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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 2 TO
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 $8,790,618.
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 split of the Company's Common Stock. The 1 for 10 reverse
split of the Common Stock was effected on February 9, 1998. Although the
number of shares of Preferred Stock outstanding was not affected by the
reverse split, after giving effect to the reverse split the number of shares
of Common Stock issued and outstanding was 2,018,293. 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. All financial data and share data in this Form
10-KSB give retroactive effect to this reverse 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
available on terms attractive to the Company, if at all. Additional equity
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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
received by the Company. There can be no assurance that the Company can
replace subscribers that discontinue service and as such the loss of
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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
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
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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.
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
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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 5,000,000
shares of Preferred Stock, $.001 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. As of March 31, 1998, there were 2,740,000 shares of Preferred
Stock outstanding convertible into 2,740,000 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. The Company re-leases alphanumeric
pagers and airtime from a nationwide paging carrier and collects a one-time
activation fee for initiating the paging service.
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.
The QuoteXpress system monitors world wide financial market information,
which potentially extends to over 200,000 issues traded on more than 100
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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.
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.
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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
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.
11
<PAGE>
<PAGE>
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. MexxageX 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.
The Company has a variety of future products planned or under
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
12
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<PAGE>
* 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
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.
13
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<PAGE>
- 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.
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.
14
<PAGE>
<PAGE>
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 $25.62 $ 3.12
September 30, 1997 $ 5.80 $ 2.60
December 31, 1997 $ 9.40 $ 3.45
March 31, 1998 $ 6.13 $ 2.50
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. Service activation fees are included in the revenue
amounts below.
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
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.
15
<PAGE>
<PAGE>
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)%
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.
16
<PAGE>
<PAGE>
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, which amounted to
approximately $2,400,000. These costs were of a one-time nature and included
providing equity related incentives in exchange for services of approximately
$2,255,000 and approximately $153,000 in the issuance of stock options in
exchange for services performed. Of the approximately $2,255,000 recognized
during fiscal year 1997 in conjunction with providing equity related
incentives in the establishment of the administrative function, approximately
$2,155,000 was for finder's fees, and $100,000 for public relations. 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.
Bad debt expense has increased during the fiscal year. Bad debt expense
was approximately $32,000 and $1,500 for the years ended March 31, 1998 and
1997, respectively. The increase in bad debts was due primarily to the fact
that during 1998 net sales have increased 388% over the prior year.
Additionally, the Company was developing the credit and collections department
during the period. The allowance for doubtful accounts of $9,800 at March 31,
1998, reflects the fact that the Company has refined the credit and collection
process, has hired collection personnel, and has written off accounts deemed
uncollectible.
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.
17
<PAGE>
<PAGE>
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
of credit with a bank in the amount of $200,000 and has obtained a credit line
18
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<PAGE>
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.
19
<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 CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Datalink Systems Corporation:
We have audited the accompanying consolidated balance sheets of Datalink
Systems Corporation and 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 and subsidiary 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/ BDO Seidman, L.L.P.
BDO SEIDMAN, L.L.P.
San Jose, California
December 2, 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 13 and 15)
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock: $.001 par value:
Authorized: 5,000,000 convertible shares in 1998
and 1997; issued and outstanding: 2,740,000 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
Years 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 (notes 5 and 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 ADDITIONAL
------------------------ -------------------- SUB- PAID
SHARES AMOUNT SHARES AMOUNT CRIPTION IN CAPITAL
----------- ----------- ----------- -------- --------- ----------
<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,
$0.065 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 280,000 280 - - - 1,049,720
11/5/1997
Preferred shares
issued in con-
junction with
private placement
11/5/1997 2,460,000 2,460 - - - 7,913,540
Beneficial conver-
sion for preferred
shareholders -
Warrants - - - - - 2,329,000
Deemed dividends on
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 2,740,000 $ 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, $7.50
per share - - - -
Shares issued
April, May
1996, $7.50
per share - - - 297,000
Shares issued
for finder's
fee, May 1996,
$7.50 per share - - - 755,000
Shares repurchased
in June 1996,
$0.065 per share - - - (10,000)
Shares issued for
options exer-
cised November
1996, to Feb-
ruary 1997, $20.00 - - - 54,400
per share
Debentures con-
verted for shares
(Note 7) - - - 3,400,000
Stock issued for
public relations
services, Febru-
ary 1997, $10.00
per share - - - 100,000
Compensation ex-
pense for options
granted - - - 152,892
Note receivable,
May 1996 (Note 14) - (1,568,750) - 2,000
Note receivable
amortization - 479,340 - 479,340
Stock issued for
services, March,
1997, $22.70 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) - - -
Deemed dividends on
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
YEARS 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 in conjunction
with anti-dilution agreement 2,000 -
Common Stock issued for services - 2,467,807
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 (3,431,486) (2,411,998)
---------- ----------
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 sale of debentures - 2,000,000
Proceeds from issuance of Common Stock - 351,400
Net proceeds from the issuance of Preferred
Stock 7,916,000 -
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 9,214,264 4,266,047
---------- ----------
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)
YEARS 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 -- 3,400,000
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 -- 1,568,750
Preferred Stock issued in exchange for
note receivable $1,050,000 --
Equipment purchased with capital lease 81,640 --
Common Stock issued in accordance with
antidilution agreement 2,000 --
Beneficial conversion feature of warrants
in association with Preferred Stock 2,329,000 --
Beneficial conversion feature for
Peter Allard 295,000 --
Deemed dividends on Preferred Stock 8,083,000 --
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).
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. Non-refundable
activation fees for pagers are recognized upon execution of the service
contract by the customer.
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 and a financial services
company.
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, and accounts 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 pagers principally from one supplier under month-to-month
operation lease agreements. Management believes that other suppliers could
provide similar equipment 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 carrying value of property and
equipment is assessed annually or when factors indicating an impairment are
present. The Company determines such impairment by measuring undiscounted
future cash flows. If an impairment is present, the assets are reported at
the lower of carrying value or fair 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.
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.
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.
STOCK-BASED COMPENSATION:
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Under
this standard, companies are encouraged, but not required, to adopt the fair
value method of accounting for employee stock-based transactions. The fair
F-13
<PAGE>
<PAGE>
value method is required for all stock-based compensation issued to non-
employees, including consultants and advisors. Under the fair value method,
compensation cost relating to issuances of stock options, warrants and
appreciation rights is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period. Companies are permitted to continue to account for employee
stock-based transactions under Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," but are required to disclose
pro forma net income and earnings per share as if the fair value method has
been adopted. The Company has elected to continue to account for stock-based
compensation under APB No. 25. (See Note 9.)
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 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 of 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.
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; both the $26,800,000 and the $10,100,000 notes
receivable have not been recorded as it is not expected that the fees and
revenues allocated to the buyer will be sufficient to service the notes
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. The exercise
price of the warrants associated with the common stock was in excess of the
fair market value of the outstanding common stock at the time that the
warrants were issued. Accordingly, no expense was recognized related to the
issuance of the warrants with a nominal value. During the year ended March
31, 1998, the warrants were repriced to $3.75 (post reverse split) per share.
The warrants were repriced at an amount in excess of the fair market value of
the common stock at the time of the repricing, and accordingly, no expense was
recognized in conjunction with the repricing as the value of the repriced
warrants was nominal.
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. 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. Each unit consisted of 40,000 shares of
Preferred Stock, par value $.001, and each share of Preferred Stock is now
F-17
<PAGE>
<PAGE>
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.
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 1,415,580
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/A 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 5,000,000 shares of Preferred Stock, of
which 2,740,000 have been designated as Series A Preferred Stock.
DIVIDENDS: The holders of shares of Series A Preferred Stock shall be
entitled to receive dividends, non-cumulative, 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 one fully paid and non-assessable share of Common Stock.
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 1,370,000 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 an exercise 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 $.50 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 $12.50 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 to investors and an officer 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. The shares underlying the preferred
stock and warrants are restricted; however, the Company agreed to file a
registration statement with the SEC to register them. The same registration
rights apply to the officer as apply to the investors.
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
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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. As of March 31, 1998,
no stock appreciation rights have been granted under the Plan.
Activity for stock options 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 (277,000) 277,000 $20.00-$40.00 $6,284,400 $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 26,000 271,280 20.00- 40.00 6,170,000 22.51
--------- --------- ---------- ------
Options repriced (3,838,151) 4.28
Authorized 200,000
Granted (116,605) 116,605 2.79- 6.41 477,060 4.09
Canceled 56,530 (56,530) 4.00- 40.00 (1,282,600) 22.69
Exercised - -
--------- --------- ---------- ------
Balance,
3/31/1998 165,925 331,355 $ 2.97-$20.00 $1,526,309 $ 4.61
========= ========= ========== ======
The weighted average fair value of those options granted through March 31,
1998 and 1997 was $4.61 and $22.40, respectively. Options to purchase 198,632
and 139,866 shares were exercisable with a weighted average exercise price of
$4.97 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 to
$4.40 per option share. No compensation expense was recorded as a result of
this repricing as the fair value of the common stock was less than the
repriced options.
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 at the original issuance price.
As of March 31, 1998, no shares had been granted under this plan.
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PRO FORMA STOCK-BASED COMPENSATION:
The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for stock or options
issued to employees under 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 (15,551,523) (5,938,181)
Net loss per share
As Reported, Basic
and Diluted (7.53) (3.01)
Pro forma, Basic
and Diluted (7.94) (3.37)
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 5,000 6.0 $ 2.89 0 $ 0
$ 3.01-$ 4.00 109,665 7.4 3.80 22,178 3.99
$ 4.01-$ 5.00 203,750 8.4 4.46 166,656 4.40
$ 5.01-$ 6.00 3,240 6.5 6.00 2,440 6.00
$ 6.01-$ 7.00 2,000 .8 6.41 0 0
$ 7.01-$10.00 0 0 0 0 0
$10.01-$20.00 7,700 0 20.00 7,558 20.00
------- --- ------ ------- ------
331,355 7.8 $ 4.61 198,632 $ 4.97
======= === ====== ======= ======
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10. REVENUE:
The Company has sales to customers in both Canada and the U.S. Revenue from
Canadian Sales totaled $103,340 and $122,526 and sales from United States
customers totaled $859,121 and $74,365 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
=========== =========
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)
============ ===========
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Average common shares outstanding 1,958,622 1,763,638
------------ -----------
Basic EPS $ (7.53) $ (3.01)
============ ===========
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)
=========== ===========
Options and convertible securities covering 5,666,107 shares in 1998, and
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.
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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 as a
contra-equity account. 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 in the amount of $200,000. Borrowings
under the letter of credit bear interest at prime plus 2% and requires 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.
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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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 18, 1999 DATALINK SYSTEMS CORPORATION
By:/s/ Anthony N. LaPine
Anthony N. LaPine
Chief Executive Officer,
President and Chairman of the Board
