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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 1998
Commission file number: 0-21069
DATALINK SYSTEMS CORPORATION
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(Name of small business issuer in its Charter)
Nevada 36-3574355
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1735 Technology Drive, Suite 790, San Jose, California 95110
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(Address of principal executive offices, including zip code)
(408) 367-1700
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(Issuer's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
[ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Issuer's revenues for its most recent fiscal year were $962,461.
As of May 18, 1998, 2,018,293 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $8,210,157.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format (check one): Yes __ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Datalink Systems Corporation (the "Company") was formed under the laws of
the State of Colorado on August 15, 1986, for the purpose of creating a
corporate vehicle to seek and acquire a business opportunity. On June 19,
1996, the Company changed its name from Lord Abbott, Inc. to Datalink Systems
Corporation, effected a one for three hundred reverse split, and changed its
domicile to Nevada.
In August of 1988, the Company completed a public offering in which it
received net proceeds of approximately $240,000.
On June 27, 1996, the Company issued 1,646,532 shares (as adjusted for
the 1 for 10 reverse split effective on February 9, 1998) of its $0.01 par
value Common Stock to the holders of 100% of the outstanding Common Stock of
Datalink Communications Corporation ("DCC") in an exchange transaction in
which DSC became a wholly owned subsidiary of the Company.
On November 5, 1997, the Company completed the sale of units of the
Company's Series A Convertible Preferred Stock. The units were sold in a
private placement pursuant to an agreement with an investment banking firm. A
total of 68.5 units were sold at a cost of $150,000 per unit for total gross
proceeds of $10,275,000. Each unit consisted of 40,000 shares of Preferred
Stock, par value $0.01, and each share of Preferred Stock is now convertible
into one share of Common Stock. Also included with each unit was a detachable
Common Stock purchase warrant to purchase 20,000 shares of the Company's
Common Stock at a purchase price of $5.00 per share.
The Company received approximately $8.0 million in cash, net of expenses,
and $1.05 million in a note receivable from an officer of the Company.
Expenses and commissions related to the private placement totaled
approximately $1.3 million.
On January 8, 1998, shareholders holding 10,582,523 shares (pre-split) of
the Company's $.001 par value Common Stock (the "Common Stock"), and 141,558
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock"), signed written consents approving a one for ten (1 for 10) reverse
split of the Company's outstanding Common Stock and an increase in the number
of shares of Common Stock which may be acquired upon the exercise of options
under the Company's 1996 Stock Option Plan from 300,000 to 500,000 after the
reverse split. On January 8, 1998, there were 20,182,925 shares of Common
Stock issued and outstanding, and 2,740,000 shares of Preferred Stock
outstanding.
On January 15, 1998 the Board of Directors of the Company approved a 1
for 10 reverse stock split. The 1 for 10 reverse stock split was effected on
February 9, 1998, and applied to all shareholders of record. Subsequent to
the split the number of shares of Common Stock into which the Preferred Stock
could be converted was reduced from 27,400,000 to 2,740,000, and the number of
shares of Common Stock issued and outstanding was 2,018,293. All financial
data and share data in this Form 10-KSB give retroactive effect to this split,
unless otherwise indicated.
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Unless the context otherwise requires, the term "Company" as used herein
refers to Datalink Systems Corporation and its wholly owned subsidiaries
Datalink Communications Corporation, and DSC Datalink Systems Corporation.
The Company is in the business of developing and marketing information
services for business and personal use, utilizing wireless and other emerging
information delivery technologies. The Company has developed an information
filtering, matching and messaging software engine which is utilized in each of
the Company's services.
DESCRIPTION OF BUSINESS
GENERAL
Except for the historical information contained herein, this Report
contains forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this section under "General" and
"Risk Factors" as well as in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company is a Silicon Valley based information service company using
proprietary intelligent agent technology to link the Internet to wireless
communications technologies. The Company provides a new way to access,
receive and send information with a complete line of Internet enabled services
for the paging, PCS and digital cellular industries. The Company's technology
combines features from Yahoo and PointCast and expands them to an Internet to
Wireless platform. The Company has been featured on CNBC, CNN and ABC, and
received SmartMoney Magazine's award as the number one wireless service of its
kind.
The Company's Internet to Wireless technology delivers both Internet and
telecommunications technologies to the consumer. The ability to request
information, search a database and receive the information back on the handset
or pager can add value to information because the consumers receive the exact
content that is personal and important to them, whether they want it
instantly, scheduled for later or triggered by a defined event. The Company's
services are used by consumers and professionals at home, on the road and in
the office.
INDUSTRY BACKGROUND
With the current growth of digital technology such as personal
communications services (PCS), there will be continued demand for
communications with data features and faster and easier access to information.
The Company has both the technology and capability to become a major contender
in providing information services to this market. The Pelorus Group forecasts
that with the increase in mobile workers there will be a significant increase
in demand for wireless data services. They predict the number of mobile
workers will increase from 40.5 million today to 62.5 million workers by 2001.
By the year 2002, the Strategic Group projects there will be over 500
million cellular and PCS subscribers worldwide, more than tripling the
end-year 1996 cellular and PCS subscriber base of nearly 140 million. This
projection contends that there is considerable pent-up demand for wireless
services. For example, of 871 non-cellular users surveyed, 24% said they
wished they had wireless of any form. And, within that group, 16% said they
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are considering a wireless purchase, such as cellular or two-way messaging via
PCS. The Pelorus Group corroborates the Yankee Group's predictions.
Currently, according to the Pelorus Group, the total number of all business
subscriptions in wireless data communications is 23 million subscribers. This
is further divided into 19 million business subscribers for pagers (alerting
only); 1.4 million for text messaging (short text messages on alphanumeric
pagers); 680,000 data users (a subset of cellular users); 489,000 specialized
data networks; and 1.45 million corporate private networks. The total 1995
revenue base for wireless data was nearly $2.5 billion. One-way paging was
$1.7 billion (or 68% of the total). Messaging-computing support was $536
million (21%) and private networks accounted for 11%. According to the
Strategic Group, wireless e-mail subscribers will grow from an estimated 1.5
million in 1997 to 15.6 million by the year 2001. The Group said 72% of
wireless users and 40% of nonusers are interested in two-way wireless e-mail.
This, according to the study, represents a total market potential of 44.3
million users. Wireless technology breaks down into one-way data, and two-way
voice and/or data communications. One-way communications is best typified by
current paging services. Some 40 million Americans carry pagers today, with
more than half of those consumers using pagers for personal reasons.
Opportunities also exist for the Company to deliver its services using a
variety of other existing and future personal communications technologies.
New services and enhanced versions of the Company s initial services will be
subsequently offered, and will utilize the capabilities of future one-way and
two-way mobile data technologies such as Digital Cellular Short Message
Service (SMS), PCS, NPCS, GSM, digital cellular, Addressable Cable TV and
other emerging communications technologies as they become available.
Future technology developments in the wireless messaging industry are
expected to evolve and drive subscriber growth as users demand more
sophisticated services and devices. Wireless technology breaks down into
one-way and two-way communications.
One-way communications is best typified by paging services. Industry
sources indicate that there are approximately 40 million pagers in service in
the United States--representing a penetration rate in excess of 15% of the
population.
While paging has been historically a one-way communications service,
technology advances are now providing two-way capability for wireless
messaging. In 1994, the FCC enhanced the potential for two-way messaging by
allocating and auctioning new frequencies for two-way paging services. With
the advent of two-way technology, the opportunity exists for the development
of two-way messaging products and services that will include inexpensive
stored voice and data acknowledgment paging services that complement the
cellular and broadband personal communication services offerings.
It is expected that the enhanced functionality of two-way messaging will
attract new subscribers through value-added services such as voice messaging,
wireless origination and delivery of e-mail, integration of wireless devices
into corporate wide area and local area networks, database access and
transaction services.
The wireless industry in general and wireless messaging in particular are
expected to experience significant subscriber growth into the next decade.
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RISK FACTORS
Shareholders or investors in shares of the Company's Common Stock should
consider the following risk factors, in addition to other information in this
Report.
1. LIMITED OPERATING HISTORY, OPERATING LOSSES AND FLUCTUATIONS. The
Company's operating results historically have been, and may continue to be,
subject to significant quarterly and annual fluctuations. For example, for
the year ended March 31, 1998, the Company had a net loss available to common
shareholders of approximately $14,738,804 and had an accumulated deficit of
approximately $21,674,410. As a result, the Company's operating results in
any quarter may not be indicative of its future performance. Factors
affecting operating results include: market acceptance of new products;
timing of significant orders; changes in pricing by the Company or its
competitors; timing of product announcements by the Company, its customers or
its competitors; order cancellations, increases in production and engineering
costs associated with new products. The impact of these and other factors on
the Company's revenues and operating results in any future period cannot be
forecasted with certainty. The Company's expense levels are based, in part,
on its expectations as to future revenues. Management anticipates that the
Company's average monthly revenue per subscription will decline in the
foreseeable future due to increased competition and a higher mix of
subscribers added through third party resellers.
2. RESEARCH AND DEVELOPMENT EXPENDITURES. The Company expects that its
net sales of existing information services may achieve approximate break-even
within the next eighteen months. However, any positive cash flow from the
Company's existing information services will be substantially used to fund
development of the Company's next generation of information services,
including without limitation, adapting existing information services to
two-way messaging technology. There can be no assurance that revenue growth
will be sufficient to fund research and development activities of the Company.
Any failure to achieve revenue projections will have a material adverse effect
on the Company's business, operating results and financial condition.
Consequently, there can be no assurance that the Company's consolidated
operations will ever become profitable.
3. NO ASSURANCE THAT GROWTH STRATEGY WILL BE ACHIEVED. The Company has
recently commenced operations in the United States and as of April 30, 1998
had a customer base of approximately 3,000 users. The Company anticipates it
will be profitable if it can expand its customer base to 10,000 users.
However, there can be no assurances the Company can achieve the desired
growth.
4. FUTURE CAPITAL NEEDS. The Company's capital requirements will depend
on numerous factors, including the progress of the Company's research and
development efforts with regard to next generation information services,
market acceptance of the Company's products, and resources the Company devotes
to marketing and distribution of its products. The Company's capital
requirements will also depend on the extent of the resources required to
expand engineering and development capacity and facilities, the extent to
which the Company generates market acceptance and demand, and other factors.
The timing and amount of such capital requirements cannot accurately be
predicted. The Company may be required to raise additional funds through
private or public financing, collaborative arrangements or other
relationships. There can be no assurance that the Company will not require
additional funding or that such additional funding, if required, will be
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available on terms attractive to the Company, if at all. Additional equity
financing may be dilutive to stockholders, and debt financing, if available,
may involve restrictive covenants. Collaborative arrangements may require the
Company to relinquish rights to certain of its technologies, products or
marketing territories.
5. MARKET ACCEPTANCE. As stated above, the Company's customer base in
the United States was approximately 3,000 on April 30, 1998. The Company's
success will be dependent upon the consumers and third party resellers' active
acceptance of the current information technology as developed by the Company
and future generations developed by the Company. The Company is unable to
predict how quickly, if at all, its products will be accepted. Any delay in
market acceptance may have a material adverse effect on the Company's
business, operating results and financial condition.
6. INTENSE COMPETITION. The telecommunications and information services
industry is a very competitive industry, and the Company will be competing
with larger companies with greater resources. The telecommunication and
information services industry is characterized by rapid technological progress
and intense competition from numerous organizations. New developments are
expected to continue at a rapid pace. Many of the Company's competitors have
significantly greater research and development, marketing, financial and human
resources than the Company and represent significant long-term competition.
If any of such competitors were to devote additional resources to the wireless
information business or focus its strategy on the Company's marketing and
product niches, the Company's results of operations could be adversely
affected. There can be no assurance that in the future the Company will be
able to develop and market products on a timely basis with sufficient features
in order to remain competitive. Furthermore, there can be no assurance that
other current and potential customers will not acquire or develop capacity to
compete directly with the Company. Any such factors may have a material
adverse effect on the Company's business, operating results and financial
condition.
Continuing technological advances in the communications industry and
regulatory and legislative developments make it impossible to predict the
extent of future competition in the businesses in which the Company operates.
Such technological advances and regulatory and legislative developments may,
for example, make available other alternatives to the services provided by the
Company, thereby creating additional sources of competition.
Certain competitors may also be able to use their substantial financial
resources to increase the already substantial pricing competition in the
markets in which the Company operates, which may have an adverse effect on the
Company's results of operations. There can be no assurance that the Company's
competitors will not succeed in developing services which are more effective
than those developed by the Company or which would render the Company's
technology and products less competitive or even obsolete.
7. ADVERSE EFFECT OF SUBSCRIBER DISCONNECTIONS. The Company expects
subscriber turnover as subscribers cancel for various reasons. The results of
operations of information service providers such as the Company are
significantly adversely affected by subscriber disconnections. In order to
realize net growth in active subscribers, disconnected users must be replaced,
and additional users must be added. However, the sales and marketing costs
associated with attracting new subscribers are substantial relative to the
costs of providing service to existing customers, and expenses associated with
each new subscription exceed the sales price and service initiation fee
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received by the Company. There can be no assurance that the Company can
replace subscribers that discontinue service and as such the loss of
subscribers and the uncertainty regarding attracting and retaining new
subscribers may have a material adverse effect on the Company's business,
operating results and financial condition.
8. ABILITY TO DEVELOP NEW PRODUCTS AND TECHNOLOGICAL CHANGES. The
markets served by the Company are characterized by rapid technological change
resulting in dynamic customer demands and frequent new product and service
introductions. The Company's markets can change rapidly as a result of
innovation in computer hardware, software and communication technology. The
Company's future results will depend in part on its ability to make timely and
cost-effective enhancements and additions to its technology and introduce new
services that meet customer demands. Maintaining flexibility to respond to
technological and market dynamics may require substantial expenditures.
An integral part of the Company's technology has been its proprietary
software. Early releases of software often contain errors or defects. There
can be no assurance that, despite extensive testing by the Company, errors
will not be found in the Company's new product releases and services prior to
or after commencement of commercial deployment, resulting in product
redevelopment costs and loss of, or delay in, market acceptance. Once these
products, processes and initiatives are introduced, no assurance can be given
that they will be generally accepted and used, or that they will fill the
strategic role that the Company intends for them.
9. DEPENDENCE ON KEY PERSONNEL. Since the first fiscal quarter of 1997,
the Company has experienced a significant expansion in its overall level of
business, including research and development, marketing, technical support and
sales. This expansion in the scope of the Company's business and operations
has resulted in a need for significant investment in infrastructure and
systems. The Company's future operating results will therefore depend on its
ability to successfully implement operating and financial procedures and
controls, to improve coordination among different operating functions, to
strengthen management information systems and to continue to hire additional
personnel, particularly in its customer service and engineering departments.
Although new management has taken actions intended to improve these areas,
there can be no assurance that the Company will be able to manage these
activities and implement these additional systems and controls successfully,
and any failure to do so could have a material adverse effect upon the
Company's operating results. In addition, the Company has recently effected
changes in its management team. The success of the Company will be dependent,
to a significant extent, upon the ability of the management team under the
direction of Anthony LaPine to successfully achieve the revenue and
performance goals of the Company.
There can be no assurance that the Company's new management team and
other new personnel can successfully manage the Company's rapidly evolving
business, and failure to do so would have a material adverse effect upon the
Company's operating results.
10. OWNERSHIP OF MAILXPRESS TECHNOLOGY. On June 14, 1996, the Company
entered into an agreement with Shalcor Investments, Inc. ("Shalcor") whereby
the Company sold and Shalcor purchased the MailXpress software. On August 21,
1996, the Company entered into an agreement with Shalcor in which Shalcor
granted to the Company an exclusive, worldwide right to use, modify and
sublicense the MailXpress software in exchange for the management and
marketing of the software by the Company. The term of the agreement continues
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until August 31, 2001, and can be extended for two additional two-year terms.
However, Shalcor may terminate the agreement before such time, if the Company
is in material default of the agreement and fails to cure such default. Any
termination of such agreement could have a material adverse effect on the
operations of the Company.
11. OWNERSHIP OF QUOTEXPRESS TECHNOLOGY. On May 6, 1997, the Company
entered into an agreement with 605285 Ontario, Inc. ("Ontario "), whereby the
Company sold and Ontario purchased QuoteXpress software. Also on May 6, 1997,
the Company entered into an agreement with Ontario in which Ontario granted to
the Company an exclusive, worldwide right to use, modify and sublicense the
QuoteXpress software in exchange for the management and marketing of the
software by the Company. The term of the agreement continues until August 31,
2007, and can be extended for two additional two-year terms. However, Ontario
may terminate the agreement before such time, if the Company is in material
default of the agreement and fails to cure such default. Any termination of
such agreement could have a material adverse effect on the operations of the
Company.
12. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. Although the Company
attempts to protect its intellectual property rights through patents,
copyrights, trade secrets and other measures, there can be no assurance that
the Company will be able to protect its technology adequately or that
competitors will not be able to develop similar technology independently.
Patents may not be issued with respect to the Company's pending patent
applications, and its issued patents may not be sufficiently broad to protect
the Company's technology. No assurance can be given that any patent issued to
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide adequate protection to the Company's
products. In addition, the Company has only limited patent rights outside
the United States, and the laws of certain foreign countries may not protect
the Company's intellectual property rights to the same extent as do the laws
of the United States.
The Company may from time to time be notified by third parties that it
may be infringing patents owned by such third parties. If necessary, the
Company may have to seek a license under such patent or modify its products
and processes in order to avoid infringement of such patents. There can be no
assurance that such a license would be available on acceptable terms, if at
all, or that the Company could so avoid infringement of such patents, in which
case the Company's business, operating results and financial condition could
be materially adversely affected.
13. LIMITED PUBLIC MARKET FOR COMPANY'S COMMON STOCK. Although there
presently exists a limited market for the Company's Common Stock, there can be
no assurance that the market will become more active or that the market can be
sustained. The investment community could show little or no interest in the
Company in the future. As a result of this limited liquidity purchasers of
the Company's securities may have difficulty in selling such securities should
they desire to do so. The Common Stock currently trades on the NASD's
Bulletin Board. The Company has applied for listing on the NASDAQ Small Cap
Market and is currently undergoing a detailed review by the NASDAQ Listings
Qualifications Board.
14. DIVIDENDS. No dividend has been paid on the Common Stock since
inception and none is contemplated at any time in the foreseeable future.
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15. SHARES ELIGIBLE FOR FUTURE SALE. Of the shares of the Company's
Common Stock outstanding, 1,673,868 are "restricted securities" and under
certain circumstances may in the future be sold in compliance with Rule 144
adopted under the Securities Act of 1933, as amended. Future sales of those
shares under Rule 144 could depress the market price of the Common Stock in
any market which may exist.
16. PREFERRED STOCK. The Company is authorized to issue 500,000 shares
of Preferred Stock, $.01 par value. The Preferred Stock may be issued in
series from time to time with such designation, rights, preferences and
limitations as the Board of Directors of the Company may determine by
resolution. The potential exists, therefore, that Preferred Stock might be
issued which would grant dividend preferences and liquidation preferences to
preferred shareholders over common shareholders. Unless the nature of a
particular transaction and applicable statutes require such approval, the
Board of Directors has the authority to issue these shares without shareholder
approval. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company without any further action by
shareholders. There are currently 274,000 shares of Preferred Stock
outstanding convertible into 274,000 shares of Common Stock.
THE BUSINESS
The Company is in the business of developing and marketing information
services for business and personal use, utilizing wireless and other emerging
information delivery technologies. The Company has developed an information
filtering, matching and messaging software engine which is utilized in each of
the Company's services.
The Company's current information services include QuoteXpress,
SplitXpress, CommodityXpress, MailXpress and MessageX. Four of the Company's
five services provide information filtered according to individual customers'
criteria, and deliver it using a variety of wireless and wire-line based data
communications media; SplitXpress provides a broadcast of corporate action
information.
Information delivered using wireless media will typically be either short
form, or will simply be notification of more lengthy information which will be
subsequently delivered using a less costly wire-line connection.
Initially, one-way alphanumeric paging will be primarily utilized for
wireless delivery, with other wireless data services including two-way
messaging and PCS and digital cellular short message service being supported
as these technologies are rolled out.
Wire-line based delivery mechanisms will include fax and the Internet,
with future technologies such as addressable cable TV being supported as they
become available.
THE PRODUCTS
QUOTEXPRESS
QuoteXpress provides detailed financial market quotations to investors
via an alphanumeric pager within seconds of the specified event. Each end user
may customize their service to his or her own portfolio and track a variety of
indices or valuation characteristics, trading volume fluctuations, price
fluctuations or price floors or ceilings.
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The QuoteXpress system monitors world wide financial market information,
which potentially extends to over 200,000 issues traded on more than 100
exchanges in 30 countries. Monitored data include market index information
and business company news from a variety of sources. This information is
compared with customer profiles which indicate the specific issues, market
indices and other information that each customer wishes to track together with
customer specific reporting criteria that trigger the generation and
transmission of messages. These reporting criteria include customer specific
high and low threshold values, price change values, and daily levels for each
issue. When QuoteXpress determines a match between the customer reporting
criteria and the financial market information, it automatically transmits a
message to the customer's alphanumeric pager.
One of the most significant features of QuoteXpress is that the system
monitors real time ticker data for all North American exchanges and generates
and transmits customer messages virtually instantaneously. As a result,
messages are typically received by users close to real time, within less than
two minutes of the triggering event being reported on the ticker, with typical
reporting delays of less than 120 seconds (this delay being due almost
entirely to the message processing delays inherent in most paging and wireless
data networks).
QuoteXpress quotation messages can include the following information:
* Stock symbol
* Last trade price
* Bid and ask prices
* Daily high and low
* Volume traded
* Daily price change and price change indicator from
previous day's close
* Last trade size
* QuoteXpress message code (indicated why message was sent -
i.e. which "alert" threshold was exceeded)
* Time of message receipt
QuoteXpress also has a feature called "Intra-day." Intra-day provides
quote updates at predetermined times throughout the day. A customer can
pre-program up to 58 delivery "time windows" associated with a quote. The
customer can enter a desired quote symbol and then select from volume, price
or daily change for that stock.
To date, the principal users of real time financial markets information
have been professionals involved in the financial industry such as stock
brokers and fund managers. These individuals typically require instant access
to a wide variety of data for the purpose of providing price quotations to
clients or performing detailed analysis of historical market data. For
example, a stock broker is often called upon to provide an instant price
quotation to a client for an issue traded on any of the North American, Asian
or European markets. It is to meet these requirements, that traditional
financial markets information systems such as brokers quotation terminals,
have been designed.
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In contrast, individual investors are typically interested in a
relatively small number of issues which comprise their portfolio, and
additional issues that they may be considering buying or trading. Rather than
requiring price quotations on demand, individual investors require to be
alerted whenever unusual price movement occurs, or threshold prices
representing buy or sell targets are achieved.
QuoteXpress is primarily targeted at the individual investor market
sector, and in particular at investors who trade their investments frequently.
The Company's research has indicated that a high percentage of the Company's
initial customer base will be comprised of upwardly mobile business
professionals in the 30 to 50 year age bracket, having above average incomes,
who are early adopters of technology.
The Company intends to make future enhancements to QuoteXpress that will
include (i) the ability to monitor additional financial markets and
information, including futures and options; and (ii) enhanced functionality to
utilize the capabilities of two-way wireless data and allowing users to adjust
their filtering criteria, utilizing their wireless device.
COMMODITYXPRESS
CommodityXpress tracks commodity feeds from the Chicago Board of Trade,
Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York
Cotton Exchange and the coffee, sugar and cocoa exchange. Real-time alerts
are generated when a price for a given commodity exceeds a customer's
preprogrammed setting. These "alert" criteria include:
- fixed increases or decreases in the price of the commodity
- relative high and low market price thresholds of a particular
commodity
CommodityXpress also has a feature called Intra-day. Intra-day provides
commodity updates at predetermined times throughout the day. A customer can
preprogram up to 58 delivery "time windows" associated with a commodity. The
customer can enter a desired commodity symbol and then select from volume,
price or daily change for that commodity.
CommodityXpress is primarily targeted at the individual futures trader
sector. The customer base is comprised of mobile professionals between 30 to
50 years of age with above average incomes.
SPLITXPRESS
SplitXpress is a monitoring tool that notifies a customer, in real-time,
of stock split news, buybacks, takeovers, mergers and surprise earnings
announcements and more. The system utilizes advanced computer algorithms to
search for major market news and, using state-of-the-art satellite technology,
sends the information to a customer's alphanumeric pager or PCS phone.
Target customers of SplitXpress are the QuoteXpress and CommodityXpress
segments combined.
MAILXPRESS
MailXpress caters specifically to e-mail users, and allows an e-mail user
to be notified of incoming computer mail via an alphanumeric pager. The
service also allows a customer to filter incoming e-mail, so that he or she is
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only notified of mail that meets defined criteria such as the name of the
sender, subject matter, etc. MailXpress also offers the ability for users to
retrieve their e-mail by having it sent to a fax machine or by using the world
wide web. The Company currently offers two versions of MailXpress--the
MailXpress Alphanumeric and MailXpress Numeric.
MAILXPRESS ALPHANUMERIC is a wireless communication service that alerts
the customer of critical e-mail via their alphanumeric pager or PCS phone.
MailXpress Alphanumeric provides a filtering system which allows the end user
to select desired messaging format and criteria for alerts. MailXpress
Alphanumeric is also designed to designate the subscriber a new MailXpress
address or the option of utilizing their existing e-mail address.
When retrieving e-mail, the subscriber can receive the complete text of
the e-mail from any fax machine or obtain a text-to-voice reading from any
touch-tone phone.
MAILXPRESS NUMERIC alerts the customer of critical e-mail via their
numeric pager. MailXpress Numeric provides a filtering system which allows
the end user to select desires messaging format and criteria for alerts. Like
the alphanumeric version, MailXpress Numeric is designed to designate the
subscriber a new MailXpress address or the option of utilizing their existing
e-mail address.
When retrieving e-mail, the subscriber can receive the complete text of
the e-mail from any fax machine or obtain a text-to-voice reading from any
touch-tone phone.
The Company intends to develop additional functionality for MailXpress,
including (i) the ability for users to adjust their e-mail filtering criteria
using their wireless device; and (ii) the ability for users to request that a
portion or the entire text of an e-mail message be delivered directly to their
wireless device.
MESSAGEX. MessageX allows anyone with Internet access to send text
messages directly to a MessageX user's alphanumeric pager or PCS phone. The
sender does not need to know complex account numbers, PIN numbers or access
codes. By eliminating the requirement of the sender to know PIN numbers or
carrier specific message sending details, MessageX greatly simplifies the
process of sending messages to users of PCS phones or pagers. All the sender
needs to know is the MessageX user's e-mail address. MessageX uses
proprietary patent pending technology developed by Datalink.
FUTURE INFORMATION AND COMMUNICATION SERVICES
The Company plans to build on its current product line, and to develop a
variety of new one-way and two-way services which offer more capabilities at
increasingly lower prices. The Company's core technologies have been
developed with the future in mind.
The Company's information filtering, matching and messaging software
engine, which is utilized in each of the Company's services, has been
developed in a manner to facilitate development of a variety of one-way and
two-way information services. As a result, the Company is able to develop new
information systems in significantly less time than if such systems were
designed from the conceptual stage.
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The Company has a variety of future products planned or under
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development, which are designed to utilize one and two-way alphanumeric paging
technology and other two-way wireless technologies as they become available
for the consumer market. These products could address a variety of areas
including the following:
* Additional financial markets information including futures,
options and currencies
* Company news
* Weather reports including general and specialty weather
information for a variety of areas including agriculture
and aviation
* General news clipping notification and fax-back or e-mail
(Internet) services
* Horse racing odds and results
* General sports results and odds
* Local entertainment information
* General life style information
OWNERSHIP OF MAILXPRESS TECHNOLOGY
On June 14, 1996, the Company entered into an agreement with Shalcor
Investments, Inc. ("Shalcor") whereby the Company sold and Shalcor purchased
the MailXpress software. On August 21, 1996, the Company entered into an
agreement with Shalcor in which Shalcor granted to the Company an exclusive,
worldwide right to use, modify and sublicense the MailXpress software in
exchange for the management and marketing of the software by the Company. The
term of the agreement continues until August 31, 2001, and can be extended for
two additional two-year terms. However, Shalcor may terminate the agreement
before such time, if the Company is in material default of the agreement and
fails to cure such default. Any termination of such agreement could have a
material adverse effect on the operations of the Company.
OWNERSHIP OF QUOTEXPRESS
On May 6, 1997, the Company entered into an agreement with 605285
Ontario, Inc. ("Ontario"), whereby the Company sold and Ontario purchased
QuoteXpress software. Also on May 6, 1997, the Company entered into an
agreement with Ontario in which Ontario granted to the Company an exclusive,
worldwide right to use, modify and sublicense the QuoteXpress software in
exchange for the management and marketing of the software by the Company. The
term of the agreement continues until August 31, 2007, and can be extended for
two additional two-year terms. However, Ontario may terminate the agreement
before such time, if the Company is in material default of the agreement and
fails to cure such default. Any termination of such agreement could have a
material adverse effect on the operations of the Company.
SALES AND MARKETING STRATEGY
The Company's customers include individuals, large and small companies,
and other organizations who have a need for timely information -- while still
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retaining mobility and accessibility to complete their routine activities.
This information falls into several broad categories, including:
- FINANCIAL INFORMATION SERVICES, targeted at professionals and
individual investors interested in monitoring the financial markets and the
stock performance of individual companies.
- LIFESTYLE INFORMATION SERVICES, targeted at a broad range of mobile
individuals who are interested in lifestyle-oriented information, such as
weather forecasts, sports updates, horoscopes and lotteries.
- MESSAGING SERVICES, which provides a broad range of mobile individuals
the ability to stay in contact with important information, individuals and
events.
The Company utilizes a number of direct and indirect distribution
channels to market its services, including direct response advertising,
Internet marketing (through the Company's Internet website) and alliances with
a variety of channel partners in the financial information services, stock
brokerage, wireless paging, PCS and other defined market segments. Management
believes this diversified approach to marketing and sales is necessary for the
Company to establish itself and product brands in a rapidly-changing
marketplace, and develop a dominant position there.
In order to expand its customer base as rapidly as possible, the Company
has established, and intends to continue to establish, strategic alliances
with key suppliers of complementary products and services to those offered by
the Company, and other major suppliers in the wireless communications
industry.
COMPETITION
The Company is participating in a highly competitive industry, with
competition from a broad range of both large and small service providers.
Certain of the companies have far greater financial, technical and marketing
resources than the Company.
Industry participants offering a service which competes with QuoteXpress
include Data Broadcasting Corporation, Reuters, Intelligent Information
Incorporated and Notable Technologies.
The Company believes it can distinguish QuoteXpress from competing
products based on its unique filtering capabilities and real-time delivery.
Industry participants offering a service which competes with MailXpress
include Interpage Network Services, InterNet Page, CompuServe, PageMart,
Metrocall, CID Technologies, Infinite Technologies, Innosoft International,
Inc., Norwood Ltd. and GTE Socket Communications.
EMPLOYEES
At March 31, 1998, the Company had 49 full-time employees, approximately
19 of whom were engaged in sales and customer support, 7 in marketing, 8 in
finance and administration, and 15 in engineering. No employees of the
Company are covered by a collective bargaining agreement.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's sales, marketing and customer support facilities are
located in San Jose, California. The Company occupies a 6,000 square foot
headquarters facility under a lease which expires on August 31, 2002. The
monthly rent for this facility is approximately $17,000. The Company's
research and development group is located in Vancouver, British Columbia,
where the Company leases approximately 2,200 square feet for a monthly rent of
approximately $5,000 under a lease which expires August 31, 2000. The rent
for the Vancouver office increases approximately 10% per year.
On January 2, 1997, the Company entered into a three year lease with Mr.
LaPine and his wife whereby the Company leases from the LaPine's 4,000 square
feet of office space located in the LaPine's home at an annual rate of
$100,000 or $8,333.37 per month. The lease terminates if Mr. LaPine's
employment with the Company is terminated.
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future, however, the Company anticipates
further expansion and development within its space to accommodate its
increased activities. Should the Company need additional space, management
believes it will be able to secure such additional space at commercially
reasonable rates.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings in which the Company is a party,
and the Company is not aware of any threatened legal proceedings involving the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 8, 1998, shareholders holding 10,582,523 shares (pre-split) of
the Company's $.001 par value Common Stock (the "Common Stock"), and 141,558
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock"), signed written consents approving a one for ten (1 for 10) reverse
split of the Company's outstanding Common Stock and an increase in the number
of shares of Common Stock which may be acquired upon the exercise of options
under the Company's 1996 Stock Option Plan from 300,000 to 500,000 after the
reverse split.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock trades in the
over-the-counter market, under the symbol "DASY". The following table sets
forth the high and low bid quotations for the Company's Common Stock for the
periods indicated as reported by the OTC Bulletin Board since June 25, 1996,
when the Company's Common Stock resumed trading for the first time in the last
three years. These prices are believed to be inter-dealer quotations and do
not include retail mark-ups, mark-downs, or other fees or commissions, and may
not necessarily represent actual transactions.
QUARTER ENDED HIGH BID LOW BID
------------------ -------- -------
June 30, 1996 $40.00 $30.00
September 30, 1996 $21.25 $21.25
December 31, 1996 $30.125 $25.00
March 31, 1997 $21.88 $20.00
June 30, 1997 $ 5.31 $5.31
September 30, 1997 $ 5.10 $4.70
December 31, 1997 $ 3.55 $3.45
March 31, 1998 $ 6.56 $6.44
A 1 for 10 reverse stock split became effective February 9, 1998. Share
bid prices have been adjusted to reflect this split.
(b) HOLDERS. As of March 31, 1998, the Company had approximately 876
beneficial holders of the Company's Common Stock.
(c) DIVIDENDS. The Company has never paid a cash dividend on its Common
Stock and does not expect to pay a cash dividend in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES. None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
Net sales increased from $196,891 in 1997 to $962,461 in 1998. The net
increase in sales is due to the development of a sales and marketing strategy,
the release of new products, and the development of an effective direct sales
force. The Company was a development stage company prior to the current
fiscal year, and as such was in the process of developing a sales and
marketing strategy, establishing a market presence, developing and refining
products and creating and developing a direct sales force. The following
table illustrates the comparative sales of products by product type for each
of the last two years.
NET SALES FOR THE FISCAL YEAR ENDED
PRODUCT MARCH 31, 1998 MARCH 31, 1997 INCREASE
- ----------------- ---------------- ---------------- --------
QuoteXpress $786,974 $ 196,891 $590,083
SplitXpress 166,700 0 166,700
CommoditiesXpress 7,085 0 7,085
Other 1,702 0 1,702
-------- --------- --------
Totals $962,461 $ 196,891 $765,570
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During the fiscal year the Company recruited executives to complete the
sales and marketing strategic plan. These individuals were able to identify
key accounts and markets. Together with the engineering and research and
development staff, these executives were able to develop a financial product
portfolio. The executives also have developed the direct sales force.
Advertisements have been developed for the appropriate media. The engineering
department has completed development of the SplitXpress and ComomoditiesXpress
products, completed an upgrade (in August 1997) of the QuoteXpress product,
and has begun development of a number of new products which are scheduled for
release in the fiscal year ended March 31, 1999.
COST OF REVENUES AND GROSS MARGIN
The cost of revenues has increased from the prior year, due to the
increase in net sales. Cost of revenues represents the costs necessary to
provide the services to customers, and as more services are provided to more
customers, the costs of providing those services rises. Examples of this type
of costs are the costs to obtain data feeds from the exchanges, costs to
maintain the customer service department and pager rental costs. The
following table shows the net sales, cost of revenues and gross margin for the
years ended March 31, 1998 and 1997:
YEARS ENDED MARCH 31, INCREASE
1998 1997 $ %
-------- -------- -------- -------
Net sales $962,461 $196,891 $765,570 388.8%
Cost of revenues $530,545 $159,058 $371,487 233.6%
Gross margin $431,916 $ 37,833 $394,083 1041.6%
As indicated in the table, the increase in sales has not caused a
proportional increase in the cost of revenues. This is due to the fact that
as the Company increases its sales, economies of scale are achieved, and the
Company operates more efficiently. In effect, each dollar of net sales costs
less to produce.
OPERATING EXPENSES:
Operating expenses have increased from the prior year. Operating
expenses are separated into three categories: research and development, sales
and marketing and general and administrative. The following table illustrated
the changes in these three categories of operating expenses.
YEAR ENDED MARCH 31, INCREASE (DECREASE)
DESCRIPTION 1998 1997 $ %
- -------------- ---------- ---------- ---------- --------
Research and
Development $ 755,080 $ 544,585 $ 210,495 38.7 %
Sales and
Marketing 2,133,635 1,023,492 1,110,143 108.5 %
General and
Administrative 2,406,434 3,907,438 (1,501,004) (38.4)%
---------- ---------- ---------- -----
Totals $5,295,149 $5,475,515 $ (180,366) ( 3.3)%
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Research and development expenses are expenses incurred to develop new
products and to develop product enhancements for current products. These
expenses are incurred in the Company's engineering offices located in
Vancouver B.C. Research and development expenses increased during the fiscal
year ended March 31, 1998 when compared to the year ended March 31, 1997.
This increase was due to the Company incurring costs for product enhancements
for the MailXpress product as well as for the QuoteXpress product.
Additionally, SplitXpress and CommoditiesXpress were completed and launched
during the fiscal year. A number of products are close to release, and it is
anticipated that they will be launched in fiscal year ended March 31, 1999.
Sales and marketing expenses consist of costs incurred to market the
Company's products through media development, advertising in such media as
television and financial publications, attendance at trade shows, and the
costs required to develop an effective sales and marketing strategy. Also
included in this category are costs for the maintenance of both an inside
sales staff, and an outside key account sales force. Sales and marketing
costs have increased when compared with the prior fiscal year. Prior to the
current fiscal year, the Company had only one product to market and it was
marketed through a direct sales force. Advertising was done in a limited
number of publications, and a minimal number of employees were maintained in
the marketing and sales department. During the fiscal year ended March 31,
1998, the Company hired 14 additional marketing and sales staff, did market
research, developed new sales and marketing materials for QuoteXpress and
created sales and marketing materials for the new products, SplitXpress and
CommoditiesXpress. Television advertising was initiated and additional
written publications were selected for advertising.
General and administrative expenses are classified as costs incurred in
the development and operation of the infrastructure of the organization.
These consist of accounting costs, legal costs, rent, depreciation of Company
fixed assets, utilities and other overhead related costs. Also included in
this category are salaries of all administrative personnel, and the
recruitment costs necessary to obtain those individuals. Costs associated
with this category have decreased during the fiscal year ended March 31, 1998
when compared to the fiscal year ended March 31, 1997. This change is due to
the fact that the Company incurred considerable costs when the administrative
function was being established in the fiscal year 1997. These costs were of a
one-time nature and included the costs of providing equity related incentives
in exchange for services which were charged to general and administrative
expense. The reduction in equity related incentives from 1997 to 1998 has
been partially offset due to the fact that the Company has grown considerably
in the last year, and has moved to a larger facility, hired additional staff
and increased expenditures for utilities and other costs related to increases
in space and personnel.
NON-OPERATING REVENUES AND EXPENSES
Non-operating revenues and expenses consist of interest income,
amortization of technology advance deferred revenue and owners fees and
associated interest income related to the sale of technology. The following
table illustrates the changes in the other income (expense) account.
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YEAR ENDED MARCH 31, INCREASE (DECREASE)
DESCRIPTION 1998 1997 $ %
- ----------- ------------ ---------- ---------- --------
Owners fee
sales of
technology $(1,570,000) $(273,750) $1,296,250 473.5%
Interest income
sales of
technology 1,570,000 273,750 1,296,250 473.5%
Amortization of
technology
advance 467,949 136,201 331,748 243.6%
Interest income 367,436 136,070 231,366 170.0%
Miscellaneous (3,956) (144,000) 140,044 97.3%
----------- --------- ---------- -----
Totals $ 831,429 $ 128,271 $ 703,158 548.2%
The Company completed the sale of the QuoteXpress and MailXpress
technologies to Canadian corporations. These transactions resulted in an
increase in the owners fee and related interest income. The cash received in
advance is being treated as a deferred revenue item and being recognized over
the life of the agreement. Interest income has increased due to interest
earned on cash deposited from the private placement, as well as interest
earned on the note receivable from the officer of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed a private placement during the fiscal year ended
March 31, 1998. As a result of the private placement, the Company netted
approximately $8,000,000. The Company also completed the sale of the
QuoteXpress product, a provision of which was an up-front payment of
approximately $1,300,000 and was recorded as deferred revenue to be recognized
over the life of the agreement. The sources and uses of cash during the years
ended March 31, 1998 and 1997 are as follows:
YEAR ENDED MARCH 31, INCREASE
1998 1997 (DECREASE)
----------- ----------- -----------
Cash used in
operating activities $(3,429,486) $(2,491,162) $ 938,324)
Cash used in
investing activities (349,568) (295,096) (54,472)
Cash provided by
financing activities 9,216,264 4,345,211 4,871,053
----------- ----------- -----------
Net increase in cash
and cash equivalents $ 5,437,210 $ 1,558,953 $ 3,878,257
As of March 31, 1998 the Company had cash and cash equivalents in the
amount of $7,353,719. Working capital has increased from $1,467,334 as of
March 31, 1997, to $6,181,340 as of March 31, 1998. The Company has a letter
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of credit with a bank in the amount of $200,000 and has obtained a credit line
subsequent to year end in the amount of $1,000,000. Management believes that
it has sufficient working capital for at least the next twelve months.
The Company has no material commitments for capital expenditures.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the millenium (year 2000) approaches. The
"year 2000" problem is pervasive and complex, as virtually every computer
operation will be affected in the same way by the rollover of the two-digit
year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data
or cause a system to fail. The Company is utilizing both internal and
external resources to identify, correct or reprogram, and test its systems for
year 2000 compliance. It is anticipated that all reprogramming efforts will
be completed by March 31, 1999, allowing adequate time for testing. This
process includes getting confirmations from the Company's primary vendors that
plans are being developed or are already in place to address processing of
transactions in the year 2000. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will also be
converted in a timely manner, or that any such failure to convert by another
company would not have an adverse effect on the Company's systems. Management
is in the process of completing its assessment of the year 2000 compliance
costs; however, based on information to date (excluding the possible impact of
vendor systems), management does not believe that it will have a material
effect on the Company's earnings.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are set forth on pages F-1 through F-25 hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company and its wholly-owned
subsidiary, their ages and positions held in the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
- ----------------- --- ------------------------------------
Anthony N. LaPine 55 President, Chief Executive Officer
and Director
Thomas C. Bland 45 Chief Financial Officer and Treasurer
Sara A. Fiscus 30 Secretary
Marshall Geller 58 Director
Fred Hoar 50 Director
David Ladd 51 Director
There is no family relationship between any Director or executive officer
of the Company. All Directors and Officers will hold office until the next
Annual Meeting of Shareholders.
The following sets forth biographical information as to the business
experience of each Officer and Director of the Company for at least the past
five years.
ANTHONY N. LAPINE has served as President, Chief Executive Officer and a
Director of the Company since June 27, 1996. Mr. LaPine's career began at IBM
in 1964, where his technical achievements earned him several patents and
"outstanding contribution" awards. His Data Synchronization invention (Patent
3,701,039) remains the state of the art in today's disk drives. In 1969, he
was recruited as one of the founders of Memorex's Equipment Group where he was
instrumental in giving birth to the floppy disk drive. He subsequently played
a major role in Memorex's turnaround. After Memorex's first billion dollar
revenue year, he was instrumental in the sale of Memorex to Burroughs, now
Unisys. In 1981 Mr. LaPine was recruited to re-engineer Irwin/Olivetti where
he orchestrated the invention of the first removal cartridge tape backup in
personal computers. This development opened a new billion dollar market
catapulting the company to profitability and an initial public offering. In
1983, he formed LaPine Technology, raising $30 million and launched the new
3-1/2 inch Winchester disk drive technology. He led his company's growth to a
profitable $60 million in sales before selling the company to his alliance
partners, Prudential and Kyocera, in 1987. In 1987 he formed The LaPine Group,
a private investment and turnaround management firm which he owned and
operated until December 1994. From December 1994 to June 1996, he served as
CEO of Andor International, a company launched by Gene Amdahl. After
reorganizing the company, Mr. LaPine negotiated its sale to the Fortel Group
where he now serves as Chairman. He lectures in the Graduate School of
Business at the University of San Francisco. He has served as Chairman of the
Hoover Institution's Council on Economic Development and as a strategic
advisor to the Russian government on the transition to capitalism. In 1993,
he received the San Jose State University "Alumni Award of Distinction" and is
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the recipient of the Santa Clara University 1994 "Distinguished Engineering
Alumni Award." He received a BSEE Cum Laude from San Jose State University in
1965, an MSEE from Santa Clara University in 1971, and an MBA from the
University of San Francisco in 1986.
THOMAS C. BLAND has served as the Company's Chief Financial Officer since
March 15, 1997, after consulting for the Company since August 1996. Mr. Bland
has extensive experience in technology companies. He has served as an
advisor, founder and chief financial officer to numerous software, internet
and biotechnology companies. He also has extensive experience in mergers and
acquisitions, SEC reporting, and start-up financing.
Mr. Bland's career began with Ernst & Young and Coopers & Lybrand where
he was a Senior Manager, where he specialized in small business and start-up
technology companies. He then established his own consulting practice where
he served as a contract Chief Financial Officer for software, internet and
biotechnology companies which were in the start-up phase of their development.
He assisted a number of the company founders and entrepreneurs in writing
their business plans, developing their operating systems, drafting their
financial projections, establishing product pricing and financial reporting,
as well as assisting them in obtaining funding.
Mr. Bland has a Bachelor of Science degree from the University of
California, a Master of Science from the University of Arizona, and is a
Certified Public Accountant. He belongs to numerous professional
organizations, including the American Institute of Certified Public
Accountants, and the State Society of C.P.A.'s.
SARA A. FISCUS has served as the Company's Corporate Secretary since
March 31, 1998 and has been the Company's In-House Counsel since October 1,
1997. Prior to joining the Company, Ms. Fiscus served as the Director of
International Business Development at PC Quote, Inc. from January 1, 1997 to
September 9, 1997 and the Program manager of PC Quote International from
February 22, 1996 to December 31, 1996. Ms. Fiscus received her law degree
form the University of Wisconsin Law School in August of 1995 while on an
exchange program at Diego Portales University in Santiago, Chile and became a
member of the Wisconsin State Bar in February of 1996. She received Bachelor
of Arts Degrees in English Literature and Classics from the University of
Kansas in December of 1990.
MARSHALL GELLER has served as a Director of the Company since November
1997. He is currently the Chairman, Chief Executive Officer and Founding
Partner of Geller & Friend Capital Partners, Inc., which was formed in
November 1995. From 1991 to October 1995, Mr. Geller was the Senior Managing
Partner and founder of Golenberg & Geller, Inc., a merchant banking and
investment company. From 1988 to 1990, he was the Vice-Chairman of Gruntal &
Company, a New York Stock Exchange investment banking firm. From 1967 through
1988, Mr. Geller was Senior Managing Director for Bear Stearns & Company.
While with Bear Stearns, Mr. Geller was the Managing Partner in charge of all
areas of Corporate Finance, Public Finance, Institutional Equities and Debt
for Bear Stearns offices in Los Angeles, San Francisco, Chicago and Hong Kong.
He was also a director of Shun Loong-Bear Stearns offices in Los Angeles, San
Francisco, Chicago and Hong Kong. He was also director of Shun Loong-Bear
Stearns Far East and Sun Hung Kai-Bear Stearns, both leading Chinese
investment banking firms. Mr. Geller also helped pioneer Bear Stearns' equity
and investment banking business in Japan, Hong Kong and China.
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Marshall Geller formerly served as Interim Co-chairman of Hexcel
Corporation (NYSE: HXL) and is currently on the Board of Directors. Mr.
Geller was formerly interim President and Chief Operating Officer of Players
International, Inc. (PLAY), and now serves on its board and is Chairman of its
Investment Committee. Mr. Geller also serves as Vice Chairman on the board of
Value Vision International, Inc. (VVTV), and serves as Chairman of its
Investment Cabletel Communications Corporation (AMEX: TTV). He has served on
the board of numerous charitable organizations, ranging from the Coro
Foundation to the Jewish Federations of Los Angeles, San Francisco and
Chicago, to The Center for the Partially Sighted.
Mr. Geller has served on the Illinois Task Force on Financial Services,
an organization created by Governor James R. Thompson to analyze and suggest
needed changes in the State Financial Services Regulations. Mr. Geller also
served on former Mayor of Los Angeles, Tom Bradley's Advisory Board to the
California Corporation Commissioner, assisting in the study of securities and
real estate industries.
FRED HOAR has served as a Director of the Company since March 1998. He
has over 35 years of experience in public affairs, financial relations and
marketing. He has shaped and implemented communications strategies for some
of America's seminal technology-based companies, including Apple, Fairchild,
Genentech and RCA.
Mr. Hoar joined Boston-based Miller Communications, a leading
international high-tech public relations agency, in 1989. He subsequently
became president of Miller/Shandwick Technologies West, with responsibility
for offices in Silicon Valley, Los Angeles and Dallas. In 1997 he was named
to the additional position of chairman of Shandwick Technologies. The
agency's clients include Compaq Computers, Hewlett Packard, Kodak, Microsoft,
Philips Electronics and Xerox.
In the early 1980's, Hoar was vice president of communications for Apple
Computer, directly involved in taking the company public and launching the
Lisa and Macintosh computers. He also served as vice president, communication
and marketing services for Fairchild Camera & Instrument; vice president,
corporate communications for Genentech; director, worldwide communications for
Raychem; and division vice president, public affairs and advertising for RCA.
Mr. Hoar holds a B.A. degree cum laude in American history and literature
from Harvard College and an M.A. in editorial journalism from the University
of Iowa. He began his career with the Associated Press and as an instructor
in English and journalism at the University of Northern Iowa.
A frequent speaker on marketing, communications and technology, Fred Hoar
has addressed such groups as The Conference Board, the Churchill club, the
Business Hall of Fame, Technologic Partners, Dataquest, the Semiconductor
Industry Association, the AEA, the IABC, Robertson Stephens, Lehman Brothers
and the Association for Corporate Growth.
Fred Hoar is a trustee of Golden Gate University and a member of the
advisory board of the Santa Clara University School of Business and the San
Jose Business Journal, the Enterprise Network, the Harvard Club of Silicon
Valley and Junior Achievement.
DAVID LADD has served as a Director of the Company since March 1998. He
is a telecommunications expert, who finds and cultivates new
telecommunications companies. He is currently Vice President in the New
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<PAGE>
Ventures Group of Lucent Technologies, where his primary responsibility is to
help commercialize Bell Labs technology in partnerships with Silicon Valley
venture capitalists and entrepreneurs. He joined Mayfield fund in 1998 as a
partner. In addition, he has also held senior management positions at a
number of telecommunications companies, including Rolm Corp., Octel
Communications Corp. and VMX Inc.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
Director, Officer or beneficial owner of more than 10% of the Company's Common
Stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other Executive Officer who
received compensation in excess of $100,000 for the fiscal years ended March
31, 1998 and 1997. No executive officer received any compensation for the
year ended March 31, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- ---------------------------
SECURI-
TIES
UNDERLY-
OTHER RE- ING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- -------- ----- ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anthony LaPine, 1998 $140,000 -0- 11,000 -0- 200,000 -0- -0-
President and 1997 $195,000 -0- 11,000 -0- 70,000 -0- -0-
Chairman of the <FN2> <FN3>
Board
Nicholas Miller 1998 $135,000 -0- 9,000 -0- 50,000 -0- -0-
<FN1> 1997 $180,000 -0- 12,000 -0- 70,000 -0- -0-
<FN2> <FN3>
----------------
<FN>
<FN1>
Mr. Miller resigned as Director and Secretary of the Company and as Chief
Executive Officer, President and Director of DSC DataLink Systems, the
Company's wholly owned Canadian subsidiary in February 1998.
<FN2>
Represents car allowance.
24
<PAGE>
<PAGE>
<FN3>
Represents warrants to purchase shares of the Company's stock at $3.75 which
vest over a three-year period.
</FN>
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants made to the above officers during the last
fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/WARRANTS/ OPTIONS/WARRANTS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
- --------------- ------- -------- ---------------- ----------------
Anthony LaPine -0- -0- 70,000 / 0 0 / 0
Nicholas Miller -0- -0- 70,000 / 0 0 / 0
EMPLOYMENT AGREEMENTS
Effective May 1, 1996, the Company entered into a three year employment
agreement with Anthony LaPine, the Company's President, pursuant to which he
receives a base salary of $140,000 per year, plus discretionary increases in
accordance with the Company's normal review procedures. In addition, subject
to the achievement of certain mutually agreed upon performance goals, Mr.
LaPine will be paid an annual bonus equal to 86% of his base salary. Mr.
LaPine also receives a $1,000 per month car allowance. In the event that the
Company terminates this agreement prior to the expiration of the three year
term for other than cause or disability, or if Mr. LaPine terminates the
agreement for "good reason" (as defined in the agreement), the Company is
required to continue paying the salary and other benefits for the remainder of
the term of the agreement. Mr. LaPine also receives full health, dental,
vision and disability insurance.
Concurrently with the execution of the employment agreement, Mr. LaPine
entered into a Stock Purchase Agreement pursuant to which he purchased 200,000
shares of the Common Stock of Datalink Communications Corporation (which were
later exchanged for 200,000 shares of the Company's Common Stock), and as
payment therefor, Mr. LaPine executed a non-recourse promissory note in the
amount of $1,500,000. The note bears interest at 5% per annum and the
principal plus interest are due on or before April 1, 2001. As security for
the note, Mr. LaPine granted the Company a security interest in the 200,000
shares of Common Stock.
On May 20, 1996, the Company entered into a Loan Forgiveness Agreement
with Mr. LaPine which provided that Mr. LaPine's $1,500,000 promissory note
would not be forgiven if Mr. LaPine has continued to serve as the Company's
Chief Executive Officer through May 1, 1999, and there are no uncured defaults
by Mr. LaPine under his Employment Agreement on May 1, 1999.
On January 2, 1997, the Company entered into a three year lease with Mr.
LaPine and his wife whereby the Company leases from the LaPine's 4,000 square
25
<PAGE>
<PAGE>
feet of office space located in the LaPine's home at an annual rate of
$100,000 or $8,333.37 per month. The lease terminates if Mr. LaPine's
employment with the Company is terminated.
The Company and Arundel Holdings, Inc., a company owned by Nicholas R.
Miller and his wife, are parties to an Advisor Agreement having a three-year
term which commenced May 1, 1996. The Advisor Agreement provided that Mr.
Miller would receive a base salary of $180,000 per year, plus discretionary
increases in accordance with the Company's normal review procedures. In
addition, subject to the achievement of certain mutually agreed upon
performance goals, Mr. Miller was to be paid an annual bonus equal to 100% of
his base salary. Mr. Miller also received a $1,000 per month car allowance.
On September 17, 1996, the Company entered into a Directors Agreement
with Mr. Miller pursuant to which Mr. Miller served as a Director of the
Company. The agreement provided that the Company would indemnify Mr. Miller to
the fullest extent permitted by the Company's Articles of Incorporation and
applicable laws. The agreement also granted Mr. Miller options to purchase
70,000 shares of the Company's Common Stock at $4.40 per share.
On February 12, 1998, the Company and Mr. Nicholas Miller, former
Chairman, terminated the Advisor Agreement with Arundel Holdings, Inc. The
termination was effected by a mutual release agreement which provides for the
following:
a) full payment of past due advisory fees and expenses;
b) modification to the warrants granted to Mr. Miller under the November
5, 1997 private placement so that Mr. Miller is to receive only 50,000
warrants of the 200,000 warrants originally agreed upon.
c) continuance until April 30, 1999 of Mr. Miller's right to exercise
the 70,000 shares in his option grant.
EMPLOYEE STOCK OPTION PLAN
During June 1996, the Board of Directors adopted the Employee Stock
Option Plan (the "Plan") which was approved by the Company's shareholders on
June 14, 1996. The Plan initially authorized the issuance of options to
purchase up to 300,000 shares of the Company's $.01 par value Common Stock,
and was amended on January 8, 1998 to authorize options to purchase up to
500,000 shares of the Company's $.01 par value Common Stock.
The Plan allows the Board to grant stock options from time to time to
employees, officers and directors of the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. Vesting provisions are determined by the Board at the time options
are granted. The option price for any option will be no less than the fair
market value of the Common Stock on the date the option is granted.
During the fiscal year ended March 31, 1998, the Company's Board of
Directors granted a total of 144,555 options to a total of 35 employees,
directors and consultants.
26
<PAGE>
<PAGE>
On June 17, 1997, the Board of Directors of the Company approved the
repricing of Mr. LaPine's and Mr. Miller's outstanding options from an
exercise price of $22.00 per share to an exercise price of $4.40 per share.
On the same date, the Board also approved the repricing of all of the options
held by the other employees of the Company from an exercise price of $20.00
per share to an exercise price of $4.00 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1998, the stock ownership
of each person known by the Company to be the beneficial owner of five percent
or more of the Company's Common Stock, each director individually, and all
officers and directors as a group. Each person has sole voting and investment
power over the shares except as noted.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF BENE- PERCENT
OF BENEFICIAL OWNERS FICIAL OWNERSHIP OF CLASS
- -------------------- ---------------- --------
<S> <C> <C>
Anthony LaPine 575,000 <FN1> 24.0%
1735 Technology Drive
San Jose, California 95110-1333
Orbis Pension Trustees Ltd. 266,640 <FN2> 11.7%
One Connaught Place
London, England W11DY
J.F. Shea Co. Inc. as Nominee 266,640 <FN3> 11.7%
1997-60
Edmund H. Shea Jr. VP
655 Brea Canyon Road
Walnut, CA 91789
Commonwealth Associates 140,000 <FN4> 6.8%
830 Third Avenue
New York, NY 10022
Marshall Geller 27,760 <FN5> 1.4%
1735 Technology Drive, Suite 790
San Jose, CA 95110-1333
Fredrick M. Hoar 10,000 <FN6> *
1735 Technology Drive, Suite 790
San Jose, CA 95110-1333
David Ladd 10,000 <FN6> *
1735 Technology Drive, Suite 790
San Jose, CA 95110-1333
Nicholas Miller 323,334 <FN7> 14.9%
1590-1500 West Georgia Street
Vancouver, B.C.
Canada V6G 2Z6
27
<PAGE>
<PAGE>
Peter A. Allard 324,917 <FN8> 15.3%
Seawatch, The Garden
St. James, Barbados
British West Indies
All Officers and Directors 652,760 <FN1><FN4> 26.4%
as a Group (6 Persons) <FN5>
___________________
* Less than one percent.
<FN>
<FN1>
Includes 200,000 shares owned directly by Mr. LaPine; 280,000 shares
underlying convertible preferred shares; 70,000 shares underlying currently
exercisable options held by Mr. LaPine; and 25,000 shares underlying currently
exercisable options held by Mr. LaPine's wife, Pamela LaPine. Does not
include 340,000 shares underlying warrants which are not exercisable within 60
days.
<FN2>
Includes 266,640 shares of Common Stock underlying convertible preferred
shares. Does not include 133,320 shares underlying warrants which are not
exercisable within 60 days.
<FN3>
Includes 266,640 shares of Common Stock underlying convertible preferred
shares. Does not include 133,320 shares underlying warrants which are not
exercisable within 60 days.
<FN4>
Includes 100,000 shares held directly and 40,000 shares underlying convertible
preferred stock.
<FN5>
Includes 10,000 shares underlying currently exercisable options and 17,760
shares of Common Stock underlying convertible preferred shares. Does not
include 18,880 shares underlying warrants which are not exercisable within 60
days.
<FN6>
Represents shares underlying currently exercisable options.
<FN7>
Includes 94,584 shares held directly by Mr. Miller; 15,000 shares held by
Arundel Holdings, a company owned by Mr. Miller and his wife; 93,750 shares
held by Mr. Miller's wife; 50,000 shares underlying currently exercisable
warrants; and 70,000 shares underlying currently exercisable options.
<FN8>
Includes 214,917 shares held directly by Mr. Allard; 10,000 shares held by
Euphemia Trust; and 100,000 shares underlying currently exercisable warrants.
<FN9>
Includes 30,000 shares underlying currently exercisable options held by other
executive officers.
</FN>
</TABLE>
The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ACQUISITION OF DATALINK COMMUNICATIONS CORPORATION
On June 27, 1996, the Company issued 1,646,532 shares of its $0.01 par
value Common Stock to the holders of 100% of the outstanding common stock of
Datalink Communications Corporation ("DCC") in an exchange transaction in
which DSC became a wholly-owned subsidiary of the Company.
28
<PAGE>
<PAGE>
The stock issuances were made pursuant to an Agreement Concerning the
Exchange of Common Stock ("Agreement") between the Company and DSC. The terms
of the Agreement were the result of negotiations between the managements of
the Company and DCC. However, the Company's Board of Directors did not obtain
any independent "fairness" opinion or other evaluation regarding the terms of
the Agreement, due to the cost of obtaining such opinions or evaluations.
Pursuant to the Agreement, Mark Moldenhauer, the former President and a
Director of the Company, sold back to the Company at closing 153,333 shares of
the Company's Common Stock for $10,000.
Pursuant to the Agreement, at Closing, the Company issued to Westridge
Capital Limited, as a finder's fee, a Debenture in the principal amount of
$130,000 which was convertible into 130,000 shares of the Company's Common
Stock at $1.00 per share. On October 11, 1996, Westridge Capital Limited
converted its Debenture into 130,000 shares of the Company's Common Stock.
TRANSACTIONS INVOLVING THE COMPANY
During July 1996, the Company completed a transaction in which it sold to
an unaffiliated investor Peter Allard a Convertible Debenture in the principal
amount of $2,000,000. The Debenture matures on July 1, 1998, and is
convertible at any time prior thereto into shares of the Company's Common
Stock at $20.00 per share. Mr. Allard was also issued a warrant to purchase
up to 100,000 shares of the Company's Common Stock at $25.00 per share at any
time prior to July 15, 1998. Mr. Allard also received certain registration
rights. On October 14, 1996, Peter Allard exercised his right to convert the
Debentures and the Company issued for 100,000 shares of its Common Stock. In
connection with the closing of the Peter Allard transaction in July 1996, the
Company issued 10,000 shares of its Common Stock to the Euphemia Trust for
services rendered in connection with the transaction. Peter Allard
beneficially owns the shares issued to Euphemia Trust.
In September 1997, the Company entered into a settlement agreement with
Peter Allard which recomputed the stock issued to Mr. Allard in the July 1996
Convertible Debenture. The settlement agreement provided for the issuance of
an additional 10,000 shares of the Company's fully-paid non-assessable Common
Stock and a five year warrant, commencing on December 1, 1997, to purchase
10,000 shares of the Company's Common Stock at $3.75 per share.
In August 1997, the Board of Directors approved the issuance of warrants
to Anthony N. LaPine and Nicholas R. Miller as of the Initial Closing Date of
the private offering of Series A Convertible Preferred Stock and Warrants.
Mr. LaPine received warrants to purchase 200,000 shares of Common Stock at
$3.75 per share. These will vest over a three-year period in equal
installments of one-third of the total shares on each anniversary of the date
of grant, and expire five years from the Initial Closing of the Offering. Mr.
Miller received Warrants to purchase 200,000 shares of Common Stock at $3.75
per share; however, the number of Warrants was subsequently reduced to 50,000
when Mr. Miller's Advisory Agreement was terminated. The above Warrants were
approved pursuant to the requirements of the Company's letter of intent with
the placement agent for the private offering.
Anthony LaPine purchased seven (7) Units in the Company's 1997 private
offering in exchange for a promissory note in the amount of $1,050,000 payable
to the Company and secured by certain of Mr. LaPine's assets other than his
personal residence and contents. The 7 Units included a total of 280,000
shares of preferred stock and 140,000 Warrants.
29
<PAGE>
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3 Articles of Incorporation and Incorporated by reference to
Bylaws Exhibit Nos. 2 and 3 to the
Registrant's Form 8-A filed
on July 22, 1996 (No. 0-21069)
10.1 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Exhibit No. 10 to the Regis-
Between Datalink Systems trant's Form 8-K dated June 27,
Corporation and Datalink 1996
Communications Corporation
10.2 Application Software Purchase Incorporated by reference to
Agreement between Datalink Exhibit No. 10.1 to the Regis-
Systems Corporation and trant's Form 8-K dated August
Shalcor Investments 26, 1996
10.3 Management and Marketing Incorporated by reference to
Agreement between Datalink Exhibit No. 10.2 to the Regis-
Systems Corporation and trant's Form 8-K dated August
Shalcor Investments 26, 1996
10.4 8% Secured Term Note Incorporated by reference to
Exhibit No. 10.3 to the Regis-
trant's Form 8-K dated August
26, 1996
10.5 Employment Agreement with Incorporated by reference to
Nicholas Miller dated May 1, Exhibit 10.5 to the Regis-
1996 trant's Form 10-K dated
March 31, 1997
10.6 Employment Agreement with Anthony Incorporated by reference to
LaPine dated May 1, 1996 Exhibit 10.6 to the Regis-
trant's Form 10-K dated
March 31, 1997
10.7 Amendment No. 1 to Employment Incorporated by reference to
Agreement with Anthony LaPine Exhibit 10.7 to the Regis-
dated January 1, 1997 trant's Form 10-K dated
March 31, 1997
10.8 Lease Agreement with Anthony Incorporated by reference to
and Pamela LaPine dated January 2, Exhibit 10.8 to the Regis-
1997 trant's Form 10-K dated
March 31, 1997
30
<PAGE>
<PAGE>
10.9 Loan Forgiveness Agreement with Incorporated by reference to
Anthony LaPine dated June 28, 1996 Exhibit 10.9 to the Regis-
trant's Form 10-K dated
March 31, 1997
10.10 Directors Agreement with Nicholas Incorporated by reference to
Miller dated September 17, 1996 Exhibit 10.10 to the Regis-
trant's Form 10-K dated
March 31, 1997
10.11 Application Software Purchase Incorporated by reference to
Agreement between Datalink Systems Exhibit 10.1 to the Regis-
Corporation and 605285 Ontario Inc. Form 8-K dated May 6, 1997
10.12 Management and Marketing Agreement Incorporated by reference to
between Datalink Systems Corpora- reference to Exhibit 10.2
tion and 6045285 Ontario to the Registrant's Form 8-K
dated May 6, 1997
10.13 6% Secured Term Note Incorporated by reference to
Exhibit No. 10.3 to the
Registrant's Form 8-K dated
May 6, 1997
22 Subsidiaries of the Registrant Incorporated by reference to
Exhibit 22 to the Registrant's
Form 10-K dated March 31, 1997
24.1 Consent of Coopers & Lybrand, LLP Filed electronically herewith
27 Financial Data Schedule Filed electronically herewith
(b) REPORTS ON FORM 8-K. None.
31
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Accountants . . . . . . . . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheets, March 31, 1998 and 1997 . . F-3
Consolidated Statements of Operations for the years
ended March 31, 1998 and 1997. . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity
for the years ended March 31, 1998 and 1997. . . . . . . F-5 - F-8
Consolidated Statements of Cash Flows for the years
ended March 31, 1998 and 1997. . . . . . . . . . . . . . F-9 - F-10
Notes to Financial Statements. . . . . . . . . . . . . . F-11 - F-25
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Datalink Systems Corporation:
We have audited the accompanying consolidated balance sheets of Datalink
Systems Corporation and its subsidiary as of March 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Datalink Systems
Corporation as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 7, 1998
F-2
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1998 1997
CURRENT ASSETS: ----------- -----------
Cash and cash equivalents $ 7,353,719 $ 1,916,509
Trade receivables (net of allowance for
doubtful accounts of $9,800 in 1998
and $1,500 in 1997) 65,241 49,685
Other receivables 500 4,733
Prepaid expenses 42,537 5,432
----------- -----------
Total current assets 7,461,997 1,976,359
Property and equipment, net 629,696 321,368
Other assets 23,625 14,741
----------- -----------
Total assets $ 8,115,318 $ 2,312,468
=========== ===========
LIABILITIES
Current liabilities:
Bank overdraft $ - 21,521
Accounts payable 236,469 131,188
Accrued liabilities 300,450 93,024
Deferred revenue 269,538 -
Current portion of capital lease obligation 13,699 -
Current portion of advances on technology sales 460,501 263,292
----------- -----------
Total current liabilities 1,280,657 509,025
Advances on technology sales,
net of current portion 2,162,628 1,531,154
Obligations under capital leases,
net of current portion 62,640 -
----------- -----------
Total liabilities 3,505,925 2,040,179
=========== ===========
Commitments and contingencies (Notes 7, 13 and 15)
SHAREHOLDERS' EQUITY:
Preferred Stock: $.01 par value:
Authorized: 500,000 shares in 1998 and 1997;
Issued and outstanding: 274,000 in 1998 and
none in 1997 2,740 -
Common Stock: $.01 par value in 1998; Authorized:
8,000,000 shares in 1998 and 5,000,000 shares
in 1997; issued and outstanding: 2,018,293
shares in 1998 and 1,918,293 shares in 1997 20,183 19,183
Additional paid-in capital 28,007,037 8,335,777
Foreign currency translation adjustment (53,923) (57,655)
Notes receivable (1,692,234) (1,089,410)
Accumulated deficit (21,674,410) (6,935,606)
----------- -----------
Total shareholders' equity 4,609,393 272,289
----------- -----------
Total liabilities and shareholders' equity $ 8,115,318 $ 2,312,468
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
--------------------------
1998 1997
------------ -----------
Revenue $ 962,461 $ 196,891
Cost of revenue (530,545) (159,058)
Research and development (755,080) (544,585)
Sales and marketing (2,133,635) (1,023,492)
General and administrative (2,406,434) (3,907,438)
Other income (note 11) 831,429 128,271
------------ -----------
Net loss $ (4,031,804) $(5,309,411)
Deemed dividends on preferred
stock (8,083,000) -
Beneficial conversion feature
of warrants in association
with preferred stock (2,624,000) -
------------ -----------
Net loss available to
common shareholders $(14,738,804) $(5,309,411)
============ ===========
Basic (7.53) (3.01)
Diluted (7.53) (3.01)
Shares used in per share
calculation, Basic and
Diluted 1,958,622 1,763,638
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK STOCK
------------------------ -------------------- SUB-
SHARES AMOUNT SHARES AMOUNT CRIPTION APIC
----------- ----------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
3/31/1996 - - 1,453,501 $14,535 271,049 $1,638,583
Common stock
subscription
exercised
April, May
1996, $7.50
per share - - 27,105 271 (271,049) 270,778
Shares issued
April, May
1996, $7.50
per share - - 35,933 359 - 296,641
Shares issued
for finder's
fee, May 1996,
$7.50 per share - - 100,667 1,007 - 753,993
Shares repurchased
in June 1996,
$0.10 per share - - (153,333) (1,533) - (8,467)
Shares issued for
options exer-
cised November
1996, to Feb-
ruary 1997, $20.00
per share - - 2,720 27 - 54,373
Debentures con-
verted to shares
(Note 6) - - 240,000 2,400 - 3,397,600
Stock issued for
public relations
services, Febru-
ary 1997, $10.00
per share - - 10,000 100 - 99,900
Compensation ex-
pense for options
granted (Note 9) - - - - - 152,892
Note receivable,
May 1996 (Note 14) - - 200,000 2,000 - 1,568,750
Note receivable
amortization - - - - - -
Stock issued for
services, March,
1997, $22.70 per
share - - 1,700 17 - 38,546
Compensation ex-
pense - - - - - 72,188
Translation ad-
justments - - - - - -
Net loss - - - - - -
---------- ----------- ---------- ------- ------- -----------
F-5
<PAGE>
<PAGE>
Balance at
3/31/1997 - - 1,918,293 $19,183 - $8,335,777
Common Stock
issued in ex-
change for notes
receivable
8/20/1997 - - 10,000 100 - 99,900
Notes receivable
canceled and com-
mon stock returned
9/23/1997 - - (10,000) (100) - (99,900)
Peter Allard is-
sued antidilu-
tive shares
11/15/1997 - - 100,000 1,000 - 1,000
Notes receivable
issued to officer
in exchange for
preferred shares 28,000 280 - - - 1,049,720
11/5/1997
Preferred shares
issued in con-
junction with
private placement
11/5/1997 246,000 2,460 - - - 7,913,540
Beneficial conver-
sion for preferred
shareholders -
Warrants - - - - - 2,329,000
Beneficial conver-
sion for preferred
shareholders -
Preferred Stock - - - - - 8,083,000
Beneficial conver-
sion for Peter
Allard - - - - - 295,000
Translation adjust-
ment - - - - - -
Amortization of
Notes receivable - - - - - -
Net loss - - - - - -
---------- ----------- ---------- ------- ------- -----------
Balance at
3/31/1998 274,000 $ 2,740 2,018,293 $20,183 - $28,007,037
========== =========== ========== ======= ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED NOTES TRANSLATION
DEFICIT RECEIVABLE ADJUSTMENT TOTAL
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at
3/31/1996 $ (1,626,195) $ - $ 3,185 $ 301,157
Common stock
subscription
exercised
April, May
1996, $.75
per share - - - -
Shares issued
April, May
1996, $.75
per share - - - 297,000
Shares issued
for finder's
fee, May 1996,
$.75 per share - - - 755,000
Shares repurchased
for June 1996,
$.01 per share - - - (10,000)
Shares issued for
options exer-
cised November
1996, to Feb-
ruary 1997, $2.00 - - - 54,400
per share
Debentures con-
verted for shares
(Note 7) - - - 3,400,000
Stock issued for
public relations
services, Febru-
ary 197, $1.00
per share - - - 100,000
Compensation ex-
pense for options
granted (Note 10) - - - 152,892
Note receivable,
May 1996 (Note 8) - (1,568,750) - 2,000
Note receivable
amortization - 479,340 - 479,340
Stock issued for
services, March,
1997, $2.27 per
share - - - 38,563
Compensation ex-
pense - - - 72,188
Translation ad-
justments - - (60,840) (60,840)
Net loss (5,309,411) - - (5,309,411)
------------ ------------ --------- ------------
F-7
<PAGE>
<PAGE>
Balance at
3/31/1997 $ (6,935,606) $(1,089,410) $(57,655) $ 272,289
Common Stock
issued in ex-
change for notes
receivable 100,000
8/20/1997 - - -
Notes receivable
canceled and com-
mon stock returned
9/23/1997 - - - (100,000)
Peter Allard is-
sued antidilu-
tive shares
11/15/1997 - - - 2,000
Notes receivable
issued to officer
in exchange for
preferred shares
11/5/1997 - (1,050,000) - -
Preferred shares
issued in con-
junction with
private placement
11/5/1997 - - - 7,916,000
Beneficial conver-
sion for preferred
shareholders -
Warrants (2,329,000) - - -
Beneficial conver-
sion for preferred
shareholders -
Preferred Stock (8,083,000) - - -
Beneficial conver-
sion for Peter
Allard (295,000) - - -
Translation adjust-
ment - - 3,732 3,732
Amortization of
Notes receivable - 447,176 - 447,176
Net loss for the
year (4,031,804) - - (4,031,804)
------------ ------------ --------- ------------
Balance at 3/31/1998 $(21,674,410) $ (1,692,234) $ (53,923) $ 4,609,393
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $(4,031,804) $(5,309,411)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of technology advance (474,882) (136,201)
Depreciation and amortization 570,631 537,413
Common Stock issued for services - 2,388,643
Changes in operating assets and
liabilities:
Accounts receivable (15,556) (33,623)
Other current assets (38,599) 6,002
Accounts payable and accrued
liabilities 291,186 129,015
Deferred revenue 269,538 (73,000)
---------- ----------
Net cash used in operating
activities (3,429,486) (2,491,162)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (346,411) (280,355)
Deposits (3,157) (14,741)
---------- ----------
Net cash used in investing
activities (349,568) (295,096)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock - 2,430,564
Net proceeds from the issuance of Preferred
Stock 7,918,000 -
Repurchase of Common Stock - (10,000)
Advance on technology fee 1,303,565 1,924,647
Payments on capital lease (5,301) -
---------- ----------
Net cash provided by
financing activities 9,216,264 4,345,211
---------- ----------
Net increase in cash and cash equivalents 5,437,210 1,558,953
---------- ----------
Cash and cash equivalents, beginning
of year 1,916,509 357,556
---------- ----------
Cash and cash equivalents, end of year $7,353,719 $1,916,509
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEAR ENDED MARCH 31,
------------------------
1998 1997
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock in exchange
for services performed -- $ 855,000
Issuance of stock option in exchange
for services performed -- 152,892
Issuance of Common Stock in exchange
for employee compensation -- 110,751
Common Stock issued in exchange for
debentures exercised -- 1,270,000
Issuance of Common Stock in exchange
for stock subscription -- 271,049
Foreign currency translation
adjustment -- (60,840)
Common Stock issued in exchange for
note receivable $1,050,000 $1,568,750
Equipment purchased with capital lease 81,640 --
Common Stock issued in accordance with
antidilution agreement $ 1,000 --
Beneficial conversion feature for
shareholders of Preferred Stock 10,412,000 --
Beneficial conversion feature for
shareholders of Common Stock 295,000 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
<PAGE>
DATALINK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
DataLink Systems Corporation (formerly Lord Abbott, Inc., a publicly traded
shell corporation) (the Company), is engaged in providing wireless
communication services.
On June 27, 1996 the Company completed the acquisition of 100% of the
outstanding common stock of Datalink Communication Corporation (DCC) a U.S.
corporation in exchange for shares of the Company's Common Stock. The Company
issued a total of 1,646,532 shares of its $0.01 par value Common Stock to the
shareholders of DCC. For accounting purposes, the acquisition has been treated
as the acquisition of the Company by DCC with DCC as the acquiror (reverse
acquisition). The historical financial statements prior to June 27, 1996 are
those of DCC. Since the Company prior to the reverse acquisition was a public
shell corporation no pro-forma information giving effect to the acquisition is
required. All shares and per share data have been restated to reflect the
stock issuance and stock split.
In anticipation of the above acquisition, the Company changed its domicile
from the State of Colorado to the State of Nevada, changed its name from Lord
Abbott, Inc. to Datalink Systems Corporation, and effected a 1-for-300 reverse
stock split.
On January 16, 1996, shareholders of DSC Datalink Systems Corporation (a
company in the development stage) (a Canadian Corporation) (DSC) exchanged
100% of their shares for 100% of the shares in DCC. As a result, DSC Datalink
Systems Corporation became a wholly owned subsidiary company of DCC. For
accounting purposes, the acquisition has been treated as the acquisition of
DCC by DSC with DSC as the acquiror (reverse acquisition).
Prior to the acquisition of DSC, there were no material operations in DCC;
consequently the historical information provided covering the period from June
15, 1993 to June 27, 1996 (date of the reverse acquisition) is that of DSC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies is presented to
assist the reader in understanding and evaluating the consolidated financial
statements. These policies are in conformity with generally accepted
accounting principles and have been applied consistently in all material
respects.
BASIS OF PRESENTATION:
Revenues are deferred until services have been performed, and expenses are
recognized when goods have been received or services provided.
PRINCIPALS OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary DSC Datalink Systems Corporation. All significant
intercompany transactions and balances have been eliminated in consolidation.
F-11
<PAGE>
<PAGE>
USE OF ESTIMATES:
The preparation of the 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with original
maturities of three months or less from the date of purchase to be cash
equivalents. The Company places substantially all of its cash and cash
equivalents in a demand deposit account with one bank.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents, trade and
other receivables, accounts and notes payable.
Trade receivables are with a large number of customers, dispersed across a
wide national and Canadian geographic base. The Company extends credit to its
customers in the ordinary course of business and periodically reviews the
credit levels extended to customers. Provision is made for estimated losses on
uncollectible accounts.
The Company rents pager inventory principally from one supplier. Management
believes that other suppliers could provide similar inventory on comparable
terms. A change in supplier, however, could cause a delay and a possible loss
of sales, which would affect operating results adversely.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets
which are generally three to seven years. Maintenance and repairs are charged
to expense as incurred; expenditures for additions, improvements and
replacements are capitalized. Upon disposal of fixed assets, the accounts are
relieved of the related costs and accumulated depreciation and resulting gains
or losses are reflected in operations. The Company assesses its ability to
recover the net book value of property and equipment. The carrying value of
assets determined to be impaired are written down to net realizable value.
FOREIGN CURRENCY TRANSLATION:
Exchange adjustments resulting from foreign currency transactions are
generally recognized in operations where adjustments resulting from
translation of financial statements are reflected as a separate component of
shareholder's equity. Net foreign currency transaction gains or losses are
not material in any of the years presented.
F-12
<PAGE>
<PAGE>
INCOME TAXES:
Deferred income taxes have been recorded for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts using enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances reduce deferred tax assets to the amount
expected to be realized.
REVENUE RECOGNITION:
The Company recognizes revenues from transaction fees, monthly charges, and
pager rental income from its QuoteXpress, SplitXpress and CommoditiesXpress
systems. Revenues are recognized when the services are performed.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, receivables and payables are
a reasonable estimate of their fair value due to their short-term nature.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Expenditures related to research, design and development of products are
charged to product development and engineering expenses as incurred. Software
development costs are capitalized beginning when a product's technological
feasibility has been established and ending when a product is available for
general release to customers. At March 31, 1998 and 1997, there were no
capitalized software development expenditures since the period between
technological feasibility and availability have coincided and products under
development have not yet achieved technological feasibility.
Research and development expenditures are expensed as incurred.
ADVERTISING EXPENDITURES:
Advertising expenditures of $1,196,903 and $321,229 in 1998 and 1997
respectively, were charged to operations as incurred.
COMPUTATION OF NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), which specifies the computation presentation
and disclosure requirements for earnings per share. SFAS 128 superseded
Accounting Principles Board Opinion No. 15 and became effective for financial
statements issued for periods ending after December 15, 1997. SFAS 128
required restatement of all prior-period earnings per share data presented
after the effective date. The Company's financial statements have been
revised to effect the new standard.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The reclassification
has no effect on previously reported net loss or shareholders' equity.
F-13
<PAGE>
<PAGE>
2. RECENT PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This Statement establishes standards for reporting and
displaying comprehensive income and its components in the consolidated
financial statements. It does not, however, require a specific format for the
statement, but requires the Company to display an amount representing total
comprehensive income for the period in that financial statement. The Company
believes that the adoption of SFAS 130 will have an immateral impact on the
financial statements. This Statement is effective for the Company's 1999
fiscal year.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Statement establishes standards for
how public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement is effective for the Company's
1999 fiscal year. The Company does not believe it currently has any
separately reportable segments.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist principally of balances due from customers, net of
allowance for doubtful accounts. The customers are billed through customers'
Visa, Mastercard, and American Express accounts. Amounts due from Visa,
Mastercard, and American Express were $22,099, $10,947 and $8,442 in 1998, and
$30,493, $14,231 and $0 in 1997, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following:
MARCH 31,
1998 1997
-------- --------
Furniture and fixtures $114,328 $ 71,424
Computer and office equipment 506,470 295,238
Equipment under capital lease 81,640
Software 115,719 14,021
Leasehold improvements 9,423
-------- --------
818,157 390,106
Less accumulated depreciation
and amortization (188,461) (68,738)
-------- --------
$629,696 $321,368
======== ========
F-14
<PAGE>
<PAGE>
5. SALES OF TECHNOLOGY:
Effective August 21, 1996, Datalink completed a transaction with a Canadian
corporation (the Buyer) selling the Company's technology for cash and a note
under the terms of a sales agreement (sales agreement). At closing for
settlement Datalink received approximately $1,095,000, and an additional
payment of approximately $1,095,000 was received November 1996, and a note for
approximately $26,800,000. The note is due December 31, 2006 and bears
interest at 8% per annum. The note is collateralized by the technology.
Datalink and the Buyer entered into a "Management and Marketing Agreement"
dated August 21, 1996 (the Agreement). The Agreement expires August 31, 2001,
and may be extended for two additional two year terms. The extension of the
term will be automatic and Datalink or the Buyer during any extension can
terminate the agreement with 90 days notice to the other party. The
significant terms of the agreement are as follow:
Datalink will receive an annual fee of 10% of "Direct Cost Marketing,
Distributing and Selling" technology related services, as defined in the
Agreement, Datalink receives an exclusive worldwide right to use, modify and
sub license the source code for the technology, including application
software, intellectual property and documentation, Datalink has first right of
refusal in the event the Buyer desires to transfer all or part of the
application software,
The Buyer will receive, commencing January 1, 1997, an annual "owners fee" of
$1,095,000, the owners fee to be applied as follows: pay accrued interest and
the excess, if any; a) 60% of the remaining fee applied to the note balance,
and b) 40% of the remaining fee paid in cash to the Buyer until the note is
paid in full, Buyer will receive the "net revenue less owners fee payable," as
defined in the Agreement, related to the technology sold to be applied as
follow: a) 60% of the net revenue applied to the note balance, and b) 40% of
the net revenue paid in cash to the Buyer until the note is paid in full, and
After the note is paid, the "net revenue," as defined in the Agreement,
related to the technology sold to be applied as follows:
40% of the net revenue paid in cash to the Buyer, and 60% retained by the
Company.
Effective May 1997, the Company completed a transaction with a Canadian
corporation selling certain other of the Company's technology for cash and a
note. At closing, Datalink received approximately $2,900,000, and a note for
approximately $10,100,000. The note is due December 31, 2006 and bears
interest at 6% per annum. The note is collateralized by the technology. This
transaction is accounted for in the same manner as the sale of technology
agreement detailed above; the note receivable has not been recorded as it is
not expected that the fees and revenues allocated to the buyer will be
sufficient to service the note receivable principal and interest payments due
to Datalink.
The cash received by Datalink has been accounted for under the provisions of
the "Emerging Issues Task Force, 88-18: Sales of Future Revenues" (EITF
88-18). It is expected that the owners fees and net revenue allocated to the
buyer will not be sufficient to service the note receivable principle and
interest payments due Datalink and as such the note has not been recorded.
F-15
<PAGE>
<PAGE>
Based on the criteria included within EITF 88-18, the amounts received under
the sales agreement have been included within the balance sheet caption
"Advance on Technology Sales" and is being amortized using the interest method
over the term of the agreement. (Note 11.)
Other income for fiscal years 1998 and 1997 includes as an expense within the
caption "Technology Owners Fee" of $1,570,000 and $273,750, representing a
portion of the owners fee earned through March 31, 1998 and 1997,
respectively. The sale agreement requires that the owners fee be applied to
the interest owed by the buyer on the note. Interest, if accrued through
March 31, 1998 and 1997 would have approximated $4,000,000 and $1,312,000,
respectively. Since it is uncertain whether the interest and principal will
be collected over the term of the agreement, interest income on the note has
been recognized to the extent of the amounts due under the Technology Owners
Fee provision of the sales agreement. (Note 11.)
6. CONVERTIBLE DEBENTURES AND WARRANTS:
The Company issued a convertible debenture of $130,000 during fiscal year 1997
as a finders fee which was exercisable into shares of Common Stock. The
debenture was subsequently converted into 130,000 shares in October 1996. The
Company recorded an expense of $1.17 million associated with the issuance.
The Company also issued a convertible debenture in the sum of $2 million which
was subsequently converted into 100,000 shares. On July 1, 1996, the Company
issued the same investor a warrant to purchase 100,000 shares of Common Stock
at $25 per share exercisable at any time prior to July 1, 1998. During the
year ended March 31, 1998, the warrants were repriced to $3.75 per share.
The Common Stock issued under these agreements were issued pursuant to the
exemption from registration under the Securities Act of 1933 (the Securities
Act) provided under Regulation S; the Company was a "Reporting Issuer" under
the provisions of the Securities Act, as amended.
7. CAPITAL LEASES:
The Company has entered into a leasing agreement for certain equipment used in
the operation of the Company. The lease has been classified as a capital
lease, and is for a five year term, with payments due monthly at an interest
rate of 10.45% per annum. Payments, including interest in the initial three
years of the lease are approximately $2,000 per month. During the last two
years of the lease the payments are reduced to approximately $1,100 per month.
The principal portion of obligation under the capital lease for the next five
years are as follows:
Year ended March 31,
1999 $13,699
2000 15,201
2001 16,868
2002 18,718
2003 11,853
-------
Total $76,339
F-16
<PAGE>
<PAGE>
8. INCOME TAXES:
At March 31, 1998, the Company has approximately $370,000 in Canadian net
operating loss carryforwards which expire in the years 2000 through 2004.
Net operating loss carryforwards were determined using the applicable
statutory rates. The net operating loss carryforward balances vary from the
applicable percentages of net loss due to expenses applied under generally
accepted accounting principles not deductible for tax purposes.
Net operating loss carryforwards available for the Company for U.S. tax
purposes are as follows:
FEDERAL STATE
------------------------- -------------------------
BALANCE EXPIRATION BALANCE EXPIRATION
---------- ---------- ---------- ----------
$ 980,000 2012 $ 500,000 2002
1,650,000 2013 800,000 2003
---------- ----------
$2,630,000 $1,300,000
========== ==========
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
MARCH 31, MARCH 31,
1998 1997
Deferred tax assets: ---------- ---------
Net operating loss carryforwards $4,300,000 $520,000
Less: valuation allowance (4,300,000) (520,000)
---------- ---------
$ - $ -
========== =========
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that
a tax benefit may be realized from the asset in the future. The Company has
established a valuation allowance to the extent of its deferred tax assets
since it is more likely than not that the benefit cannot be realized in the
future.
9. SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of Common Stock and Preferred
Stock.
On November 5, 1997, the Company completed the sale of units of the Company's
Series A Convertible Preferred Stock. The units were sold in a private
placement pursuant to an agreement with an investment banking firm. A total
of 68.5 units were sold at a cost of $150,000 per unit for total gross
proceeds of $10,275,000. Each unit consisted of 40,000 shares of Preferred
Stock, par value $0.01, and each share of Preferred Stock is now convertible
into one share of Common Stock. Also included with each unit was a detachable
Common Stock purchase warrant to purchase 20,000 shares of the Company's
Common Stock at a purchase price of $5.00 per share.
F-17
<PAGE>
<PAGE>
The Company received approximately $8.0 million in cash, net of expenses, and
$1.05 million in a note receivable from an officer of the Company. Expenses
and commissions related to the private placement totaled approximately $1.3
million.
On January 8, 1998, shareholders holding 10,582,523 shares (pre-split) of the
Company's $.001 par value Common Stock (the "Common Stock"), and 141,558
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock"), signed written consents approving a one for ten (1 for 10) reverse
split of the Company's outstanding Common Stock and an increase in the number
of shares of Common Stock which may be acquired upon the exercise of options
under the Company's 1996 Stock Option Plan from 300,000 to 500,000 after the
reverse split. On January 8, 1998, there were 20,182,925 shares of Common
Stock issued and outstanding, and 2,740,000 shares of Preferred Stock
outstanding.
On January 15, 1998 the Board of Directors of the Company approved a 1 for 10
reverse stock split. The 1 for 10 reverse stock split was effected on
February 9, 1998, and applied to all shareholders of record. Subsequent to
the split the number of shares of Common Stock into which the Preferred Stock
could be converted was reduced from 27,400,000 to 2,740,000, and the number of
shares of Common Stock issued and outstanding was 2,018,293. All financial
data and share data in this Form 10-KSB give retroactive effect to this split,
unless otherwise indicated.
CONVERTIBLE PREFERRED STOCK:
Under the Company's Articles of Incorporation, as amended in February 1998,
the Company is authorized to issue 500,000 shares of Preferred Stock, of which
274,000 have been designated as Series A Preferred Stock.
DIVIDENDS: The holders of shares of Series A Preferred Stock shall be
entitled to receive dividends, out of any assets legally available therefor,
ratably with any declaration or payment of any dividend with holders of the
Common Stock or other junior securities of this Corporation, when as and if
declared by the Board of Directors, based on the number of shares of Common
Stock into which each share of its Series A Convertible Preferred Stock is
then convertible. As of March 31, 1998, no dividends have been declared.
LIQUIDATION: In the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, the holders of record of the
shares of the Series A Preferred Stock shall be entitled to receive, before
and in preference to any distribution or payment of assets of the Company or
the proceeds thereof may be made or set apart for the holders of Common Stock
or any other security junior to the Series A Preferred Stock in respect of
distributions upon liquidation out of the assets of the Corporation legally
available for distribution to its stockholders, in an amount in cash equal to
$37.5 per share. If, upon such liquidation, the assets of the Corporation
available for distribution to the holders of the Series A Preferred Stock and
any other series of preferred stock then outstanding ranking on parity with
the Series A Preferred Stock upon liquidation ("Parity Stock") shall be
insufficient to permit payment in full to the holders of the Series A
Preferred Stock and Parity Stock, then the entire assets and funds of the
Company legally available for distribution to such holders and the holders of
the Parity Stock then outstanding shall be distributed ratable among the
holders of the Series A Preferred Stock and Parity Stock based upon the
F-18
<PAGE>
<PAGE>
proportion the total amount distributable on each share upon liquidation bears
to the aggregate amount available for distribution on all shares of the Series
A Preferred Stock and such Parity Stock, if any.
CONVERSION: Each share of Preferred Stock, at the option of the holder,
is convertible into a number of fully paid and non-assessable shares of Common
Stock as determined by dividing the Preferred Stock issue price of $37.5 by
the initial conversion price of $3.75. Conversion is automatic immediately
commencing 18 months after the final closing of the Private Placement if the
closing price of the Company's Common Stock equals or exceeds $10.00 per share
for 30 consecutive trading days and a registration statement covering the
shares of Common Stock issuable upon conversion of the Preferred Stock has
been declared effective by the Securities and Exchange Commission.
REDEMPTION: The Series A Preferred Stock is not redeemable.
VOTING RIGHTS: The holder of each share of Preferred Stock is entitled
to one vote for each share of Common Stock into which each share of Series A
Preferred Stock could be converted.
DETACHABLE WARRANTS: The Company has granted the Series A Preferred
Stock holders detachable warrants to purchase 137,000 shares of Common Stock.
The warrants are exercisable for a period of four years commencing one year
after the date of initial closing of the offering at a purchase price of $5.00
per share and expire in November 2002. The warrants are subject to redemption
by the Company upon 30 days' prior notice at $5.00 per warrant commencing 18
months after the final closing, provided that the Warrants and the underlying
common shares have been registered under the Securities Act and the Common
Stock has traded at or above $12.5 per share for 30 consecutive trading days.
In connection with the private placement, the placement agent received
warrants to purchase 824,383 shares of Common Stock with an exercise price of
$3.75.
The deemed dividends on the preferred stock of $8,083,000 and on warrants of
$2,624,000 issued in conjunction with the private placement, reflect the
beneficial conversion feature, which is the difference between the proceeds
allocated to the preferred stock or warrants respectively, and the fair value
of the preferred stock or warrants (assuming immediate conversion) upon
issuance.
STOCK OPTION PLAN:
In June 1996, the Company adopted the 1996 Stock Incentive Plan (the "Plan").
The "Plan" provides for the granting of stock options to acquire Common Stock
and/or the granting of stock appreciation rights to obtain, in cash or shares
of Common Stock, the benefit of the appreciation of the value of shares of
Common Stock after the grant date. The Company is currently authorized to
issue up to 500,000 shares of Common Stock under the Plan. The Plan expires
ten years after its adoption.
Under the Plan, the Board of Directors may grant incentive stock options to
purchase shares of the Company's Common Stock only to employees, directors,
officers, consultants and advisers of the Company. The Board of Directors may
grant options to purchase shares of the Company's Common Stock at prices not
less than fair market value at the date of grant for incentive stock options.
The Board of Directors also has the authority to set exercise dates (no longer
F-19
<PAGE>
<PAGE>
than ten years from the date of grant), payment terms and other provisions for
each grant. In addition, incentive options may be granted to persons owning
more than 10% of the voting power of all classes of stock, at a price no lower
than 110% of the fair market value at the date of grant, as determined by the
Board of Directors. Options granted under the Plan generally vest at a rate
of 25% per annum over 4 years from the date of grant.
1996 STOCK PURCHASE PLAN:
In September 1996, the Company adopted the 1996 Nonqualified Stock Purchase
Plan (the Nonqualified Plan). The Company has reserved 224,622 shares of its
$.01 par value Common Stock for issuance to eligible persons under this plan.
Stock granted under this plan are subject to a purchase option that expires
over a five year period a the original issuance price.
As of March 31, 1998, no shares had been granted under this plan.
Activity under the 1996 Stock Incentive Plan through March 31, 1998 is as
follows:
WEIGHTED
SHARES NUMBER AGGREGATE AVERAGE
AVAILABLE OF PRICE PER EXERCISE EXERCISE
FOR GRANT OPTIONS SHARE PRICE PRICE
----------- --------- ----------- ---------- --------
Balance,
3/31/1996 - - $ - $ - $ -
Authorized 300,000
Granted (268,080) 268,080 $20.00-$40.00 $5,991,600 $22.40
Canceled 3,000 (3,000) $20.00 (60,000) $20.00
Exercised - (2,720) $20.00 (54,400) $20.00
--------- --------- ---------- ------
Balance,
3/31/1997 34,920 262,360 $20.00-$40.00 $5,877,200 $22.40
--------- --------- ---------- ------
Options repriced 1,419,368 $ 5.41
Authorized 200,000
Granted (144,555) 144,555 $ 2.97-$20.00 612,987 $ 4.30
Canceled 69,596 (69,596) $ 2.00-$20.00 (185,821) $ 2.67
Exercised - -
--------- --------- ---------- ------
Balance,
3/31/1998 159,961 337,319 $ 2.97-$20.00 $7,723,734 $ 4.54
The weighted average fair value of those options granted through March 31,
1998 and 1997 was $4.54 and $22.40, respectively. Options to purchase 227,867
and 223,802 shares were exercisable with a weighted average exercise price of
$4.70 and $21.30 at March 31, 1998 and 1997 respectively. Effective August
18, 1997, the Board of Directors repriced the employee options to $4.00 per
option share.
F-20
<PAGE>
<PAGE>
PRO FORMA STOCK-BASED COMPENSATION:
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock
Based Compensation. Accordingly, no compensation expense has been recognized
for these plans. Had compensation expense been determined on the fair value
at the grant dates for awards under these plans consistent with the method of
SFAS 123, the Company's net loss in 1998 and 1997 would have been adjusted to
the pro forma amounts indicated below:
1998 1997
Net loss available to ------------- -----------
common shareholders
As reported $(14,738,804) $(5,309,411)
Pro forma (15,650,080) (5,938,181)
Net loss per share
As Reported, Basic
and Diluted (7.53) (3.01)
Pro forma, Basic
and Diluted (7.99) (3.40)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants under the Plan in 1998 and 1997:
1998 1997
----------- ----------
Expected dividend $ -- $ --
Expected life of option 1-4 years 1-4 years
Risk-free interest rate 5.60%-6.62% 6.01%-6.63%
Expected volatility 90% 40%
The above pro forma disclosures are not likely to be representative of the
effects on reported net income for future years.
The following table summarizes the stock options outstanding at March 31,
1998:
OPTIONS
OPTIONS OUTSTANDING CURRENTLY EXERCISABLE
- ----------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------- ----------- ----------- -------- ----------- --------
MARCH 31, 1998
$ 1.00-$ 3.00 2,000 9.4 $ 2.97 291 $ 2.97
$ 3.00-$ 4.00 103,334 8.5 3.79 29,080 3.86
$ 4.00-$ 5.00 219,886 8.7 4.49 189,981 4.45
$ 5.00-$ 6.00 4,240 9.8 6.00 2,448 6.00
$ 6.00-$ 7.00 2,000 9.6 6.40 208 6.41
$ 7.00-$10.00 1,163 9.1 10.00 1,163 10.00
$10.00-$20,00 4,696 8.1 20.00 4,696 20.00
------- --- ------ ------- ------
337,319 8.7 $ 4.22 227,867 $ 4.70
======= === ====== ======= ======
F-21
<PAGE>
<PAGE>
10. REVENUE:
The Company has sales to customers in both Canada and the U.S. Revenue from
Canadian Sales totaled $103,340 and $112,525 and sales from United States
customers totaled $859,121 and $74,366 in 1998 and 1997, respectively.
11. OTHER INCOME:
Other Income (expense) consists of the following items:
YEAR ENDED
DESCRIPTION 1998 1997
--------------------- ------------ ----------
Owners fee sale $(1,570,000) $(273,750)
of technology
Interest on note from 1,570,000 273,750
sale of technology
Amortization of 474,882 136,201
technology advance
Interest income 367,436 136,070
Miscellaneous (10,889) (144,000)
----------- ---------
Total Other income $ 831,429 $ 128,271
(expense) =========== =========
12. EARNINGS PER SHARE (EPS) DISCLOSURES:
NET LOSS PER SHARE:
The Company has adopted Financial Accounting Standards Board No. 128 "Earnings
Per Share" (EPS) and accordingly all prior periods have been restated. Basic
EPS is computed as net income (loss) divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and other convertible securities. Common equivalent shares are
excluded from the computation of net loss per share if their effect is
anti-dilutive.
The following is a reconciliation of the numerator (net loss) and denominator
(number of shares) used in the basic and diluted EPS calculation:
MARCH 31,
1998 1997
----------- -----------
Basic EPS:
Net Loss $ (4,031,804) $(5,309,411)
Deemed dividends on preferred
stock (8,083,000) -
Beneficial conversion feature
of warrants in association
with preferred stock (2,624,000) -
------------ -----------
Net loss available to common
shareholders $(14,738,804) $(5,309,411)
============ ===========
Average common shares outstanding 1,958,622 1,763,638
------------ -----------
Basic EPS $ (7.53) $ (3.01)
============ ===========
F-22
<PAGE>
<PAGE>
Diluted EPS:
Net loss $(4,031,804) $(5,309,411)
Deemed dividends on preferred
stock (8,083,000) -
Beneficial conversion feature
of warrants in association
with preferred stock (2,624,000) -
------------ -----------
Net loss available to common
shareholders $(14,738,804) $(5,309,411)
============ ===========
Average common shares outstanding 1,958,622 1,763,638
Convertible notes - -
Warrants - -
Stock options - -
Total shares 1,958,622 1,763,638
------------ -----------
Diluted EPS $ (7.53) $ (3.01)
=========== ===========
5,666,107 shares in 1998, 362,360 shares in 1997 were excluded from the shares
used to calculate diluted EPS as their effect is anti-dilutive.
13. OPERATING LEASES:
The Company leases space for both its San Jose and Vancouver locations through
2003. Rental expense for these leases and for various equipment leases
totaled approximately $123,000 in 1998 and $79,000 in 1997.
Future minimum lease payments due under these agreements are as follows for
the years ending March 31:
1999 $ 254,800
2000 239,331
2001 231,004
2002 237,217
2003 100,829
----------
$1,063,181
==========
14. RELATED PARTY TRANSACTIONS:
Effective May 1, 1996, DCC, entered into a three year employment agreement
with the Company's Chief Executive Officer.
F-23
<PAGE>
<PAGE>
Concurrently with the execution of the employment agreement, the Company's
Chief Executive Officer entered into a Stock Purchase Agreement pursuant to
which he purchased 200,000 shares of the Common Stock of DCC (which were later
exchanged for 200,000 shares of the Company's Common Stock), and as payment
terms he executed a non-recourse promissory note in the amount of $1,500,000.
The note bears interest at 5% per annum and the principal plus interest are
due on or before April 1, 2001. As security for the note, the Chief Executive
Officer has granted the Company a security interest in the 2,000,000 shares of
Common Stock.
On June 26, 1996, the Company entered into a Loan Forgiveness Agreement with
the Chief Executive Officer which provided that the $1,500,000 promissory note
would be forgiven if he continues to serve as the Company's Chief Executive
Officer through May 1, 1999, and there are no uncured defaults by him under
this Employment Agreement on May 1, 1999.
The note, together with interest accrued thereon has been incorporated in the
balance sheet. The note plus interest is being amortized over the period of
the contract as employment. Consequently, in the years ended March 31, 1998
and 1997, expense of $585,044 and $479,340 has been recorded as compensation
expense.
On January 2, 1997, the Company entered into a three year noncancelable lease
agreement with an officer of the Company where the Company leases office space
owned by the officer at an annual rate of $100,000 or $8,333.37 per month.
In conjunction with the private placement dated November 5, 1997 an officer of
the Company entered into a stock purchase agreement. Under the terms of the
agreement, the officer received 28,000 shares of Preferred Stock with
detachable warrants to purchase 140,000 shares of the Company's Common Stock
at $5.00 per share, in exchange for a note receivable in the amount of
$1,050,000. The note is collateralized by certain assets of the officer and
bears interest at a rate of 10.25%. No payments are due until November 5,
2002 at which time the full amount is due.
15. COMMITMENTS AND CONTINGENCIES:
The Company has a letter of credit agreement with Union Bank of California as
condition of its pager rental agreement. Under the terms of the agreement,
the letter of credit is in the amount of $200,000. Borrowings under the letter
of credit bear interest at prime plus 2% and required a compensating balance
to be on deposit at the bank of $200,000. The letter of credit expires
February 1, 1999, and is renewable. There were no amounts outstanding under
this arrangement as of March 31, 1998 or March 31, 1997.
16. EMPLOYEE BENEFIT PLAN:
During 1998, the Company established a plan (the "Plan") which is qualified
under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees
may make voluntary contributions to the Plan of up to 20% of their annual
compensation, not to exceed the statutory amount, and the Company may make
matching contributions. The Company made no contributions in 1998.
F-24
<PAGE>
<PAGE>
17. SUBSEQUENT EVENTS:
Subsequent to year end the Company entered into a Line of Credit agreement
with a financial services company. The line of credit is for the express
purpose of purchasing wireless information devices. The line of credit is in
the amount of $1,000,000 and is collateralized by funds on account at the
financial services company. Borrowings under the line of credit bear interest
at a variable rate equal to 2.4% above the 30-day commercial paper rate. The
line of credit expires March 27, 1999, with an automatic one year renewal
provision.
SCHEDULE 2
Supplementary Income Statement Information:
COLUMN A COLUMN B
ITEM CHARGED TO COSTS AND EXPENSE
- -------------------------------------- ----------------------------
Maintenance and Repairs $ 6,372
Depreciation of Property and Equipment 119,723
Amortization of Notes Receivable 447,176
Advertising Costs 1,196,903
Bad Debt Charge-Offs 32,523
F-25
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 29, 1998 DATALINK SYSTEMS CORPORATION
By:/s/ Anthony N. LaPine
Anthony N. LaPine
Chief Executive Officer,
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Anthony N. LaPine Chief Executive Officer, June 29, 1998
Anthony N. LaPine President and Chairman
of the Board
/s/ Thomas C. Bland Chief Financial Officer June 29, 1998
Thomas C. Bland
/s/ Marshall Geller Director June 29, 1998
Marshall Geller
/s/ Fred Hoar Director June 29, 1998
Fred Hoar
/s/ David Ladd Director June 29, 1998
David Ladd
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 of Datalink Systems Corporation of our report dated
May 7, 1998, on our audits of the consolidated financial statements of
Datalink Systems Corporation as of March 31, 1997 and 1998, and for the
two years in the period ended March 31, 1998, which report is included in
this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
San Jose, California
June 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages F-3 and F-4 of the Company's Form 10-KSB for the fiscal year ended March
31, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,353,719
<SECURITIES> 0
<RECEIVABLES> 75,547
<ALLOWANCES> (9,806)
<INVENTORY> 0
<CURRENT-ASSETS> 7,461,997
<PP&E> 818,157
<DEPRECIATION> (188,461)
<TOTAL-ASSETS> 8,115,318
<CURRENT-LIABILITIES> 1,280,657
<BONDS> 0
0
2,740
<COMMON> 20,183
<OTHER-SE> 4,586,470
<TOTAL-LIABILITY-AND-EQUITY> 4,609,393
<SALES> 962,461
<TOTAL-REVENUES> 962,461
<CGS> 530,545
<TOTAL-COSTS> 5,295,149
<OTHER-EXPENSES> (831,429)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,031,804)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,738,804)
<EPS-PRIMARY> (7.53)
<EPS-DILUTED> (7.53)
</TABLE>
