and Holding, does not and will not (with or
without the giving of notice or the passage of time, or both) violate, conflict
with, result in a breach or default under, give rise to any rights of
acceleration, modification, termination or cancellation of, result in the
creation of any lien, claim or encumbrance pursuant to, or require any notice or
consent under, the charter or bylaws of any Seller or Holding, or any mortgage,
indenture, instrument, agreement, understanding or commitment of any kind, or
any law, regulation, rule, order, judgment or decree, to which any Seller or
Holding is a party or by which any Seller or Holding is bound or affected, other
than such notices and consents which have been given or obtained. No
authorization, permit, approval or consent of, and no registration or filing
with, any governmental or regulatory authority is required, in connection with
the execution, delivery and performance by Sellers and Holding of the Sellers'
Documents.
3.4 Ownership of Subsidiaries. Holding owns all of the outstanding
--------------------------
capital stock of each Seller. No Seller has any direct or indirect interest in
any corporation, limited liability company, partnership, joint venture,
association, trust or other business entity.
3.5 SEC Documents; Consolidated Financial Statements. Since June 30,
--------------------------------------------------
1996, Holding has filed with the Securities and Exchange Commission (the "SEC")
all documents required to be filed by it pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended, and Holding has delivered to
Buyer true and complete copies of all such documents (the "SEC Documents"). As
of their respective dates, none of the SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the consolidated financial statements of Holding and its
subsidiaries included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements of the SEC. Such consolidated
financial statements have been prepared from the books and records of Holding
and its subsidiaries in accordance with generally accepted accounting
principles, consistently applied and maintained throughout the periods
indicated, and present fairly in all material respects the financial condition,
results of operations and cash flows of Holding and its subsidiaries on a
consolidated basis at the dates and for the periods covered.
3.6 Segment Financial Statements. Sellers have delivered to Buyer true
----------------------------
and complete copies of the following financial statements (the "Segment
Financial Statements"), all of which have been prepared from Sellers' books and
records in accordance with generally accepted accounting principles consistently
applied and maintained through-out the periods indicated, and present fairly and
accurately the financial condition, results of
7
<PAGE>
operations and cash flows of the Business, treated as a distinct business
segment from Sellers' other businesses, at the dates and for the periods
covered:
(a) balance sheet as of November 30, 1997 (the "Latest Segment Balance
Sheet") and balance sheet as of June 30, 1997;
(b) statements of operations for the interim period ended November 30,
1997, and for the fiscal years ended June 30, 1997 and June 30, 1996; and
(c) statements of cash flows for the interim period ended November 30,
1997, and for the fiscal years ended June 30, 1997 and June 30, 1996.
3.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule
----------------------------------
3.7, or as reflected on or reserved against in the Latest Segment Balance Sheet,
Sellers have no liabilities, obligations or commitments arising from or
associated with the Business.
3.8 Absence of Changes or Events. Since June 30, 1997, except as
------------------------------
disclosed in the SEC Documents or the Segment Financial Statements, there has
not been any change, development, event or condition which has had or which
could reasonably be expected to have a material adverse effect on the financial
condition or operations of any Seller, the Assets or the prospects of the
Business (collectively, a "Material Adverse Effect"). Since June 30, 1997,
except as disclosed in the SEC Documents, the Segment Financial Statements or
Schedule 3.8, no Seller has (a) directly or indirectly declared or paid any
dividend or made any other distribution with respect to its capital stock
(including, with limitation, the redemption or purchase of shares), (b) directly
or indirectly acquired any shares of its capital stock, (c) made any capital
expenditures in connection with the Business in excess of $1,000, (d) incurred
any indebtedness in connection with the Business in excess of $1,000, or (e)
entered into any transaction with respect to the Assets or Business other than
in the ordinary course.
3.9 Title to and Condition of Assets. Sellers have, and at the Closing
--------------------------------
Buyer will obtain, good, valid and marketable title to the Assets, free and
clear of any lien, claim or encumbrance of any kind, except (i) as expressly set
forth on the Latest Segment Balance Sheet or as otherwise expressly permitted by
this Agreement, (ii) liens for current taxes not yet due, or (iii) minor matters
that, in the aggregate, are not substantial in amount and do not and could not
reasonably be expected to materially impair the use of the Assets. Except as set
forth on Schedule 3.9, the Assets constitute all of the assets and properties
used in the conduct of the Business and are adequate and sufficient for the
current operations of the Business. Except as set forth on Schedule 3.9, there
are no assets or properties located at the Facilities which are not being
transferred to Buyer hereunder. All leasehold improvements and all furniture,
fixtures, equipment, vehicles, machinery and similar property to be acquired by
Buyer hereunder are in good operating condition and repair, reasonable wear and
tear excepted, are free from material defects and are suitable for the purposes
used. All inventory and related supplies (including raw materials, work-in-
progress and finished goods) to be acquired by Buyer hereunder are usable and
saleable, free of defects, in the ordinary course of business as first quality
goods, and except for sales in the ordinary course, have a value equal or
greater than the stated inventory amount set forth on the Latest Segment Balance
Sheet.
3.10 Taxes. Sellers have timely filed with the appropriate authority
-----
all required federal, state, local and foreign income and other tax returns and
reports relating to Sellers' assets or businesses. Except as set forth on
Schedule 3.10, Sellers have paid or caused to be paid in full all taxes,
assessments and other governmental charges (including interest and penalties
thereon) which are due and payable by Sellers, or in respect of Sellers' assets
or businesses (including, but not limited to, franchise, property, sales,
intangible and payroll taxes), except for those taxes which are reasonably being
contested by the Company or which individually, or in the aggregate, if not paid
could not reasonably be expected to have a Material Adverse Effect. Sellers
specifically acknowledge that Buyer is not assuming any tax liabilities of
Sellers (including, without limitation, state tax
8
<PAGE>
liabilities resulting from nexus of the Business with any state) and that the
indemnification obligations of Sellers under this Agreement shall extend to such
tax liabilities.
3.11 Litigation. There is no pending claim, action, suit, proceeding or
----------
investigation (judicial, governmental or otherwise), nor any order, decree or
judgment in effect, or, to the best knowledge of Sellers, threatened, against
Sellers or their affiliates which could reasonably be expected to have a
Material Adverse Effect or which relates to the transactions contemplated by
this Agreement.
3.12 Contracts. Schedule 3.12 contains a complete description of each
---------
written and oral agreement, understanding and commitment relating to the Assets
or Business, to which any Seller is a party or by which any Seller is bound,
which, measured from and after Closing, provides for aggregate payments
exceeding $1,000, has a term greater than one year, or which is otherwise
material to the Assets or Business (such oral and written agreements,
understandings and commitments are referred to as the "Material Contracts").
Each Material Contract is valid, binding and enforceable, is fully assignable to
Buyer (without requiring a consent or approval which has not been obtained), and
neither any Seller nor, to any Seller's knowledge, any other party is in default
thereunder (or will be with the giving of notice, the passage of time, or both).
Sellers have no reason to believe that any Material Contract can not be replaced
on substantially similar terms.
3.13 Compliance. Each Seller has complied in all material respects with
----------
all federal, state, local and foreign laws, ordinances, regulations and orders
applicable to the Business or the ownership of the Assets. No Seller is in
violation of any order, writ, injunction or decree of any court or any federal,
state, municipal or other domestic or foreign governmental department,
commission, board, bureau, agency or instrumentality, which violation could
reasonably be expected to have a Material Adverse Effect. Except with respect to
regulatory approvals, which may in the future be required with respect to
products or services offered or to be offered in connection with the Business,
Each Seller has all federal, state, local and foreign governmental licenses and
permits material to and necessary in the conduct of the Business; such licenses
and permits are in full force and effect, no violations have been recorded in
respect of any such licenses or permits, and no proceeding is pending or
threatened to revoke or limit any thereof. None of such licenses and permits
will be affected in any material respect by the consummation of the transactions
contemplated in this Agreement.
3.14 Insurance. Schedule 3.14 contains a listing of the policies of
---------
liability, theft, fidelity, business interruption, life, fire, product
liability, worker's compensation, indemnification or directors and officers,
health and other forms of insurance maintained by Sellers in connection with the
Business. All of such policies are in full force and effect and no notice of
cancellation or similar notice has been given to Sellers.
3.15 Environmental Matters. Sellers are not aware of, nor have Sellers
---------------------
received notice of, any past, present or future events, conditions,
circumstances, activities, practices, incidents, actions or plans which may
interfere with or prevent compliance or continued compliance with those laws or
any regulations, code, plan, order, decree, judgment, injunction, notice or
demand letter issued, entered, promulgated or approved thereunder, or which may
give rise to any common law or legal liability, or otherwise form the basis of
any claim, action, demand, suit, proceeding, hearing, study or investigation,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any pollutant,
contaminant, chemical, or industrial, toxic or hazardous substance or waste.
3.16 Accounts Receivable. Schedule 3.16 contains a complete and
--------------------
accurate list of all Accounts Receivable as of the date of the Latest Segment
Balance Sheet. The schedule delivered by Sellers to Buyer after the Closing Date
pursuant Section 2.6 will contain a complete and accurate list of all Accounts
Receivable as of the Closing Date. All of the Accounts Receivable listed on such
schedules are and will be, as of the date of the Latest Segment Balance Sheet
and as of the Closing Date, as the case may be, bona fide, current and fully
collectable in the ordinary course of business without further action or
performance by Sellers. None of the Accounts Receivable listed on such schedules
are or will be, as of the date of the Latest Segment Balance Sheet and the
Closing Date, as the case may be, disputed or subject to any claim, defense or
offset.
9
<PAGE>
3.17 Accounts Payable. Schedule 3.17 contains a complete and accurate
-----------------
list of all Accounts Payable as of the date of the Latest Segment Balance Sheet.
The schedule delivered by Sellers to Buyer after the Closing Date pursuant
Section 2.7 will contain a complete and accurate list of all Accounts Payable as
of the Closing Date.
3.18 Employment Matters. Except as set forth on Schedule 3.18, all of
-------------------
Sellers' employees involved in the Business are employed on an "at-will" basis
and may be terminated by Buyer without liability. Schedule 3.18 lists each
salaried employee involved in the Business and describes his or her position and
salary, and describes all benefit plans and other benefits provided or available
to Sellers' employees (including, without limitation, retirement, health and
death, incentive compensation, and vacation benefits). None of Sellers'
employees is a member of a labor union, nor has any Seller encountered any labor
union activity. There are no unfunded pension or similar liabilities regarding
employees of Sellers. Except as set forth on Schedule 3.18, all pension plans
have been properly funded and have at all times been administered in compliance
with all applicable laws (including, without limitation, ERISA).
Schedule 3.18 sets forth the terms of the DataMark Annual Profit Bonus
Program for certain employees involved in the Business, and includes the
estimated amount of bonuses accrued thereunder through January 31, 1998. The
financial information delivered by Sellers to Buyer pursuant Section 2.8 will
fairly present the results of operations of the Business for the applicable
period.
3.19 Intellectual Property. Sellers (i) own or have the right to use all
----------------------
trademarks, trade names, service marks, copyrights, patents, licenses and rights
with respect thereto (collectively, "Intellectual Property"), used in or
necessary for the conduct of the Business without infringing upon or otherwise
acting adversely to the right or claimed right of any person under or with
respect to any of the foregoing and (ii) are not obligated or under any
liability to make any payments by way of royalties, fees or otherwise to any
owner or licensee of, or other claimant to, any Intellectual Property with
respect to the use thereof or in connection with the conduct of the Business. A
list of all Intellectual Property used in or necessary for the conduct of the
Business and the nature of the ownership or rights with respect thereto
(including all registrations issued or applied for in respect thereof), are set
forth on Schedule 3.19.
3.20 Related Party Transactions. Except as contemplated or otherwise
---------------------------
disclosed in this Agreement or on Schedule 3.20, no shareholder, officer,
director or employee of Sellers or Holding, nor any "affiliate" or "associate"
of such persons (as such terms are defined in the rules and regulations
promulgated under the Securities Act), is a party to, or otherwise has a direct
or indirect interest in, any transaction with Sellers as it relates to the
Business, including without limitation, any contract, agreement or other
arrangement providing for the employment of, furnishing of services by, rental
of real or personal property from, or otherwise requiring payments to, any such
person or entity.
3.21 Brokers. Neither any Seller nor Holding, nor any officer,
-------
director, employee or agent of any Seller or Holding has engaged or used an
investment banker, broker, finder or intermediary in connection with the sale of
the Assets.
3.22 Complete and Accurate Disclosure. No representation or warranty
---------------------------------
made to Buyer in this Agreement or in connection with this transaction contains
or will contain an untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make such representation or warranty not
misleading or necessary to enable a prospective purchaser of the Assets and
Business to make a fully informed decision. All documents and information which
have been or will be delivered to Buyer or its representatives by or on behalf
of Sellers are and will be true, correct and complete copies of the documents
they purport to represent.
IV. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers that:
10
<PAGE>
4.1 Corporate Organization. Buyer is a corporation duly organized,
-----------------------
validly existing and in good standing under the laws of the state of its
incorporation, with full power and authority (corporate, governmental and
otherwise) to own and operate its properties and business as currently conducted
and as contemplated to be conducted. Buyer is duly qualified to do business and
is in good standing as a foreign corporation in each jurisdiction where the
conduct of its business requires it to be so qualified. Buyer has delivered to
Sellers true and complete copies of Buyer's charter and bylaws.
4.2 Corporate Power; Authorization; Enforceable Obligations. The
------------------------------------------------------------
execution, delivery and performance of this Agreement by Buyer is within such
party's corporate power and authority, and has been duly authorized by all
requisite corporate action. This Agreement has been, and the other agreements,
documents and instruments required to be delivered by Buyer pursuant to this
Agreement (together with this Agreement, the "Buyer's Documents") will be, duly
executed and delivered on behalf of Buyer. This Agreement constitutes, and the
Buyer's Documents when executed and delivered will constitute, the legal, valid
and binding obligations of Buyer, enforceable against it in accordance with
their respective terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors' rights
generally and by general equitable principles.
4.3 No Conflicts; Consents. The execution, delivery and performance of
-----------------------
the Buyer's Documents by Buyer, does not and will not (with or without the
giving of notice or the passage of time, or both) violate, conflict with, result
in a breach or default under, give rise to any rights of acceleration,
modification, termination or cancellation of, result in the creation of any
lien, claim or encumbrance pursuant to, or require any notice or consent under,
the charter or bylaws of Buyer, or any mortgage, indenture, instrument,
agreement, understanding or commitment of any kind, or any law, regulation,
rule, order, judgment or decree, to which Buyer is a party or by which any Buyer
is bound or affected. No authorization, permit, approval or consent of, and no
registration or filing with, any governmental or regulatory authority is
required, in connection with the execution, delivery and performance by Buyer of
the Buyer's Documents.
4.4 Brokers. Buyer has not retained or used an investment banker,
-------
broker, finder or intermediary in connection with the purchase of the Assets.
V. COVENANTS OF SELLERS PENDING CLOSING
Sellers jointly and severally covenant and agree with Buyer that from the
date of this Agreement to the Closing:
5.1 Conduct of Business. Sellers shall conduct the Business only in the
-------------------
ordinary course, consistent with its prior practices and prudent business
practices prevailing in the industry. For example (and not in limitation of the
foregoing), Sellers shall (i) preserve, maintain the condition of, and maintain
insurance at current levels on, its Assets, (ii) preserve for the benefit of
Buyer the goodwill of the Business and relations with their employees, agents,
customers and suppliers. Without limiting the foregoing, Sellers shall consult
with Buyer regarding all significant developments, transactions and proposals
relating to the Assets or Business. Sellers shall not take any action or omit to
take any action which could reasonably be expected to render inaccurate the
representations and warranties contained in this Agreement, as if such
representations and warranties were made at and as of the Closing.
5.2 Access to Information. Upon reasonable notice and during regular
---------------------
business hours, Sellers will give Buyer's representatives full access to
Sellers' personnel and to all properties, documents, contracts, books and
records of Sellers as Buyer may reasonably require for due diligence purposes
and in order to consummate the transactions contemplated by this Agreement.
However, the representations and warranties made in this Agreement or in
connection with this transaction shall not be affected or deemed waived by
reason of the fact that Buyer or its representatives knew or should have known
that any such representation or warranty is or might be inaccurate.
11
<PAGE>
5.3 Continuing Disclosure. Sellers shall promptly disclose to Buyer any
---------------------
information contained in their representations and warranties made pursuant to
this Agreement which, because of an event occurring after the date hereof, is
incomplete or is no longer correct as of all times after the date hereof until
the Closing Date; provided, however, that none of such disclosures shall be
deemed to modify, amend or supplement the representations and warranties of
Sellers or the schedules hereto for the purposes of Article VII hereof, unless
Buyer shall have consented thereto in writing.
5.4 Confidentiality. Unless and until the Closing has been consummated,
---------------
Sellers shall hold, and shall cause their employees, agents and representatives
to hold in confidence any confidential data or information of Buyer made
available to Sellers in the course of their discussions with Buyer in connection
with this Agreement, using the same standard of care to protect such
confidential data or information as is used to protect Sellers' confidential
information. If the transactions contemplated by this Agreement are not
consummated, Sellers shall return or cause to be returned to Buyer all written
materials and all copies thereof that were supplied to Sellers by Buyer and that
contain any such confidential data or information.
5.5 No Shopping. Sellers shall not negotiate with any other person, or
-----------
solicit or entertain any proposal, or furnish to any other person any
information, concerning the acquisition in any form of the Assets or Business or
a material interest therein.
5.6 Press Releases. Except as required by applicable law or as
---------------
contemplated herein, Sellers shall not give notice to third parties or otherwise
make any public statement or releases concerning this Agreement or the
transactions contemplated hereby except for such written information as shall
have been approved in writing as to form and content by Buyer, which approval
shall not be unreasonably withheld.
VI. COVENANTS OF BUYERS PENDING CLOSING
Buyer covenants and agrees with Sellers that from the date of this
Agreement to the Closing:
6.1 Confidentiality. Unless and until the Closing has been consummated,
---------------
Buyer shall hold, and shall cause its employees, agents and representatives to
hold in confidence any confidential data or information made available to Buyer
in connection with this Agreement with respect to the Business, using the same
standard of care to protect such confidential data or information as is used to
protect Buyer's confidential information. If the transactions contemplated by
this Agreement are not consummated, Buyer shall return or cause to be returned
to Sellers all written materials and all copies thereof that were supplied to
Buyer by Sellers and that contain any such confidential data or information.
6.2 Press Releases. Except as required by applicable law or as
---------------
contemplated herein, Buyer shall not give notice to third parties or otherwise
make any public statement or releases concerning this Agreement or the
transactions contemplated hereby except for such written information as shall
have been approved in writing as to form and content by Sellers, which approval
shall not be unreasonably withheld.
VII. CONDITIONS TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to close is subject to the fulfillment of each of the
following conditions precedent (any of which may be waived by Buyer), and
Sellers shall use their best efforts to cause each condition to be fulfilled:
12
<PAGE>
7.1 Performance of Obligations. Sellers shall have complied with and
---------------------------
performed each agreement, covenant and condition in this Agreement which are
required to be performed or complied with by each of them at or prior to
Closing.
7.2 Accuracy of Representations and Warranties. The representations and
------------------------------------------
warranties of Sellers contained in this Agreement or made in connection with
this transaction shall be true and correct at and as of the date of the Closing,
as if such representations and warranties were made at and as of Closing.
7.3 Closing Certificate. Buyer shall have received a certificate from
--------------------
Sellers dated the Closing Date, certifying in such detail as Buyer may
reasonably request that the conditions specified in Sections 7.1 and 7.2 hereof
have been fulfilled or satisfied.
7.4 Opinions of Counsel for Sellers. Outside legal counsel for Sellers,
-------------------------------
shall have delivered to Buyer a written opinion, dated the Closing Date, in the
form of Exhibit 7.4 hereto with only such changes as shall be in form and
substance reasonably satisfactory to Buyer and its counsel.
7.5 No Material Adverse Changes. Since the date of this Agreement, no
---------------------------
event or development has occurred, and no condition has arisen, that has had or
could reasonably be expected to have a Material Adverse Effect.
7.6 Key Employee Agreements. Arthur Benjamin, Thomas Dearden, Dennis
-----------------------
Holmes, Donald Stoh and Edward Patterson ("Key Employees") shall each have
executed and delivered to Buyer an employment agreement, containing or
accompanied by non-compete and confidentiality agreements, in form and substance
acceptable to Buyer in its sole discretion.
7.7 Confidentiality and Noncompete Agreements. Each Seller and Holding
-----------------------------------------
shall have executed and delivered to Buyer a confidentiality and noncompetition
agreement in form and substance acceptable to Buyer in its sole discretion (the
"Corporate Noncompete Agreements"). Each director and officer of each Seller
(other than Key Employees), and each director, officer and 10% or greater
stockholder of Holding, shall have executed and delivered to Buyer a
confidentiality and noncompetition agreement in form and substance acceptable to
Buyer in its sole discretion.
7.8 Stockholder Guaranty. Holding shall have executed and delivered to
--------------------
Buyer a guaranty, in form acceptable to Buyer (the "Stockholder Guaranty"),
pursuant to which Holding shall guarantee the timely payment and performance of
Sellers' indemnification obligations set forth in Article X.
7.9 Consents and Licenses. Buyer shall have obtained all governmental
---------------------
approvals, permits and licenses, and shall have obtained all other consents and
approvals, as are necessary in the opinion of Buyer's counsel, to consummate the
transactions contemplated herein and to enable Buyer to operate the Business as
it is now being operated.
7.10 Satisfaction with Due Diligence. Buyer shall be satisfied, in its
-------------------------------
sole discretion, with the results of its due diligence investigation (including,
without limitation, its investigation of the condition of the Assets and its
review of Sellers' financial statements).
7.11 Additional Documents. Buyer shall have received such documents,
---------------------
certificates and other evidence as Buyer or its counsel may reasonably request
relating to the existence and standing of Sellers, the authorization, execution
and delivery of this Agreement by Sellers, the accuracy of the representations
and warranties of Sellers contained herein, and the compliance by Sellers with
their obligations hereunder.
VIII. CONDITIONS TO SELLERS' OBLIGATIONS TO CLOSE
13
<PAGE>
Sellers' obligations to close is subject to the fulfillment of each of the
following conditions precedent (any of which may be waived by Sellers), and
Buyer shall use its best efforts to cause each condition to be fulfilled:
8.1 Performance of Obligations. Buyer shall have complied with and
----------------------------
performed each agreement, covenant and condition in this Agreement which are
required to be performed or complied with by it at or prior to Closing.
8.2 Accuracy of Representations and Warranties. The representations and
------------------------------------------
warranties of Buyer contained in this Agreement or made in connection with this
transaction shall be true and correct at and as of the date of the Closing, as
if such representations and warranties were made at and as of Closing.
8.3 Closing Certificate. Sellers shall have received a certificate from
-------------------
Buyer dated the Closing Date, certifying in such detail as Sellers may
reasonably request that the conditions specified in Sections 8.1 and 8.2 hereof
have been fulfilled or satisfied.
8.4 Payment of Purchase Price. Buyer shall have paid the Cash Purchase
-------------------------
Price as provided by Section 2.1.
IX. ADDITIONAL SELLERS' OBLIGATIONS FOLLOWING CLOSING
9.1 Preservation of Goodwill. Following Closing, Sellers and their
-------------------------
respective officers, directors, employees and shareholders will restrict their
activities so that Buyer's reasonable expectations with respect to the goodwill,
business reputation, employee relations, and prospects connected with the Assets
and Business will not be materially impaired thereby.
9.2 Payments Received. Sellers and Buyer shall hold and will promptly
------------------
transfer and deliver to the other, from time to time as and when received, any
cash, checks (with appropriate endorsements) or other property that properly
belongs to the other, including without limitation any insurance proceeds, and
after the Closing, Buyer shall have the right and authority to endorse without
recourse the names of Sellers on any check or any other evidences of
indebtedness received by Buyer on account of the Business and the Assets.
X. INDEMNIFICATION
10.1 Indemnification by Sellers. Sellers agree, jointly and severally, to
--------------------------
indemnify, defend and hold harmless Buyer and its shareholders, officers,
directors, employees and agents, and their respective successors and assigns,
from and against any and all claims, suits, losses, expenses (legal, accounting,
investigation and otherwise), damages and liabilities (including, without
limitation, tax liabilities), arising out of or relating to (i) any liability,
obligation or commitment of any Seller or Holding other than the Assumed
Liabilities, (ii) the conduct of, or conditions existing with respect to, the
Business prior to Closing, and (iii) any misrepresentation or breach of warranty
or covenant made by any Seller in this Agreement or the Sellers' Documents.
10.2 Indemnification by Buyer. Buyer agrees to indemnify, defend, and
------------------------
hold harmless Sellers and their shareholders, officers, directors, employees and
agents, and their respective successors and assigns, from and against any and
all claims, suits, losses, expenses (legal, accounting, investigation and
otherwise), damages and liabilities, arising out of or relating to (i) any
Assumed Liability, (ii) the conduct of, or conditions existing with respect to,
the Business after Closing, and (iii) any misrepresentation or breach of
warranty or covenant made by Buyer in this Agreement or the Buyers' Documents.
10.3 Payment. Upon the determination of the liability under Sections
-------
10.1 and 10.2 hereof, the appropriate party shall pay the other, as the case may
be, within ten days after such determination, the amount of any claim for
indemnification made hereunder. In the event that the indemnified party is not
paid in full for any
14
<PAGE>
such claim pursuant to the foregoing provisions promptly after the other party's
obligation to indemnify has been determined in accordance herewith, it shall
have the right, notwithstanding any other rights that it may have against any
other person, to set off the unpaid amount of any such claim against any amounts
owed by it under this Agreement, the Sellers' Documents or the Buyer's
Documents. Upon the payment in full or any claim, either by setoff or otherwise,
the entity making payment shall be subrogated to the rights of the indemnified
party against any person with respect to the subject matter of such claim.
XI. MISCELLANEOUS
11.1 Termination.
-----------
(a) This Agreement may be terminated by written notice of termination
at any time prior to the Closing, as follows:
(i) by mutual consent of Sellers and Buyer;
(ii) by Buyer, (A) at any time if the representations and
warranties of Sellers contained herein were incorrect in any material respect
when made or at any time thereafter, (B) upon the material breach by any Seller
of any covenant of such Seller made herein, or (C) upon written notice to
Sellers given at any time after March 31, 1998, if all of the conditions
precedent set forth in Article VII hereof have not been met; or
(iii) by Sellers, (A) at any time if the representations and
warranties of Buyer contained herein were incorrect in any material respect when
made or at any time thereafter, (B) upon the material breach by Buyer of any
covenant of Buyer made herein, or (C) upon written notice to Buyer given at any
time after March 31, 1998 if all of the conditions precedent set forth in
Article VII hereof have not been met.
(b) Notwithstanding any other rights a party may have upon termination
of this Agreement, in the event the Closing has not occurred on or before March
31, 1998, through no fault of Buyer, then Sellers shall bear all fees and
expenses of Buyer in connection with the transactions contemplated hereby,
including all reasonable legal, accounting and other professional fees.
11.2 Expenses. Real estate title insurance costs and environmental
--------
survey expenses shall be borne by Sellers. Income taxes, sales and use taxes,
and transfer taxes arising out of the transactions contemplated herein shall be
borne by Sellers. Except as otherwise provided herein, legal, accounting and
other costs and expenses incurred in connection with the transactions
contemplated herein shall be paid by the party incurring such expenses.
11.3 Notices. Any notice, request, demand, waiver, consent, approval or
-------
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered personally or sent by telegram or by
registered or certified mail, postage prepaid, or by express overnight delivery
service, as follows:
If to Buyer, to:
Focus Direct, Inc.
9707 Broadway
San Antonio, Texas 78217
Attn: Fred B. Lederman
With a copy to:
Mission City Management, Inc.
15
<PAGE>
8122 Datapoint Drive, Suite 900
San Antonio, TX 78229
Attn: Thomas W. Lyles Jr.
If to any Seller, to:
c/o DataMark Holding, Inc.
448 East Winchester Street, Suite 400
Salt Lake City, Utah 84107
Attn: Mitchell Edwards
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered, telegraphed or mailed.
11.4 Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective
successors, legal representatives and assigns; however, this Agreement may not
be assigned by any party without the written consent of the other parties
hereto.
11.5 Entire Agreement; Amendment. This Agreement, the schedules and
-----------------------------
exhibits hereto, and the related agreements referred to herein embody the entire
agreement of the parties hereto, and supersede all prior agreements and
understandings, with respect to the subject matter hereof. This Agreement may be
amended only by a written instrument executed by each of the parties hereto.
11.6 Counterparts. This Agreement may be executed in counterparts, each of
------------
which individually shall be deemed an original, but all of which collectively
shall constitute the same instrument.
11.7 Survival of Representations and Warranties. All representations
-------------------------------------------
and warranties contained in or made in connection with this Agreement shall
survive Closing.
11.8 Severability. Any provision of this Agreement which is invalid,
------------
unenforceable or illegal in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such invalidity, unenforceability or
illegality without affecting the remaining provisions hereof and without
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.
11.9 Captions and Headings; Use of term "Person". Captions and headings
-------------------------------------------
used herein are for convenience only, do not constitute a part of this
Agreement, and shall not be considered in construing this Agreement. Unless the
context otherwise requires, all article, section or subsection cross-references
are to articles, sections or subsections within this Agreement. As used herein,
the term "person" shall include an individual, corporation, partnership,
venture, proprietorship, trust, benefit plan or other entity or enterprise.
11.10 Incorporation of Exhibits and Schedules. Except as otherwise
------------------------------------------
expressly provided, all references in this Agreement to schedules and exhibits
refer to those schedules and exhibits attached hereto. All such schedules and
exhibits, and any statements contained therein or in any certificate or
instrument delivered pursuant hereto, constitute an integral part of this
Agreement and shall be deemed made in this Agreement as if set forth in full
herein.
11.11 Reliance on Counsel. Each party hereto has retained its own legal
-------------------
and tax advisors to evaluate the tax and legal merits and consequences of the
transactions contemplated herein, and no party is relying on the advice (with
respect to the tax consequences of such transactions or otherwise) of any other
party hereto or such other party's agents or advisors.
16
<PAGE>
11.12 Governing Law; Forum. This Agreement shall be governed by and
---------------------
construed in accordance with the laws of the State of Texas, without regard to
any conflicts of law rules. Any action relating to this Agreement or this
transaction must be brought in Bexar County, Texas.
17
<PAGE>
BUYER:
FOCUS DIRECT, INC.
By: /s/ Fred B. Lederman
--------------------
President
SELLERS:
DATAMARK SYSTEMS, INC.
By: /s/ Arthur Benjamin
-------------------
President
DATAMARK PRINTING, INC.
By: /s/ Arthur Benjamin
-------------------
President
DATAMARK LISTS, INC.
By: /s/ Arthur Benjamin
-------------------
President
WORLDNOW ONLINE NETWORK, INC.
By: /s/ Mitchell Edwards
-------------------
Executive Vice President
18
<PAGE>
STOCK PURCHASE AGREEMENT
DataMark Holding, Inc. ("the Company") agrees to purchase 2,050,000 shares
of the Company's issued and outstanding common stock ("the Shares") now
beneficially owned by Chad Evans ("Evans") on the terms and conditions set forth
below, effective as of March 5, 1998.
1. Shares. Evans is the sole beneficial and legal owner of the Shares,
represented by certificates numbered as shown on Appendix A, attached hereto and
incorporated here by this reference.
2. Purchase Price. The Company will purchase all of Evans' right, title
and interest in the Shares for a total purchase price of $2,000,000 in cash.
This cash amount will be referred to as "the Purchase Price."
3. Unconditional Agreement. The parties acknowledge that the Company's
agreement to purchase, and Evans' agreement to sell, the Shares is irrevocable
and subject to no conditions precedent or subsequent except as explicitly
provided in this Agreement. By their signatures below, the authorized officers
of Purchaser warrant to Evans that valid and binding Board of Directors action
has already taken place to approve this Agreement. While the Purchaser intends
to present this Agreement to its shareholders for ratification at a Special
Meeting of Shareholders, the approval or non approval of this Agreement by the
Shareholders of Purchaser is not a condition precedent or subsequent to the
Purchaser's or Evans' respective obligations to perform fully under this
Agreement.
4. Voting Trust Agreement and Escrow Agreement.
At the Closing of this Agreement,
(1) Purchaser will deliver the Purchase Price and Evans will deliver
the Shares to A. Robert Thorup, Esq. Who will act as Escrow Agent for the
parties in accordance with the Escrow Agreement, the form of which is
attached to this Agreement as Appendix C, and by this reference
incorporated herein.
1
<PAGE>
(2) The Escrow Agent will sign the Voting Trust Agreement in the form
attached hereto as Appendix B and incorporated herein by this reference,
and will deliver the Shares to the Voting Trustee under the Voting Trust
Agreement in return for a Voting Trust Certificate in the name of the
Escrow Agent representing the beneficial ownership of the Shares held in
under the Voting Trust Agreement ("the Voting Trust Certificate.").
(3) Purchaser will provide evidence satisfactory to Evans and his
legal counsel that shareholders representing, with Evans, over 50% of the
issued and outstanding voting stock of Purchaser, have executed and
delivered the Voting Trust Agreement, and that said shareholders have
already delivered their shares to the Voting Trustee.
(4) The Escrow Agent will execute an assignment of all rights under
the Voting Trust Certificate to Purchaser, and will hold said Assignment
together with the Voting Trust Certificate and will act with respect
thereto as provided in the Escrow Agreement.
5. Hold Harmless. The parties agree to hold each other harmless from
any and all Losses or liabilities of any kind whatsoever based on Evans' actions
or inactions as an officer, director or affiliate of the Company, including but
not limited to the entering into and performance under this Agreement. In this
connection, the Company agrees to indemnify Evans for any Loss or liability to
this same extent and scope, including reimbursing Evans' attorneys fees and
costs in connection with any claim made against him.
For this purpose, Loss means any and all liabilities, losses, damages,
claims, costs and expenses, interest, awards, judgments and penalties (whether
or not arising out of third-party claims) including, without limitation, costs
of mitigation, losses in connection with any securities law, lost profits,
attorneys' fees and expenses and all amounts paid in investigation, defense or
settlement of any of the foregoing.
By way of limitation on the duty of the parties to hold each other harmless
and on the duty of the Company to indemnify Evans, the extent of any such duty
shall be limited to the amount of the Purchase Price. Moreover, such duties
shall have a deductible of $50,000 per occurrence before any claim for
indemnification of hold harmless may be made under this Agreement.
6. Closing. The parties will meet at the offices of Ray Quinney &
Nebeker on March 4, 1998 at the hour of 10:00 AM at which time the parties shall
deliver to the Escrow Agent the Shares and the Purchase Price, and shall deliver
to each other signed counterparts of this Agreement, and at which time the
Escrow Agent shall deliver the Shares to Mitchell Edwards in return for the
Voting Trust Certificate.
2
<PAGE>
7. Public Disclosure. The parties agree that a press release, in the form
attached as Appendix D, may be issued by the Company following the Closing.
8. Notices. All notices and claims under this Agreement are to be made to
the parties as follows, by fax and hand delivery:
If to Evans, at: Chad Evans
48 East Winchester Street
Suite 400
Salt Lake City, Utah 84107
FAX: 801-268-2292
With a copy to: A. Robert Thorup
RAY QUINNEY & NEBEKER
7TH Floor
79 South Main Street
Salt Lake City, Utah 84111
FAX: 801-532-7543
If to the Company, at: James Egide, Chairman
Mitchell Edwards, Senior Vice President
DataMark Holding, Inc.
448 East 6400 South, Suite 400
Salt Lake City, Utah 84107
FAX: 801-268-2292
With a copy to: Richard Beard, Esq.
CALLISTER DUNCAN & NEBEKER
Suite 800
15 East South Temple Street
Salt Lake City, Utah 84133
9. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
10. Severability. If any term or other provision to this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions or this Agreement shall nevertheless
remain in full force and effect so long as the
3
<PAGE>
economic or legal substance of the transactions contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the greatest extent possible.
11. Entire Agreement. This Agreement (including the Appendices hereto)
constitute the entire agreement among the parties and supersede all prior
agreements and undertakings with respect to the subject matter hereof.
12. Assignment. This Agreement may not be assigned by a any party hereto
without the prior written consent of the other parties hereto.
13. Governing Law. This Agreement shall be construed in accordance with,
and governed by the substantive laws of, the State of Utah, without reference to
principles governing choice or conflicts of laws.
14. No Third-Party Beneficiaries. This Agreement is for the sole benefit
of the parties hereto and nothing herein expressed or implied shall give or be
construed to give to any person or entity, other than the parties hereto and
such assigns, any legal or equitable rights hereunder.
15. Amendment. This Agreement may not be amended or modified except by an
instrument in writing signed by the parties.
16. Arbitration. Notwithstanding anything herein to the contrary, in the
event that there shall be a dispute among the parties after the Closing arising
out of or relating to this Agreement, including without limitation the
indemnities provided herein, or the breach thereof, the parties agree that such
dispute shall be resolved by final and binding arbitration in Salt Lake City,
Utah, administered by the American Arbitration Association ("AAA") or such other
organization agreed to by the parties, in accordance with AAA's rules of
practice then in effect or such other procedures as the parties may agree to
prior to the Closing. Any award issued as a result of such arbitration shall be
final and binding between the parties thereto, and shall be enforceable by any
court having jurisdiction over the party against whom enforcement is sought. The
fees and expenses of such arbitration
4
<PAGE>
(including reasonable attorneys' fees) or any action to enforce an arbitration
award shall be paid by the party that does not prevail in such arbitration.
17. Survival. The duties of indemnification, hold harmless and notice
provided herein shall survive the Closing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first written above.
DATAMARK HOLDING, INC.,
a Utah corporation
By:
________________________________
Name: James Egide
Title: Chairman
DATAMARK HOLDING, INC.,
a Utah corporation
By:
________________________________
Name: Mitchell Edwards
Title: President
Chad Evans
____________________
5
<PAGE>
APPENDIX A
CERTIFICATES REPRESENTING THE SHARES
<TABLE>
<CAPTION>
Certificate # # of Shares Name on Certificate
<S> <C> <C>
D1591 1,500,000 Chad Evans
D1592 100,000 Chad Evans
D1593 100,000 Chad Evans
D1594 100,000 Chad Evans
D1595 100,000 Chad Evans
D1596 100,000 Chad Evans
D1597 50,000 Chad Evans
Total: 2,050,000
</TABLE>
6
<PAGE>
AMENDED STOCK PURCHASE AGREEMENT
DataMark Holding, Inc. ("the Company") agreed to purchase 2,050,000 shares
of the Company's issued and outstanding common stock ("the Shares") then
beneficially owned by Chad Evans ("Evans") on the terms and conditions set forth
in a Stock Purchase Agreement effective as of March 5, 1998 ("the Purchase
Agreement"). The Company and Evans now desire to amend the Purchase Agreement as
follows:
1. SHARES. The Shares are 1,800,000 shares rather than the 2,050,000
shares set out in the Purchase Agreement. The Shares as now constituted are
represented by certificates numbered as shown on Appendix A, attached hereto and
incorporated here by this reference.
2. PURCHASE PRICE. The Purchase Price is reduced to $1,500,000 instead of
the $2,000,000 provided in the Purchase Agreement.
3. RECONCILING THIS AMENDED STOCK PURCHASE AGREEMENT WITH THE PURCHASE
AGREEMENT AND ANCILLARY AGREEMENTS.
(a) All other provisions of the Purchase Agreement remain in full force and
effect, except that the delivery of Shares and the delivery of the Purchase
Price have already taken place.
(b) Evans will be credited with $375,000 of the $1,500,000 new Purchase
Price as having been received at the time of the closing of the Purchase
Agreement.
(c) The parties will jointly instruct the Escrow Agent under the Escrow
Agreement to release 250,000 shares back to Evans and to release $875,000 to the
Company.
(d) All other provisions of the Escrow Agreement shall remain in full force
and effect.
(e) The Non Compete Agreement between Evans and the Company shall be
amended to reflect consideration of $25,000 to Evans.
4. SALE OF 250,000 SHARES TO A NEW INVESTOR IN THE COMPANY. The Company
expressly consents to the sale by Evans of the 250,000 shares being released to
Evans by the Escrow Agent at a price per share higher than that being paid by
the Company under this Amended Purchase Agreement.
5. VOTING TRUST AGREEMENT AND ESCROW AGREEMENT.
At the Closing of this Amended Purchase Agreement,
7
<PAGE>
(a) the Escrow Agent will deliver $850,000 to the Company.
(b) the Escrow Agent will surrender the Voting Trust Certificate for
2,050,000 shares now in his possession to the Voting Trustee in return for a new
Voting Trust Certificate for 1,800,000 shares.
(c) the Voting Trustee shall surrender to the Company one or more
certificates representing 250,000 shares to the Company shall deliver to Evans
one or more certificates representing 250,000 shares of the Company's common
stock bearing no different legend or restriction than on the certificates
originally surrendered to the Voting Trustee by Evans in the closing of the
Purchase Agreement.
In Witness Whereof, the parties hereto have caused this Agreement to be
executed as of the date first written above.
Datamark Holding, Inc.,
a Utah corporation
By: /s/ James Egide
___________________________________
Name: James Egide
Title: Chairman
Datamark Holding, Inc.,
a Utah corporation
By: /s/ Mitchell Edwards
___________________________________
NAME: MITCHELL EDWARDS
TITLE: PRESIDENT
Chad Evans
/s/ Chad Evans
_______________________________
8
