SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------
Commission File Number 0-20771
DATAMARK HOLDING, INC.
(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
448 E. Winchester Street, Suite 400
Salt Lake City, Utah 84107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(801) 268-2202
Check whether the registrant (1) has filed all reports required to be
filed by Sections 13 and 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant has only one class of stock issued and outstanding which
is Common Stock with $.0001 par value. As of April 30, 1998, 7,027,626 of the
Registrant's Common Shares were issued and outstanding.
1
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
March 31, June 30,
1998 1997
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $6,946,635 $ 4,938,404
Trade accounts receivable, net of allowance
for doubtful accounts of $0 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 750,000 -
----------- -----------
NET NON-CURRENT 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.
2
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
<CAPTION>
1998 1997
----------- -----------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $166,493 $ 1,086,474
Current portion of capital lease obligation 960,777 -
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
=========== ===========
The accompanying notes to condensed consolidated
financial statements are an integral part of these balance sheets.
</TABLE>
3
<PAGE>
<TABLE>
.DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<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 (50,548) 120,901
, net of income tax benefit (provision) of $30,329 and $72,540,
respectively
Gain on sale of direct mail marketing subsidiary, net of income tax
provision of 4,394,717 -
$2,636,831
Loss from operations of discontinued Internet service provider
subsidiary, net of (20,698) (1,823,006)
income tax benefit of $12,419 and $72,540, respectively
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 232,911 -
----------- -----------
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)
===========
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.
4
<PAGE>
<TABLE>
.DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
1998 1997
<CAPTION>
----------- -----------
<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 111,377 263,672
income tax provision of $66,827 and $158,203, respectively
Gain on sale of direct mail marketing subsidiary, net of income tax
provision 4,394,717 -
of $2,636,831
Loss from operations of discontinued Internet service provider
subsidiary, net of (265,674) (1,737,343)
income tax benefit of $159,404 and $158,203, respectively
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 232,911 -
----------- -----------
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)
=========== ===========
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.
5
<PAGE>
<TABLE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Increase (Decrease) in Cash
<CAPTION>
1998 1997
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
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 1,126,854 115,015
Acquired research and development - 1,674,721
Stock issued in lieu of compensation 61,250 -
Amortization of goodwill 26,932 -
Loss on disposition of equipment 11,196 -
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 (750,000) -
Purchase of property and equipment (802,414) (2,675,116)
Increase in net non-current 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 6,857,300 -
operations
Net proceeds from the issuance of common stock and other
contributed capital - 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)
Acquisition of common stock (200,000) -
Proceeds from borrowings 86,000 -
Net proceeds from the exercise of common stock options 22,418 -
----------- ---------
Net cash provided by financing activities 8,797,560 1,786,354
----------- ---------
NET INCREASE (DECREASE ) IN CASH 1,994,361 (4,912,285)
CASH AT BEGINNING OF PERIOD 4,952,274 13,159,404
----------- ---------
CASH 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.
6
<PAGE>
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of 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. The assets acquired consisted of approximately $32,000 of trade
accounts receivable, $124,000 of inventory and $500,000 of computer and office
equipment and the liabilities assumed consisted of approximately $289,000 of
trade accounts payable, $233,000 of notes payable and $134,000 of other accrued
liabilities.
In March 1998, the Company sold Sisna back to Sisna's former 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 trade accounts receivable, $35,000 of prepaid expenses,
$48,000 of computer and office equipment and $10,000 of other assets and assumed
liabilities of $33,000 of trade accounts payable, $102,000 of notes payable, and
$244,000 of other accrued liabilities.
The operations of Sisna have been included in the accompanying
statements of operations from the acquisition date in January 1997 through the
sale in March 1998 as part of discontinued operations.
7
<PAGE>
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. in exchange for shares of the Company's common stock, in a
transaction that was accounted for as a purchase. The shareholders' of Books
Now, Inc. received 100,000 shares of the Company's common stock upon signing the
agreement. The excess of the purchase price over the estimated fair value of the
acquired assets less liabilities assumed was approximately $539,000. 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 shareholders' of Books Now, Inc. can receive a maximum of 87,500
additional shares of the Company's common stock for each year for the next three
years based on performance goals established in the exchange agreement. The
average of the bid and ask price for the Company's stock on the date of exchange
was $3.13.
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.
<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 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")
and 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.
8
<PAGE>
Pursuant to the 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 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 $492,922 of trade accounts receivable, $179,276
of inventory, $577,869 of furniture and equipment and $10,550 of other assets
and assumed liabilities of $592,440 of trade accounts payable and $320,939 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 - EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings per Share" which became effective December 15, 1997, basic net income
per common share was computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
common share takes into consideration the dilutive effects of outstanding stock
options. During periods in which the Company incurs a net loss, the inclusion of
the common stock equivalents would decrease the net loss per share and therefore
have not been added to basic weighted average shares.
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
-------------- -------------
Weighted average number of shares
for basic net income per common
<S> <C> <C>
share 8,763,505 8,759,900
Stock Options 68,581 201,415
-------------- -------------
Weighted average number of shares
for diluted net income per common
share 8,832,086 8,961,315
============== =============
</TABLE>
9
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
March 31, 1997 March 31, 1997
<CAPTION>
------------ ------------
<S> <C> <C>
Weighted average number of shares
for basic net income per common
share 8,479,376 8,242,116
Stock Options - -
------------ ------------
Weighted average number of shares
for diluted net income per common
share 8,479,376 8,242,116
============ ============
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company began operations in 1987 to provide highly targeted
business to consumer advertising through direct mail. Since the Company's
founding, the direct mail marketing business had provided substantially all of
the Company's revenues. The direct mail advertising business was sold in March
1998 and the operations of the direct mail marketing operations have been
classified as discontinued operations in the accompanying consolidated financial
statements.
In fiscal 1994, the Company began developing its own proprietary
advertiser and end-user funded national online network, known as WorldNow Online
(formerly named ValuOne Online). Since fiscal 1994, the Company has devoted
significant resources towards the development of WorldNow Online and launched
this proprietary service in the fourth quarter of fiscal 1997. WorldNow Online
is attempting to create a national Internet-based network of local television
stations by signing affiliation agreements with television stations in major
television markets in the United States. By providing free web hosting services
and revenue opportunities to local television stations, WorldNow Online obtains
free television commercial advertising driving Internet traffic to the WorldNow
Online website. WorldNow Online provides and aggregates national content and
advertising for its local television station affiliates, who augment the
national content with highly relevant local content and advertising. Although
the Company believes it will sign affiliate agreements with television stations
in up to 100 markets, WorldNow Online has to date only signed affiliate
agreements with television stations in twenty four markets.
10
<PAGE>
In January 1997, the Company acquired Sisna, Inc. ("Sisna") an Internet
service provider headquartered in Salt Lake City, Utah. The acquisition was
accounted for as a purchase. The Company agreed to issue up to 325,000 shares of
its common stock to acquire all of the outstanding shares of common stock of
Sisna. 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 since the date of acquisition
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 based
upon financial performance. 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.
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, Inc. acquisition accounted for $141,160 of the 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, Inc. acquisition 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 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.
11
<PAGE>
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 costs 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 costs have decreased due to reduced
levels of activity currently required for the development of WorldNow Online. To
remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, features and content of the WorldNow online main
site.
Research and development costs decreased 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 enchance 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 pretax 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 pretaxloss 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 research and development.
12
<PAGE>
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 profit 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 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 research and development.
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. their 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
$700,000 in June 1999.
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 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 included the
investment in CommTouch, Ltd. of $750,000 and 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 non-current assets of
discontinued operations.
13
<PAGE>
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 direct mail marketing net assets in March
1998, $2,750,000 from the sale 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 previous
officer of the Company's direct mail advertising subsidiary. During the nine
months ended March 31, 1997, the Company received $1,829,555 of net proceeds
from the issuance of common stock and other contributed capital offset by
$43,201 in principal repayments on notes.
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 WorldNow Online. As of March 31,
1998, the Company had $6,946,635 of cash. The Company is attempting to obtain
additional debt or equity funding. If adequate funding is not available, the
Company may be required to revise its plans and reduce future expenditures.
There can be no assurance that the additional funding will be available or, if
available, that it will be available on acceptable terms or in required amounts.
In April 1998 the Company purchased 1,800,000 shares of its common
stock held by a previous officer of the Company in exchange for $1,500,000.
Year 2000 Issue
The Company's systems are compliant with the Year 2000 issues. It
further expects that costs associated to achieve compliance with the Year 2000
issue with other entities with which the Company electronically interacts will
be minimal.
Forward Looking Information
Statements regarding the Company's expectations as to future revenue
from WorldNow Online, and certain other statements presented in the Form 10-Q
constitute forward looking information within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to (i) WorldNow
Online has only generated minimal revenues, and it has not generated and may not
generate the level of television station affiliates, users or advertisers
anticipated, (ii) the costs to market the WorldNow Online service to television
station affiliates, advertisers and users could be substantially higher than
anticipated, (iii) the online industry is rapidly changing, and the Company may
not have the technical or financial resources to obtain sufficient television
station affiliates and advertisers and to generate sufficient Internet traffic
in order to compete against existing online services or against services which
are newly introduced or modified, and (iv) the direct mail business may not grow
as anticipated due to competitive factors, including postage and material price
increases which make direct mail uneconomical with other forms of advertising,
and competition from other direct mailers over which the Company may not have a
competitive advantage.
14
<PAGE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATAMARK HOLDING, INC.
Date: May 7, 1998 By /s/ Michael D. Bard
--- ----------------------------------
Michael D. Bard
Chief Financial Officer
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