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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 1999
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. [ ]
The Issuer's revenues for its most recent fiscal year were $2,128,438.
As of June 4, 1999, 2,450,207 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $9,790,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format (check one): Yes __ No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
RECENT DEVELOPMENTS
In the second half of fiscal year 1999, the Company developed and is now
preparing to offer business-level services that use the Company's "Web to
Wireless" proprietary technology, XpressLink. In order to market these
services, called Enterprise Business Solutions, the Company formed a division
called the Enterprise Business Group. The Enterprise Business Group provides
services that enable Internet content providers, Internet "e-commerce"
companies, Internet auction sites, Internet point of entry sites (Web
Portals), and general businesses to automatically disseminate information
content to the wireless devices of customers, employees, and colleagues. The
Company's Enterprise Business Group will provide: (1) "Web to Wireless"
information content wireless enablement for Internet and Intranet Web sites;
(2) the development of customized "Web to Wireless" information products for
businesses to market and sell to their consumer markets; and 3) an account
maintenance and billing software package for use in an Internet "e-commerce"
environment. SEE "DESCRIPTION OF BUSINESS" AND "PRODUCTS AND SERVICES" BELOW.
BACKGROUND AND FORMATION OF THE COMPANY
Datalink Systems Corporation (the "Company") was formed under the laws of the
State of Nevada on June 18, 1996. On June 27, 1996, the Company went public
through an acquisition of a public corporation, Datalink Communications
Corporation ("DCC"), which was previously Lord Abbott, Inc., a Colorado
corporation formed in 1986. In the June 27, 1996 acquisition of DCC, the
Company issued 1,646,532 shares of its $0.01 par value Common Stock (as
adjusted for the 1 for 10 reverse split effective on February 9, 1998) to the
holders of 100% of the outstanding Common Stock of DCC, and DCC became a
wholly owned subsidiary of the Company. As a part of the transaction, the
Company acquired a Canadian corporation, DSC Datalink Systems Corporation,
incorporated in Vancouver, British Columbia.
On November 5, 1997, the Company completed the sale of units of the Company's
Series A Convertible Preferred Stock and Common Stock Purchase Warrants. 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 $0.001, 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 an exercise 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 a majority of the Company's voting
power signed written consents approving a one for ten (1 for 10) reverse split
of the Company's outstanding Common Stock. The 1 for 10 reverse
split of the Common Stock was effected on February 9, 1998. After giving
effect to the reverse split, the number of shares of Common Stock issued and
outstanding was 2,018,293. Although the number of shares of Preferred Stock
outstanding was not affected by the reverse 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. All financial data and share data in this Form
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10-KSB give retroactive effect to this reverse split, unless otherwise
indicated.
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.
DESCRIPTION OF BUSINESS
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 in the business of developing and marketing "Web to Wireless"
information products for consumer users and business-level services utilizing
the Company's wireless information technology. The Company's products and
services extend the World Wide Web and non-Web based customized information to
individuals using wireless devices such as pagers, digital cellular phones, or
personal digital assistant devices. The technology that makes "Web to
Wireless" possible is the Company's proprietary XpressLink platform. The
Company's products and services allow users to access and search databases,
receive and send messages and other information, and to receive time sensitive
information in real-time (such as stock quotes), at scheduled times (such as
the calendar reminder service), or triggered by an event (such as news,
sports, e-mail, and Internet auctions). Most importantly, the Company's
products and services are independent of the type of wireless communications
users employ or the company that provides the user's wireless service; they
work with any device or communications carrier.
PRODUCTS AND SERVICES
CONSUMER PRODUCTS GROUP
In it's early efforts to generate revenue by bringing the information
available on the World Wide Web to wireless communications consumers, the
Company used its XpressLink technology platform to provide several consumer
oriented products. The division of the Company focused on marketing the
consumer products is the Consumer Products Group. This effort focused on
stock traders and investors and led to the development of the Company's
Financial Product Suite. The Financial Product Suite remains successful
today, offering a range of personalized real-time services like stock and
commodity quotes, company press releases, and other time sensitive news that
effect stock performance.
As the market for wireless information evolved, the Company developed its
Lifestyle Product Suite. The suite was built with the mass-market of wireless
device users in mind. Lifestyle products provide personalized real-time
information, ranging from sports scores and horoscopes to news and weather.
In response to the growing need expressed by paging carriers to provide free
or low-cost information services to their customers and in the interest of
exposing more consumers to the Company's products with the idea that after
trying the broadcast services a consumer may purchase a more advanced product,
the Company developed a series of broadcast information products. The
broadcast products do not provide real-time, user specific information;
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rather, they send out the same pre-programmed information to all product
users. These products provide information such as news headlines, closing
stock indexes, and general sports information.
ENTERPRISE BUSINESS GROUP
The Company believes the future of its business lies in the growth of the
Internet and transactions which use the Internet's "e-commerce". The
explosion of Internet usage for "e-commerce" and instant information
requirements has created new opportunities for the Company. The Company is
preparing to offer business-level services, called Enterprise Business
Solutions, that will connect the World Wide Web and corporate Intranet sites
to the wireless marketplace. These business solutions will be marketed
through a new division at the company called the Enterprise Business Group.
The Company's Enterprise Business Group will deliver: (1) turn-key "Web to
Wireless" solutions that enable Internet and Intranet Web sites to deliver
information wirelessly; (2) development of customized "Web to Wireless"
information products for businesses to market and sell to consumer markets;
and 3) an account maintenance and billing software package for use in an
Internet "e-commerce" environment for e-commerce Internet and Intranet sites.
The Enterprise Business Group developed a series of services that include
simple text messaging, optional information services provided to a Web site's
distribution list, two-way wireless trading on Internet auction sites, and
custom wireless solutions. At this point the Company's Enterprise Business
Solutions suite includes the Wireless Bookmark, an easy to use Web based
messaging service that allows a business to send out information alerts to
customers with wireless devices; the Auction Engine, built for Internet-based
auction sites to provide auction update alerts to customers and allow bidding
via two-way wireless devices; the Content Engine, which provides for
distribution of information content that a business might be selling via their
Web site; and the Intranet Productivity Tool, a customized product that allows
a wireless device to communicate with a corporate Intranet site. In addition,
the Company will license its proprietary account maintenance and billing
software for businesses engaged in Internet "e-commerce".
MAJOR DISTRIBUTION PARTNERS
The Company currently uses direct and channel distribution initiatives
channels to offer its products and services. Its direct methods include
direct mail campaigns, television advertising on CNBC and other cable channels
and Internet advertising. The channel methods include strategic alliances
with carriers and retailers. The Company is pursuing a strong Web presence
through relationships with Internet sites.
The Company has established partnerships with several wireless communications
leaders and other wireless distribution companies. These partnerships, as
described below, will provide the Company with a large distribution network
and enhance future relationship building.
BELLSOUTH WIRELESS DATA (a wholly owned subsidiary of BellSouth). On May 25,
1999 the Company announced a strategic partnership with BellSouth Wireless
Data that allows for BellSouth to market the Company's products and services
directly to all BellSouth Interactive Paging subscribers. BellSouth Wireless
Data operates its wireless data services throughout the United States,
covering more than 93 percent of the urban business population located in 492
Metropolitan Statistical Areas (MSAs) and non-MSAs with a total population of
200 million people.
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SKYTEL COMMUNICATIONS, INC. SkyTel, the leading paging carrier, has been
distributing the Company's products since early Fiscal 1999. In addition to
the Financial Product Suite, the Company offers over 25 broadcast channels to
SkyTel advanced messaging customers. SkyTel's advanced messaging customer
base grew by over 100% in the past year to 450,600 units in service, and
offers an excellent avenue for growth.
OFFICE DEPOT, INC. The Company recently signed a reseller agreement with
Office Depot, a worldwide chain of office supply outlets. Office Depot
provides the Company its first outlet for distributing consumer information
services to the mass market. This relationship will help the Company build
brand awareness and increase distribution for its consumer products. Office
Depot operates 749 stores throughout the United States, Canada, France, and
Japan.
PAGENET, INC. The Company is a PageNet reseller. This gives the Company
leverage when purchasing airtime for its customers. PageNet is a national
carrier serving more than 10 million customers with a state-of-the-art network
capable of reaching 90% of the US population. More than one in every five
U.S. paging customers use PageNet. They offer comprehensive and reliable
local, regional, and national coverage from over 90 offices nationwide.
The Company is continuing to build relationships with other leading paging PCS
and retail wireless providers. These partnerships will assist the Company's
efforts to position itself as a leader in Web to Wireless.
CONSUMER PRODUCTS INDUSTRY BACKGROUND
With the current growth of wireless digital technology such as personal
communications services (PCS), and personal digital assistants (PDAs), the
Company believes there will be continued demand for communications with data
features and faster and easier access to information. Management believes 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. Pelorus predicts the number of mobile
workers will increase from 40.5 million to 62.5 million by 2001. A January
1999 report by Mobile Communications estimated that worldwide cellular/PCS
subscriptions would grow annually by 19% until the year 2003, reaching an
estimated 725 million total users worldwide. The Yankee Group estimates that
there will be 62 million cellular/PCS subscribers in the U.S. by the end of
the decade. With regard to paging, the Yankee Group estimates that there will
be 55 million paging subscribers in the U.S. by the end of the decade.
Although the paging industry is expected to continue to grow, a Mobile
Communications report says that the industry is nearing the crest of its life
cycle curve and the market is almost saturated. Mobile's report states: "To
capture, retain and earn a profit on the next 20% of the population, operators
and device vendors must develop customized products for distinct sub-segments
of demand." The Company believes that its products provide paging carriers
not only with a competitive advantage but also a tool that helps them to
remain solvent, reduce the number of customers changing carriers and stabilize
revenue.
Wireless message receivers are expected to continue to evolve into more
sophisticated devices with two-way communications capabilities; larger
displays; more memory capacity; on-board processors; and the capability to
communicate directly with personal computers using infrared and other
technologies. Paging capabilities are already offered as an option on new
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smaller hand held personal computers such as 3Com's Palm Pilot. Handheld
devices with smaller operating systems like Windows CE will provide users with
the ability to generate alphanumeric pages, send e-mail, use CE versions of MS
Word and MS Excel, and eventually browse the Web.
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 are
expected to be offered that will utilize the capabilities of future one-way
and two-way mobile data technologies such as Digital Cellular Short Message
Service (SMS), PCS, NPCS, 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.
ENTERPRISE BUSINESS SOLUTIONS INDUSTRY BACKGROUND
The Company believes that the business side of the Internet market, comprised
of "e-commerce" sites, is in need of a way to reach more customers. The
number of registered Internet business names reached 5 million and continues
to grow. In 1997, "e-commerce" sales totaled $3 billion. In 1998
"e-commerce" sales reached $7.1 billion. Jupiter Communications projects
online sales to reach $12 billion in 1999 and $41 billion by 2002.
Ultimately, as a tool for transacting commerce, there has never been anything
comparable to the Internet and its rapid growth.
International Data Corporation (IDC) predicts an increase of users and
Internet commerce in 1999. They estimate that the number of U.S. Internet
users will surge 28% to 147 million, and Internet commerce will more than
double to $68 billion. Looking ahead, IDC estimates that from 1999 to 2002,
buyers will spend nearly $900 billion on-line.
In the past two years, the market for Web to Wireless information services and
the need for Web to Wireless "e-commerce" tools have increased substantially.
Numerous organizations have investigated the industry and concluded that it
will continue to experience significant growth. Recent announcements by major
industry players confirm that the major software, hardware and
telecommunications companies expect tremendous opportunities in Web to
Wireless connectivity.
COMPETITION
The Company is participating in a highly competitive industry, with
competition from a broad range of both large and small information product and
service providers. Certain of the companies have far greater financial,
technical and marketing resources than the Company.
Competitive pressures within the wireless and Internet industries are
considerable as different players position themselves to reach more customers
and establish industry standards. Within this highly competitive market, the
Company is attempting to establish a strong position among a diverse group:
software companies, technology platform companies, carriers, service
providers, and content providers. To a great extent, the industry is in flux.
In the face of such uncertainly, the Company will need to create strategic
alliances, remain innovative, and respond quickly to change in order to be
successful.
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EMPLOYEES
At June 4, 1999, the Company had 40 full-time employees, approximately 17 of
whom were engaged in sales and customer support, 7 in marketing, 8 in finance
and administration, and 8 in engineering. No employees of the Company are
covered by a collective bargaining agreement.
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. The Company's business
started in 1996. For the year ended March 31, 1999, the Company had a net
loss available to common shareholders of approximately $4,430,164 and had an
accumulated deficit of approximately $26,104,574. Factors affecting future
operating results include: market acceptance of new services; 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 service order will decline in the
foreseeable future due to increased competition and a higher mix of customers
added through third party resellers.
2. RESEARCH AND DEVELOPMENT EXPENDITURES. 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 and development of business services. 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. As of April 30, 1999
the Company had a paying customer base of approximately 2,525 customers and
approximately 68,000 non-paying customers of broadcast services. The Company
anticipates it will be profitable if it can expand its customer base to 13,000
paying customers or achieve a certain level of success with its Enterprise
Business Solutions. 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 services, and resources the Company devotes
to marketing and distribution of its services. 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
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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
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 paying customer base
was approximately 2,525 users and non-paying broadcast customer base was
approximately 68,000 on April 30, 1999. The Company's success will be
dependent upon consumers, third party resellers, and business' active
acceptance of the current information services 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 services 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 information services industry is a very
competitive industry, and the Company will be competing with much larger
companies with greater resources. The 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. As competitors devote additional
resources to the wireless information business or focus strategies on
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 wireless information services
industry as well as regulatory and legislative developments make it impossible
to predict the extent of future competition in the businesses in which the
Company operates. Such advances and 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 services less competitive or even obsolete.
7. ADVERSE EFFECT OF CUSTOMER CANCELLATIONS. The Company expects customer
turnover as customers cancel for various reasons. The results of operations
of wireless information service providers such as the Company are
significantly adversely affected by customer cancellations. In order to
realize net growth in active customers, canceled customers must be replaced,
and additional customers must be added. However, the sales and marketing
costs associated with attracting new customers are substantial relative to the
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costs of providing service to existing customers, and expenses associated with
each new service order can exceed the sales price and non-refundable service
activation fee received by the Company. There can be no assurance that the
Company can replace customers that discontinue service and as such the loss of
customers and the uncertainty regarding attracting and retaining new customers
may have a material adverse effect on the Company's business, operating
results and financial condition.
8. ABILITY TO DEVELOP NEW SERVICES AND TECHNOLOGICAL CHANGES. The markets
served by the Company are characterized by rapid technological change
resulting in dynamic customer demands and frequent new 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
technology. 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 technology and service releases
prior to or after commencement of commercial deployment, resulting in service
redevelopment costs and loss of, or delay in, market acceptance. Once these
technology services, 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 depend on its ability to
successfully implement operating and financial procedures and controls, to
improve coordination among different operating functions, to continue to
strengthen management information systems and to continue to hire additional
personnel, particularly in its customer service, sales and engineering
departments. Although 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. 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 management team and other
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. 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
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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
services or technology. 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.
11. 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 OTC Bulletin
Board. The Company intends to apply for listing on the NASDAQ Small Cap
Market or the American Stock Exchange when qualification conditions are met.
12. DIVIDENDS. No dividend has been paid on the Common Stock since inception
and none is contemplated at any time in the foreseeable future.
13. PREFERRED STOCK AND SHARES ELIGIBLE FOR FUTURE SALE. 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 June 7, 1999 there
were 2,328,873 shares of Preferred Stock outstanding convertible into
2,328,873 shares of Common Stock. Upon conversion, these shares would be
"restricted securities" and under certain circumstances may be sold in
compliance with Rule 144 adopted under the Securities Act of 1933, as amended.
Future sales of those shares under Rule 144 could depress the market price of
the Common Stock in any market which may exist.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's sales, marketing and customer support facilities are located in
San Jose, California. The Company occupies a 6,000 square foot headquarters
facility under a lease which expires on August 31, 2002. The monthly rent for
this facility is approximately $17,000. The Company's research and
development group is located in Vancouver, British Columbia, where the Company
leases approximately 2,200 square feet for a monthly rent of approximately
$5,000 under a lease which expires August 31, 2000. The rent for the
Vancouver office increases approximately 10% per year.
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On January 2, 1997, the Company entered into a three year lease with Mr. and
Mrs. LaPine whereby the Company leases from the LaPines 4,000 square feet of
office space located in the LaPine's home at an annual rate of $100,000 or
$8,333.37 per month. The lease terminates if Mr. LaPine's employment with the
Company is terminated.
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future, however, the Company anticipates
further expansion and development within its space to accommodate its
increased activities. Should the Company need additional space, management
believes it will be able to secure such additional space at commercially
reasonable rates.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company is a party, and
the Company is not aware of any threatened legal proceedings involving the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1999.
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 "NETD". 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 April 1, 1997.
These prices are believed to be inter-dealer quotations and do not include
retail mark-ups, mark-downs, or other fees or commissions, and may not
necessarily represent actual transactions.
QUARTER ENDED HIGH BID LOW BID
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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
June 30, 1998 $ 7.94 $ 4.00
September 30, 1998 $ 4.94 $ 1.00
December 31, 1998 $ 1.31 $ 0.63
March 31, 1999 $ 4.00 $ 1.06
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 June 7, 1999, the Company had approximately 1,100
beneficial holders of the Company's Common Stock and 258 shareholders of
record.
(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.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Net loss available to common shareholders decreased from $14,738,000 in 1998
to $4,430,164 in 1999 due to the factors described below and to non-cash
charges booked in 1998 resulting principally from the November 5, 1997 private
placement of preferred stock and common stock purchase warrants. These
charges reflected the beneficial conversion features which were deemed
dividends on preferred stock of $8,083,000 and on warrants of $2,624,000.
These amounts represent 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 conversions) upon issuance.
Revenue increased from $962,461 in 1998 to $2,128,438 in 1999. This was due
principally to the development of new products and services along with sales
and marketing strategies designed to capture new business. These strategies
used both direct sales utilizing sales personnel and extensive print and media
advertising and channel sales initiatives working with third party
distribution partners. The following table describes the amounts of revenues
and the amount of increase for the Company's various products:
NET SALES FOR THE FISCAL YEAR ENDED
PRODUCT MARCH 31, 1999 MARCH 31, 1998 INCREASE
- ----------------- ---------------- ---------------- ----------
QuoteXpress $1,025,570 $ 786,974 $ 238,596
SplitXpress 966,484 166,700 799,784
CommodityXpress 100,964 7,085 93,879
Other 35,420 1,702 33,718
--------- --------- ----------
Totals $2,128,438 $ 962,461 $1,165,977
During calendar 1998, the Company recruited personnel to refine and execute
the Company's marketing and sales plan. These individuals developed a sales
and marketing strategy which identified key markets and business
opportunities, and which required development of additional sophisticated
financial information products, which were introduced mid-year 1998. The
marketing strategy provided for the use of a direct sales channel utilizing
extensive print and media advertising together with a sales call center and
Web site to be utilized in soliciting subscriptions to the Company's services
directly from consumers. Additionally, an indirect sales channel initiative
was launched which involved developing joint marketing alliances with various
wireless carriers, information service providers, Internet companies and
retail stores to market and sell the Company's products and services as value
added to the products and services provided by the alliance companies.
In the latter part of calendar 1998, an extensive advertising campaign
involving direct mail, television and print advertisements was implemented to
promote the direct sales channel marketing strategies. In May 1998, the
Company recognized a need to develop a series of non-financial products
relating to life styles. Among these products are a real-time sports alert
service, and a general lifestyle service providing updates on weather,
horoscopes, ski and surf conditions, winning lottery numbers, and other
information. The Company also launched an extensive Internet marketing
initiative providing on-line capabilities for sales and account maintenance of
these new products along with the financial products.
12
<PAGE>
The new lifestyle products were introduced in the Fall of 1998, about the time
the United States financial markets were negatively impacted by an interim
stock market correction. A decrease in sales and resultant sales revenue at
that time caused the Company to reassess its marketing plans, which resulted
in substantial reductions in the expensive print and media advertising
campaigns. While continuing to promote and sell products through direct
channel marketing, the Company's focus for the sale of consumer products
shifted principally to channel marketing strategy, with substantially less
reliance on print and media advertising. While these channels, which include
paging carriers and retail stores among others, have good potential, they have
not been in place long enough to produce meaningful results.
COST OF REVENUES AND GROSS MARGIN
Cost of revenues increased from $530,545 in Fiscal 1998 to $822,636 in Fiscal
1999, primarily due to the increase in net revenues. Cost of revenues
represents the direct costs necessary to provide the services to customers.
As more services are provided to more customers, the cost of providing these
services also increases, but not in proportion to the increase in revenues.
This is due primarily to economies of scale, as some portions of the costs are
relatively fixed and do not increase in direct proportion to revenues. Cost
of revenues principally includes costs to obtain data feeds from various
exchanges, costs for pager rental and airtime for those customers without
their own pagers, and certain telephone costs. The following tables show the
net revenues, cost of revenues, and gross margin for the years ended March 31,
1999 and 1998.
YEARS ENDED MARCH 31, INCREASE
--------------------
1999 1998 $ %
-------- -------- ---------- -------
Net revenues $2,128,438 $962,461 $1,165,977 121.1%
Cost of revenues $ 822,636 $530,545 $ 292,091 55.1%
Gross margin $1,305,802 $431,916 $ 873,886 202.3%
OPERATING EXPENSES
Operating expenses have increased in fiscal 1999 from the prior year period.
The Company classifies operating expenses into three major categories:
research and development, sales and marketing, and general and administrative.
The tables shown below summarize the increases in these three categories of
operating expenses:
YEAR ENDED MARCH 31, INCREASE
-----------------------
DESCRIPTION 1999 1998 $ %
- -------------- ---------- ----------- ---------- --------
Research and
Development $ 798,549 $ 755,080 $ 43,469 5.8%
Sales and
Marketing 2,937,140 2,133,635 803,505 37.7%
General and
Administrative 2,816,655 2,406,434 410,221 17.0%
---------- ----------- ----------- ---------
Totals $6,552,344 $5,295,149 $1,257,195 23.7%
Research and development expenses are expenses incurred in developing new
products and product enhancements for current products. These costs increased
13
<PAGE>
during the first nine months of 1999 due principally to additional personnel
who were utilized in developing the new lifestyle products and leveled off
somewhat during the latter part of the year due to a reduction in personnel.
Sales and marketing expenses consist of costs incurred to develop and
implement marketing programs for the Company's products. These include costs
required to staff and execute a sales and marketing strategy, participation in
trade shows, media development, advertising in media such as television and
printed financial publications and the related overhead, and Web site
development and maintenance. These costs also include the expense of a sales
staff and a customer support call center. Sales and marketing expenses have
increased in the current year over the prior year due primarily to increased
salaries and expenditures for the development of marketing materials, media
production, media placement, trade shows, and public relations. Salaries
increased due mainly to personnel hired in the latter part of 1998 to develop
and execute new marketing and sales programs and materials for financial
products and the newly developed lifestyle products, with a full year of costs
being incurred in 1999. For most of 1999, increased resources were employed
in media and print development and production and advertising placement, with
these programs being reduced only in the latter months of the year. Other
increases were related to the development of the e-commerce components of the
Company's Web site, development of collateral for and participation in trade
shows, and the initiation of the Company's programs for product sales through
retail chain stores in conjunction with the retailing of pagers, PCS phones
and other wireless products.
NON-OPERATING REVENUES AND EXPENSES
Non-operating revenues and expenses are primarily made up of interest income
from invested cash, amortization of deferred revenue from technology sales
advances, and the owner's fees and offsetting interest income recognized,
related to the technology sales (see footnote 5 to the Consolidated Financial
Statements). The following tables reflect the changes in Other income
(expense).
YEAR ENDED MARCH 31, INCREASE (DECREASE)
-----------------------
DESCRIPTION 1999 1998 $ %
- ----------- ---------- ---------- ---------- ----------
Owners fee
sales of
technology $(1,570,000) $(1,570,000) $ 0 0
Interest income
sales of
technology 1,570,000 1,570,000 0 0
Amortization of
technology
advance 460,502 467,949 (7,447) (1.5%)
Interest income 402,164 367,436 34,728 9.4%
Miscellaneous (46,288) (3,956) (42,332) (1,070.0%)
---------- ---------- ---------- ----------
Totals $ 816,378 $ 831,429 $ (15,051) (1.8%)
These non-operating items have remained relatively constant from 1998 to 1999.
Interest income (from invested cash) included only a partial year in 1998 due
14
<PAGE>
to funds being received from the Company's private placement in November 1997.
As cash has been utilized in operations during 1999 and 1998, as reflected in
the following table of Liquidity and Capital Resources, interest income is now
decreasing, even though the total for 1999 exceeded interest income for 1998.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company completed a private placement of preferred
stock and common stock purchase warrants, which netted approximately
$8,000,000 in new funds. Additionally, the Company also completed the sale of
the QuoteXpress technology during 1998, which generated an up-front cash
payment of approximately $1,300,000. Sources and uses of cash during 1999 and
1998 are summarized as follows:
YEAR ENDED MARCH 31,
1999 1998 CHANGE
----------- ----------- -----------
Cash used in
operating activities $(3,850,717) $(3,427,486) $ (423,231)
Cash used in
investing activities (328,305) (349,568) 21,263
Cash provided by (used in)
financing activities (5,254) 9,214,264 (9,219,518)
----------- ----------- -----------
Net increase (decrease)in
cash and cash equivalents $(4,184,276) $ 5,437,210 $(9,621,486)
As of March 31, 1999, the Company had cash and cash equivalents amounting to
$3,169,443, exclusive of reserves on deposit with our merchant bank of
$68,243, which reserves are not immediately available for usage. Working
capital decreased from $6,181,340 as of March 31, 1998 to $1,664,133 at March
31, 1999, due to continuing development of new products and services and prior
aggressive media and print advertising campaigns. The Company has not yet
generated sufficient revenues to defray costs associated with the continued
product support and development, marketing and sales costs and administrative
expenditures. As previously mentioned, the Company has moved to channel
marketing processes through retail storefronts (i.e. Office Depot), wireless
communications carriers providing paging, PCS Phone, and other wireless
devices (i.e. SkyTel, BellSouth), resellers of pagers and paging services
(i.e. Totally Wireless), the Internet through the Company's "Linkshare"
affiliate membership program, and other Internet-based e-commerce marketing
activities. It is expected that these new marketing programs will ultimately
result in a reduction in sales and marketing expenses for direct channel
marketing which is very dependent on extensive advertising expenditures.
There are no ongoing advertising commitments as of March 31, 1999, although
there are advertising payables totaling approximately $271,000 included in
accounts payable at that date which were recognized in expense during the year
and will be paid evenly over the next eight months. There are no material
commitments for capital expenditures at March 31, 1999.
At March 31, 1999, the Company had a deferred tax asset of approximately
$5,020,000, principally arising from net operating loss carryforwards
available to offset future taxable income. As management cannot determine
that is more likely than not that the Company will realize the benefit of this
asset, a 100% valuation allowance has been established.
15
<PAGE>
Management believes that it has adequate working capital for the next 12
months. However, management anticipates the need to raise additional funds
during the next 12 months in order to fund new marketing and development
initiatives. The Company has a letter of credit with a bank in the amount of
$200,000 which expires in March 2000, and has obtained a credit line in the
amount of $1,000,000. The Company also has outstanding warrants which, if
exercised, could provide additional capital. However, there is no assurance
that any of the warrants will be exercised.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the functioning of the
programming code in computer systems as the Year 2000 approaches. The Year
2000 issues result from the inability of some computer programs to distinguish
the year 1900 from the year 2000. Many computer programs and operating
systems were written using two digits to define the applicable year rather
than four digits. This means that any equipment containing computer programs
with time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. In some instances, this could result in system
failures, disruption in operations and possible inaccuracies of data.
The Company does not use mainframe computers in its internal operations.
Consequently, it does not have the extent of Year 2000 issues of other
companies that depend on what is commonly known as "legacy" systems. The
Company uses PCs and "server class" systems in its operations and the
operating system for its software platform and technology is Microsoft Windows
NT.
Phase I of the Company's Year 2000 initiative has been to substantially
complete an inventory of all its IT and non-IT systems and equipment, and
based on this inventory, review its IT and non-IT proprietary systems and
contact its significant vendors to determine how their IT and non-IT products
and services might be effected by the Year 2000 issues. The Company's review
of its internal systems has resulted in the Company's determination that its
proprietary IT and non-IT systems meet the compliance requirements of the Year
2000. Ninety percent of the Company's vendors have provided statements that
their IT and non-IT systems are Year 2000 compliant. The Company continues to
collect statements from the remaining ten percent of its vendors.
The Company anticipates that there will be little or no Year 2000 issues and
therefore little or no cost will be incurred therefrom. However, although
compliance confirmation has been provided by ninety percent of the Company's
vendors, and the remaining ten percent have indicated that they are
currently Year 2000 compliant, there can be no assurance that these vendors
will not experience some level of Year 2000 issues that in some way may have
an adverse effect on the Company's systems. The level of risk related to this
occurrence has been assessed as very low. The Company's contingency plan in
the event that unforeseen Year 2000 issues should occur will be to change to
another vendor that is Year 2000 compliant. For this reason, Phase II of the
Company's Year 2000 initiative is to develop an inventory of back-up vendors
for each vendor whose systems are currently used so that if a current vendor
develops a Year 2000 issue, the back-up vendor may be called upon to provide
services in accordance with Year 2000 compliance standards.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are set forth on pages F-1 through F-26 hereto.
16
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Directors and Executive Officers of the Company and its wholly-owned
subsidiary, their ages and positions held in the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
- ----------------- ----- ------------------------------------
Anthony N. LaPine 56 Chairman and Chief Executive Officer
Charles K. Dargan II 44 Director
Frederick M. Hoar 50 Director
David Ladd 51 Director
Robert L. Priddy 53 Director
William A. Mahan 58 Chief Financial Officer and Treasurer
Sara A. Fiscus 31 Secretary and General Counsel
Cornel R. Fota 32 Vice President - Engineering
Rebecca A. Callahan 35 Vice President - Sales
Pamela B. LaPine 41 Vice President - Marketing
The is no family relationship between any Director or Executive Officer of the
Company except that Anthony N. LaPine and Pamela B. LaPine are husband and
wife. There are no known arrangements or understandings between any director
or executive officer and any other person pursuant to which any of the
above-named executive officers or directors was selected as an officer or
director of the Company.
The Company does not have a nominating committee, but does have an audit
committee and a compensation committee which consists of all of the
non-employee Directors of the Company, and therefore presently consists of
Charles K. Dargan II, Frederick M. Hoar, David Ladd and Robert L. Priddy.
Both Committees were first established on January 15, 1998.
The following sets forth biographical information as to the business
experience of each Officer and Director of the Company for at least the past
five years.
ANTHONY N. LAPINE became the Company's Chairman on September 10, 1997. He has
served as Chief Executive Officer and a Director of the Company since June 27,
1996. Mr. LaPine is a veteran Silicon Valley entrepreneur and seasoned
executive serving in the CEO capacity for over 20 years. He has severed on the
Board of Directors of 19 companies, including the Red Herring Magazine. He
served as a strategic advisor to the Russian government on its transition to
capitalism and as Chairman of the Hoover Institution's Council on Economic
17
<PAGE>
Development. He also serves as a member of the "Board of Arbitrators" for the
NASD and the Pacific Coast Stock Exchange. Additionally he lectures at the
Graduate School of Business at the University of San Francisco.
LaPine's career began at IBM in 1964, where his technical achievements earned
him several patents and "outstanding contribution" awards. His Data
Synchronization invention (Patent 3,701,039) remains the state of the art in
today's disk drives. In 1969, he was recruited as one of the founders of
Memorex's Equipment Group where he was instrumental in developing the floppy
disk drive. After Memorex's first billion dollar revenue year, he was
instrumental in the sale of Memorex to Burroughs, now Unisys. In 1981 Mr.
LaPine was recruited to re-engineer Irwin/Olivetti where he orchestrated the
invention of the first removal cartridge tape backup in personal computers.
This development opened a new billion dollar market catapulting the company to
profitability and an initial public offering. In 1983, he formed LaPine
Technology, raising $30 million and launched the new 3-1/2 inch Winchester
disk drive technology. He led his company's growth to a profitable $60
million in sales before selling the company to his alliance partners,
Prudential and Kyocera, in 1987. In 1987 he formed The LaPine Group, a private
investment and turnaround management firm which he owned and operated until
December 1994. From December 1994 to June 1996, he served as CEO of Andor
International, a company launched by Gene Amdahl. After reorganizing the
company, Mr. LaPine negotiated its sale to the Fortel Group where he now
serves as Chairman.
He has been the subject of articles in Forbes, Business Week, Venture, and the
Wall Street Journal. He has also appeared on ABC, CNBC, CNN and cable TV
programs, including Bloomberg, Venture Point and Window on Wall Street. He is
listed in "Who's Who" for: The Computer Industry, California, Finance and
Industry, Science and Engineering, American Business Leaders, Worldwide, Men
of Achievement, and Distinguished Leadership.
Mr. LaPine received a BSEE Cum Laude from San Jose State University in 1965,
an MSEE from Santa Clara University in 1971, an MBA from the University of San
Francisco in 1986, and is an SEP Alumnus of the Stanford Graduate School of
Business. He is the recipient of California State University' "Alumni Award
of Distinction" and Santa Clara University's "Distinguished Alumni Award."
CHARLES K. DARGAN II became a director of the Company on March 31, 1999. He
has been the managing director of corporate finance for the Seidler Companies,
a private brokerage, investment banking and public finance firm headquartered
in Los Angeles, since 1998. He has been involved in investment banking since
1982. Mr. Dargan was previously the managing director of corporate finance at
L.H. Friend, Weinress, Frankson and Presson, Inc., was a principal in
investment banking at Ambient Capital and a first vice president at Drexel
Burnham Lambert, Inc. His expertise includes private and public debt and
equity financing, leveraged buyouts and exchange offerings, in addition to
merger and acquisition advisory services. A Certified Public Accountant and
Chartered Financial Analyst, Mr. Dargan holds both an MBA and MS degrees from
the University of Southern California and a BA from Dartmouth College.
FREDERICK M. HOAR has served as a Director of the Company since March
1998. He has over 35 years of experience in public affairs, financial
relations and marketing. He has shaped and implemented communications
strategies for some of America's seminal technology-based companies, including
Apple, Fairchild, Genentech and RCA. Mr. Hoar joined Boston-based Miller
Communications, a leading international high-tech public relations agency, in
1989. He subsequently became president of Miller/Shandwick Technologies West,
with responsibility for offices in Silicon Valley, Los Angeles and Dallas. In
18
<PAGE>
1997 he was named to the additional position of chairman of Shandwick
Technologies. In the early 1980's, Mr. Hoar was vice president of
communications for Apple Computer. He also served as vice president,
communication and marketing services for Fairchild Camera & Instrument; vice
president, corporate communications for Genentech; director, worldwide
communications for Raychem; and division vice president, public affairs and
advertising for RCA. Mr. Hoar holds a B.A. degree cum laude in American
history and literature from Harvard College and an M.A. in editorial
journalism from the University of Iowa. He began his career with the
Associated Press and as an instructor in English and journalism at the
University of Northern Iowa.
DAVID LADD has served as a Director of the Company since March 1998. He
is a telecommunications expert, who finds and cultivates new
telecommunications companies. He is currently Vice President in the New
Ventures Group of Lucent Technologies, where his primary responsibility is to
help commercialize Bell Labs technology in partnerships with Silicon Valley
venture capitalists and entrepreneurs. He joined Mayfield fund in 1998 as a
partner. In addition, he has also held senior management positions at a
number of telecommunications companies, including Rolm Corp., Octel
Communications Corp. and VMX Inc.
ROBERT L. PRIDDY has served as a Director of the Company since October
1998. He has been Chief Executive Officer and Chairman of the Board of RMC
Capital, LLC, which holds a number of investments, since its inception in
October 1995. In addition, he was one of the four founding partners of
ValueJet Airlines. Mr. Priddy served as Chief Executive Officer, director and
Chairman of the airline, the wholly-owned subsidiary of ValueJet, Inc., from
July 1992 to November 1996. Mr. Priddy is also on the Board of Directors of
Accumed International and Advamtel. From December 1991 to April 1993, he
assisted Mesa Airlines in the founding of its subsidiary, Florida Gulf
Airlines, for which Mr. Priddy served as President. From July 1991 to January
1993, he also served as a director of Mesa Airlines, Inc. From January 1988
to November 1991, he served as President and Chief Executive Officer of Air
Midwest, Inc., a regional airline headquartered in Wichita, Kansas, for which
he also served as a director from November 1987 to November 1991. From 1979
to 1987, he served as Vice President and Chief Financial Officer of Atlantic
Southeast Airlines, Inc. ("ASA"), a regional airline headquartered in Atlanta,
Georgia, for which he also served as a director from 1981 to 1987. He was one
of the three founding stockholders of ASA. From 1966 to 1979, he worked for
Southern Airways in various capacities, his last responsibilities being
manager of scheduling.
WILLIAM A. MAHAN became the Company's Chief Financial Officer and
Treasurer effective October 5, 1998. Mr. Mahan has extensive
experience in corporate finance, operations, shareholder reporting and
investor services and has served as chief financial officer or chief
accounting officer for various public and privately held companies for the
last 30 years, including New York Stock Exchange and American Stock Exchange
listed companies. From 1995 to 1998, Mr. Mahan was a principal at W.A. Mahan
Associates, which provided interim and part-time chief financial officer
services. Clients included a manufacturer of emergency power generating
equipment and a mortgage banker. From 1993 to 1995, he was Vice President of
Finance of Information Network Corporation, a privately-held, Phoenix, Arizona
based, provider of managed health care information systems. Additionally, Mr.
Mahan was President and Chief Executive Officer of a privately held technology
company from 1989 to 1993, prior to its acquisition by a New York Stock
Exchange listed company. Mr. Mahan started his career with the Los Angeles
office of Haskins & Sells, CPA's (now Deloitte & Touche, LLP). He received
19
<PAGE>
his degree in Finance and Accounting from Arizona State University in 1964,
and earned his CPA certificate in 1966 while at Haskins & Sells.
SARA A. FISCUS has served as the Company's Corporate Secretary since
March 31, 1998 and has been the Company's In-house Counsel since October 1,
1997. Prior to joining the Company, Ms. Fiscus served as the Director of
International Business Development at PC Quote, Inc. from January 1, 1997 to
September 9, 1997 and the Program Manager of PC Quote International from
February 22, 1996 to December 31, 1996. Ms. Fiscus received her law degree
from the University of Wisconsin Law School in August of 1995 while on an
exchange program at Diego Portales University in Santiago, Chile and became a
member of the Wisconsin State Bar in February of 1996. She received Bachelor
of Arts Degrees in English Literature and Classics from the University of
Kansas in December of 1990.
CORNEL R. FOTA became the Company's Vice President of Engineering in October
1998 and has served as a senior software engineer at the Company since June
1996. Mr. Fota is a software engineer with experience in the analysis,
design, implementation and management of software based projects. His areas
of expertise include real-time systems, Internet technologies, serial
communications, paging protocols and object oriented analysis and design. At
the Company he is responsible for managing development, production and
information systems groups. From February 1996 to May 1996 Mr. Fota was a
Programmer for Instal Fobus in Brasov, Romania. From May 1995 to February
1996 Mr. Fota served as Project Manager for Bergerat Monnoyeur International
in Paris, France. From February 1992 to October 1994 Mr. Fota was a Computer
Engineer for Ro Mex Prod in Brasov, Romania and from July 1991 to February
1992 he was a Computer Engineer for ICIM, also located in Brasov, Romania.
Mr. Fota has a Master of Science in Software Engineering from the Technical
University of Bucharest, Romania. He has also a postgraduate management degree
from Ecole Nationale des Ponts et Chaussees, Paris, France.
REBECCA A. CALLAHAN became the Company's Vice President of Sales on March 24,
1999. She has over ten years of management experience in corporate sales and
marketing. Most recently, Ms. Callahan was Vice President and Market General
Manager at Paging Network, Inc. from October 1996 to March 1999 and a General
Sales Manager from October 1996 to November 1994. Prior to joining PageNet
she was the Manager of Marketing Services at Anthony Schools from September
1991 to November 1994.
PAMELA B. LAPINE has been the Company's Vice President of Marketing since
October 1998 and served as the Company's Vice President of Operations from
June 1996 to October 1998. Ms. LaPine is a seasoned business professional
with over 20 years of management experience in Silicon Valley high tech
companies. Prior to joining the Company she was a Vice President of Marketing
and Administration for the LaPine Group, a private investment and turn-around
firm, from January 1987 to June 1996. She started her management career as
Marketing Director at Digital Recording Corp. She has served on the Board of
Directors of the San Jose Cleveland Ballet and Junior Achievement, Olympiad
Corporation and Partners Petroleum Corporation.
Based solely on a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year, and Forms 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year
and certain written representations, no persons who were either a director,
officer or beneficial owner of more than 10% of the Company's Common Stock,
failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year except as follows: Cornell R.
Fota, Rebecca A. Callahan, and Pamela B. LaPine, Executive Officers of the
20
<PAGE>
Company, each filed Form 3's late; Robert L. Priddy, a Director of the
Company, filed a Form 3 late; and Mitchell H. Cohen, a 10% or greater
shareholder, filed a Form 3 late and filed a Form 4 reporting one transaction
late.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other Executive Officer who
received compensation in excess of $100,000 for the fiscal years ended March
31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- --------------- -------
SECURI-
TIES
UNDERLY-
OTHER RE- ING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- -------- ----- ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anthony LaPine, 1999 $140,000 -0- 11,000 -0- -0- -0- -0-
CEO and <FN2>
Chairman of the 1998 $140,000 -0- 11,000 -0- 200,000 -0- -0-
Board <FN2> <FN3>
1997 $195,000 -0- 11,000 -0- 70,000 -0- -0-
<FN2>
Nicholas Miller 1999 -0- -0- -0- -0- -0- -0- -0-
<FN1> 1998 $135,000 -0- 9,000 -0- 200,000 -0- -0-
<FN2> <FN4>
1997 $180,000 -0- 12,000 -0- 70,000 -0- -0-
<FN2>
- ----------------
<FN>
<FN1>
Mr. Miller resigned as Director and Secretary of the Company and as Chief
Executive Officer, President and Director of DSC DataLink Systems Corporation,
the Company's wholly owned Canadian subsidiary, in February 1998.
<FN2>
Represents a car allowance.
<FN3>
Represents warrants to purchase shares of the Company's common stock at $3.75
per share which vest over a three-year period and options to purchase the
Company's common stock at $4.40 which are immediately exercisable.
</FN4>
Represents warrants to purchase shares of the Company's common stock at $3.75
per share which vest over a three-year period and options to purchase the
Company's common stock at $4.40 which are immediately exercisable. The number
of shares covered by the warrant was subsequently reduced to 50,000.
</TABLE>
21
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/ OPTIONS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
- --------------- ------- -------- ---------------- ----------------
Anthony LaPine -0- -0- 70,000 / 0 0 / 0
EMPLOYMENT AGREEMENTS
Effective May 1, 1996, the Company entered into a three year employment
agreement with Anthony LaPine, the Company's CEO, pursuant to which he
receives a base salary of $140,000 per year, plus discretionary increases in
accordance with the Company's normal review procedures. Upon expiration of
the initial term, the Agreement automatically renews for one year terms unless
notice is provided by either party. In addition, subject to the achievement
of certain mutually agreed upon performance goals, Mr. LaPine will be paid an
annual bonus equal to 86% of his base salary. Mr. LaPine also receives a
$1,000 per month car allowance. In the event that the Company terminates this
agreement prior to the expiration of the three year term for other than cause
or disability, or if Mr. LaPine terminates the agreement for "good reason" (as
defined in the agreement), the Company is required to continue paying the
salary and other benefits for the remainder of the term of the agreement. Mr.
LaPine also receives full health, dental, vision and disability insurance.
Concurrently with the execution of the employment agreement, Mr. LaPine
entered into a Stock Purchase Agreement pursuant to which he purchased 200,000
shares of the Common Stock of Datalink Communications Corporation (which were
later exchanged for 200,000 shares of the Company's Common Stock), and as
payment therefor, Mr. LaPine executed a non-recourse promissory note in the
amount of $1,500,000. The note bears interest at 5% per annum and the
principal plus interest are due on or before April 1, 2001. As security for
the note, Mr. LaPine granted the Company a security interest in the 200,000
shares of Common Stock.
On May 20, 1996, the Company entered into a Loan Forgiveness Agreement with
Mr. LaPine which provided that Mr. LaPine's $1,500,000 promissory note would
be forgiven if Mr. LaPine has continued to serve as the Company's Chief
Executive Officer through May 1, 1999, and there are no uncured defaults by
Mr. LaPine under his Employment Agreement on May 1, 1999. As a result, the
promissory note has been forgiven as of May 2, 1999.
On January 2, 1997, the Company entered into a three year lease with Mr. and
Mrs. LaPine whereby the Company leases from the LaPines 4,000 square
feet of office space located in the LaPine's home at an annual rate of
$100,000 or $8,333.37 per month. The lease terminates if Mr. LaPine's
employment with the Company is terminated.
The Company and Arundel Holdings, Inc., a company owned by Nicholas R. Miller
and his wife, were parties to an Advisor Agreement having a three-year term
which commenced May 1, 1996. The Advisor Agreement provided that Mr. Miller
would receive a base salary of $180,000 per year, plus discretionary increases
in accordance with the Company's normal review procedures. On September 17,
22
<PAGE>
1996, the Company entered into a Directors Agreement with Mr. Miller pursuant
to which Mr. Miller served as a Director of the Company. The agreement also
granted Mr. Miller options to purchase 70,000 shares of the Company's Common
Stock at $4.40 per share.
On February 12, 1998, the Company and Mr. Nicholas Miller, former Chairman,
terminated the Advisor Agreement with Arundel Holdings, Inc. The termination
was effected by a mutual release agreement which provides for the following:
a) full payment of past due advisory fees and expenses;
b) modification to the warrants granted to Mr. Miller under the November
5, 1997 private placement so that Mr. Miller is to receive only
50,000 warrants of the 200,000 warrants originally agreed upon;
c) continuance until April 30, 1999 of Mr. Miller's right to exercise
the 70,000 shares in his option grant.
EMPLOYEE STOCK OPTION PLAN
During June 1996, the Board of Directors adopted the Employee Stock Option
Plan (the "Plan") which was approved by the Company's shareholders on June 18,
1996. The Plan initially authorized the issuance of options to purchase up to
300,000 shares of the Company's $.01 par value Common Stock, and was amended
on January 8, 1998 to authorize options to purchase up to 500,000 shares of
the Company's $.01 par value Common Stock.
The Plan allows the Board to grant stock options from time to time to
employees, officers and directors of the Company. The Board has the power to
determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. Vesting provisions are determined by the Board at the time options
are granted. The option price for any option will be no less than the fair
market value of the Common Stock on the date the option is granted, as defined
by the Plan.
During the fiscal year ended March 31, 1999, the Company's Board of Directors
granted a total of 241,452 options to a total of 36 employees, directors and
consultants.
On June 17, 1997, the Board of Directors of the Company approved the repricing
of Mr. LaPine's and Mr. Miller's outstanding options from an exercise price of
$22.00 per share to an exercise price of $4.40 per share. On the same date,
the Board also approved the repricing of all of the options held by the other
employees of the Company from an exercise price of $20.00 per share to an
exercise price of $4.00 per share.
Effective May 24, 1999 the Board of Directors of the Company approved the
repricing of all of the options held by employees of the Company except for
the Company's CEO, Anthony LaPine, and the Company's Vice President of
Marketing, Pamela LaPine. Employees with an exercise price ranging between
$.75 per share and $7.00 per share were offered the opportunity to amend their
option grants to reprice the exercise price to $2.57 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 4, 1999, the stock ownership of
each person known by the Company to be the beneficial owner of five percent or
more of the Company's Common Stock, each director individually, and all
23
<PAGE>
officers and directors as a group. Each person has sole voting and investment
power over the shares except as noted.
AMOUNT AND
NAME AND ADDRESS NATURE OF BENE- PERCENT
OF BENEFICIAL OWNERS FICIAL OWNERSHIP OF CLASS
- -------------------- ---------------- --------
Commonwealth Associates 887,051 (1) 28.6%
830 Third Avenue
New York, NY 10022
Anthony LaPine 781,667 (2) 25.8%
1735 Technology Drive
San Jose, California 95110-1333
Orbis Pension Trustees Ltd. 399,960 (3) 14.0%
One Connaught Place
London, England W11DY
J.F. Shea Co. Inc. as Nominee 399,960 (4) 14.0%
1997-60 Edmund H. Shea Jr. VP
655 Brea Canyon Road
Walnut, CA 91789
Robert L. Priddy 391,000 (5) 15.0%
3435 Kingsboro Road
Apt. 1601
Atlanta, GA 30362
Mitchell Cohen 350,000 14.3%
26 Simmons Lane
Greenwich, CT 06830
Peter A. Allard 314,917 (6) 12.3%
Seawatch, The Garden
St. James, Barbados
British West Indies
Charles K. Dargan II 10,000 (7) 0.4%
515 S. Figueroa Street, 11th Fl.
Los Angeles, CA 90071
Fredrick M. Hoar 10,000 (7) 0.4%
555 Twin Dolphin Drive
Suite 650
Redwood City, CA 94065
David Ladd 10,000 (7) 0.4%
2800 Sand Hill Road
Menlo Park, CA 94025
All Officers and Directors 1,209,226 (8) 37.5%
as a Group (10 Persons)
___________________
24
<PAGE>
(1) Represents 242,000 shares of Common Stock held by Commonwealth
Associates; 10,000 shares underlying Series A Convertible Preferred Stock held
by Commonwealth Associates; 434,284 shares underlying warrants held by
Commonwealth Associates; and 200,767 shares of Common Stock underlying
warrants held by Michael S. Falk, the Chairman and controlling equity owner of
Commonwealth Associates.
(2) Includes 200,000 shares owned directly by Mr. LaPine; 280,000 shares
underlying Series A Convertible Preferred Stock; 70,000 shares underlying
currently exercisable options held by Mr. LaPine; 25,000 shares underlying
currently exercisable options held by Mr. LaPine's wife and the Company's Vice
President of Marketing, Pamela LaPine; 206,667 shares underlying warrants held
by Mr. LaPine. Does not include 133,333 warrants issued in conjunction with
the closing of the November 5, 1997 private placement which are not currently
exercisable.
(3) Includes 266,640 shares underlying Series A Convertible Preferred Stock;
and 133,320 shares underlying warrants.
(4) Includes 266,640 shares underlying Series A Convertible Preferred Stock;
and 133,320 shares underlying warrants.
(5) Represents 231,000 shares of Common Stock; 100,000 shares underlying
Series A Convertible Preferred Stock; 50,000 shares of Common Stock underlying
Warrants; and 10,000 shares underlying currently exercisable options.
(6) Includes 214,917 shares of Common Stock held directly by Mr. Allard and
100,000 shares of Common Stock underlying currently exercisable warrants.
Represents shares underlying currently exercisable options.
(7) Represents shares of Common Stock underlying currently exercisable
options.
(8) Includes the shares listed above as beneficially owned by Messrs. LaPine,
Dargan, Hoar, Ladd and Priddy, and 6,559 shares of Common Stock underlying
currently exercisable options held by other executive officers.
The Company knows of no arrangement or understanding, the operation of which
may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS INVOLVING THE COMPANY
During July 1996, the Company completed a transaction in which it sold to an
unaffiliated investor Peter Allard a Convertible Debenture in the principal
amount of $2,000,000. The Debenture matured on July 1, 1998, and was
convertible at any time prior thereto into shares of the Company's Common
Stock at $20.00 per share. Mr. Allard was also issued a warrant to purchase
up to 100,000 shares of the Company's Common Stock at $25.00 per share at any
time prior to July 15, 1998. Mr. Allard also received certain registration
rights. On October 14, 1996, Peter Allard exercised his right to convert the
Debentures and the Company issued 100,000 shares of its Common Stock. In
connection with the closing of the transaction in July 1996, the Company
issued 10,000 shares of its Common Stock to the Euphemia Trust for services
rendered in connection with the transaction. Peter Allard beneficially owns
the shares issued to Euphemia Trust.
25
<PAGE>
In September 1997, the Company entered into a settlement agreement with Peter
Allard which recomputed the stock issued to Mr. Allard in the July 1996
Convertible Debenture. The settlement agreement provided for the issuance of
an additional 100,000 shares of the Company's fully-paid non-assessable Common
Stock and a five year warrant, commencing on December 1, 1997, to purchase
100,000 shares of the Company's Common Stock at $3.75 per share.
In August 1997, the Board of Directors approved the issuance of warrants to
Anthony N. LaPine and Nicholas R. Miller as of the Initial Closing Date of the
private offering of Series A Convertible Preferred Stock and Warrants. Mr.
LaPine received warrants to purchase 200,000 shares of Common Stock at $3.75
per share. These will vest over a three-year period in equal installments of
one-third of the total shares on each anniversary of the date of grant, and
expire five years from the Initial Closing of the Offering. Mr. Miller
received Warrants to purchase 200,000 shares of Common Stock at $3.75 per
share; however, the number of Warrants was subsequently reduced to 50,000 when
Mr. Miller's Advisory Agreement was terminated. The above Warrants were
approved pursuant to the requirements of the Company's letter of intent with
the placement agent for the private offering.
Anthony LaPine purchased seven (7) Units in the Company's 1997 private
offering in exchange for a promissory note in the amount of $1,050,000 payable
to the Company and secured by certain of Mr. LaPine's assets other than his
personal residence and contents. The 7 Units included a total of 280,000
shares of preferred stock and 140,000 Warrants.
On January 2, 1997, the Company entered into a three year lease with Mr.
LaPine and his wife, Pamela LaPine, whereby the Company leases from the
LaPines 4,000 square feet of office space located in the LaPine's home at an
annual rate of $100,000 or $8,333.37 per month. The lease terminates if Mr.
LaPine's employment with the Company is terminated.
26
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3 Articles of Incorporation and Incorporated by reference to
Bylaws Exhibit Nos. 2 and 3 to the
Registrant's Form 8-A filed
on July 22, 1996 (No. 0-21069)
3.1 Certificate of Designations, Incorporated by reference to
Powers, Preferences and Rights Exhibit 3.1 to the Registrant's
of the Series A Convertible Form 10-KSB for the year ended
Preferred Stock March 31, 1998
3.2 Certificate of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit 3.2 to the Registrant's
Form 10-KSB for the year ended
March 31, 1998
10.1 Agreement Concerning the Incorporated by reference to
Exchange of Common Stock Exhibit No. 10 to the Regis-
Between Datalink Systems trant's Form 8-K dated June 27,
Corporation and Datalink 1996
Communications Corporation
10.2 Application Software Purchase Incorporated by reference to
Agreement between Datalink Exhibit No. 10.1 to the Regis-
Systems Corporation and trant's Form 8-K dated August
Shalcor Investments 26, 1996
10.3 Management and Marketing Incorporated by reference to
Agreement between Datalink Exhibit No. 10.2 to the Regis-
Systems Corporation and trant's Form 8-K dated August
Shalcor Investments 26, 1996
10.4 8% Secured Term Note Incorporated by reference to
Exhibit No. 10.3 to the Regis-
trant's Form 8-K dated August
26, 1996
10.5 Employment Agreement with Incorporated by reference to
Nicholas Miller dated May 1, Exhibit 10.5 to the Regis-
1996 trant's Form 10-KSB for the
year ended March 31, 1997
10.6 Employment Agreement with Anthony Incorporated by reference to
LaPine dated May 1, 1996 Exhibit 10.6 to the Regis-
trant's Form 10-KSB for the
year ended March 31, 1997
27
<PAGE>
10.7 Amendment No. 1 to Employment Incorporated by reference to
Agreement with Anthony LaPine Exhibit 10.7 to the Regis-
dated January 1, 1997 trant's Form 10-KSB for the
year ended March 31, 1997
10.8 Lease Agreement with Anthony Incorporated by reference to
and Pamela LaPine dated January 2, Exhibit 10.8 to the Regis-
1997 trant's Form 10-K dated
March 31, 1997
10.9 Loan Forgiveness Agreement with Incorporated by reference to
Anthony LaPine dated June 28, 1996 Exhibit 10.9 to the Regis-
trant's Form 10-KSB for the
year ended March 31, 1997
10.10 Directors Agreement with Nicholas Incorporated by reference to
Miller dated September 17, 1996 Exhibit 10.10 to the Regis-
trant's Form 10-KSB for the
year ended March 31, 1997
10.11 Application Software Purchase Incorporated by reference to
Agreement between Datalink Systems Exhibit 10.1 to the Regis-
Corporation and 605285 Ontario Inc. Form 8-K dated May 6, 1997
10.12 Management and Marketing Agreement Incorporated by reference to
between Datalink Systems Corpora- reference to Exhibit 10.2
tion and 6045285 Ontario to the Registrant's Form 8-K
dated May 6, 1997
10.13 6% Secured Term Note Incorporated by reference to
Exhibit No. 10.3 to the
Registrant's Form 8-K dated
May 6, 1997
21 Subsidiaries of the Registrant Incorporated by reference to
Exhibit 22 to the Registrant's
Form 10-K dated March 31, 1997
23 Consent of BDO Seidman, LLP Filed electronically herewith
27 Financial Data Schedule Filed electronically herewith
(b) REPORTS ON FORM 8-K. None.
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Certified Public Accountants . . . . . F-2
Financial Statements:
Consolidated Balance Sheets, March 31, 1999 and 1998 . . F-3
Consolidated Statements of Operations and Comprehensive
Loss for the years ended March 31, 1999 and 1998 . . . . F-4
Consolidated Statements of Shareholders' Equity
for the years ended March 31, 1999 and 1998. . . . . . . F-5 - F-8
Consolidated Statements of Cash Flows for the years
ended March 31, 1999 and 1998. . . . . . . . . . . . . . F-9 - F-10
Notes to Financial Statements. . . . . . . . . . . . . . F-11 - F-26
F-1
<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, 1999 and 1998, and the
related consolidated statements of operations and comprehensive loss,
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 our audits 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, 1999 and 1998, 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
May 20, 1999
F-2
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS March 31 March 31
1999 1998
CURRENT ASSETS: ----------- -----------
Cash and cash equivalents $ 3,169,443 $ 7,353,719
Trade receivables (net of allowance for
doubtful accounts of $21,715 in 1999
and $9,800 in 1998) 63,319 65,241
Other receivables 6,372 500
Prepaid expenses 41,612 42,537
----------- -----------
Total current assets 3,280,746 7,461,997
Property and equipment, net 699,591 629,696
Other assets 76,730 23,625
----------- -----------
Total assets $ 4,057,067 $ 8,115,318
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 617,456 $ 236,469
Accrued expenses and other current liabilities 220,919 300,450
Current portion of capital lease obligation 14,004 13,699
Current portion of advances on technology sales 432,022 460,501
Deferred revenue 332,212 269,538
----------- -----------
Total current liabilities 1,616,613 1,280,657
Capital lease obligation,
net of current portion 47,439 62,640
Advances on technology sales, net
of current portion 1,730,610 2,162,628
----------- -----------
Total liabilities 3,394,662 3,505,925
----------- -----------
Commitments and contingencies (Notes 13 and 15)
SHAREHOLDERS' EQUITY:
Convertible Preferred stock: $.001 par value; $3.75
liquidation value; Authorized: 5,000,000 shares;
Issued and outstanding: 2,365,540 in 1999 and
2,740,000 in 1998 2,366 2,740
Common stock: $.01 par value in 1999; Authorized:
8,000,000 shares; Issued and outstanding:
2,414,307 in 1999 and 2,018,293 in 1998 24,143 20,183
Additional paid-in capital 28,084,147 28,007,037
Accumulated other comprehensive loss (82,002) (53,923)
Notes receivable (1,261,675) (1,692,234)
Accumulated deficit (26,104,574) (21,674,410)
----------- -----------
Total shareholders' equity 662,405 4,609,393
----------- -----------
Total liabilities and shareholders' equity $ 4,057,067 $ 8,115,318
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended
March 31,
1999 1998
------------ -----------
Revenue $ 2,128,438 $ 962,461
Cost of revenue 822,636 530,545
Research and development 798,549 755,080
Sales and marketing 2,937,140 2,133,635
General and administrative 2,816,655 2,406,434
Other income (notes 5 and 11) 816,378 831,429
------------ -------------
Net loss (4,430,164) (4,031,804)
Deemed dividends on preferred
stock (8,083,000)
Beneficial conversion feature
of warrants issued in
association with preferred stock (2,624,000)
------------ -------------
Net loss available to
common shareholders (4,430,164) (14,738,804)
Other comprehensive income
(loss) - Translation adjustment (28,079) 3,732
------------- -------------
Comprehensive loss $ (4,458,243) $(14,735,072)
============= =============
Net loss per share:
Basic $ (2.12) $ (7.53)
Diluted $ (2.12) $ (7.53)
Shares used in per share
calculation, basic and
diluted 2,093,687 1,958,622
============= =============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- -------- -----------
Balance at
4/1/1997 - - 1,918,293 $19,183 $ 8,335,777
Common stock
issued in
exchange 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 issued
antidilutive shares
11/15/1997 - - 100,000 1,000 1,000
Preferred shares
issued to CEO of
Company in exchange
for note receivable 280,000 280 - - 1,049,720
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
Beneficial conver-
sion for preferred
shareholders -
Preferred Stock - - - - 8,083,000
Beneficial conver-
sion for Peter
Allard - - - - 295,000
Translation
adjustments - - - - -
Amortization of
Note receivable - - - - -
Net loss - - - - -
---------- -------- ---------- --------- -----------
Balance at
3/31/1998 2,740,000 $ 2,740 2,018,293 $ 20,183 $28,007,037
---------- -------- ---------- --------- -----------
F-5
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- -------- -----------
Balance at
3/31/1998 2,740,000 $ 2,740 2,018,293 $ 20,183 $28,007,037
Options exercised - - 21,554 215 80,481
Conversion of
preferred to
common (374,460) (374) 374,460 3,745 (3,371)
Amortization of
note receivable - - - - -
Translation
adjustment - - - - -
Net loss - - - - -
----------- ---------- --------- --------- -----------
Balance at
3/31/1999 2,365,540 $ 2,366 2,414,307 $ 24,143 $28,084,147
=========== ========== ========== ========= ============
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED NOTES ACCUMULATED
OTHER RECEIVABLE DEFICIT TOTAL
COMPREHENSIVE
LOSS
------------- ------------ ------------ ------------
Balance at
4/1/1997 $ (57,655) $(1,089,410) $(6,935,606) $ 272,289
Common stock
issued in ex-
change for notes
receivable
8/20/1997 - - - 100,000
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
Preferred shares
issued to CEO of
company in exchange
for note receivable - (1,050,000) - -
Preferred shares
issued in con-
junction with
private placement
11/5/1997 - - - 7,916,000
Beneficial conver-
sion for preferred
shareholders -
Warrants - - (2,329,000) -
Beneficial conver-
sion for preferred
shareholders -
Preferred Stock - - (8,083,000) -
Beneficial conver-
sion for Peter
Allard - - (295,000) -
Translation
adjustment 3,732 - - 3,732
Amortization of
Note receivable - 447,176 - 447,176
Net loss - - (4,031,804) (4,031,804)
------------ ------------ ------------ ------------
Balance at $ (53,923) $(1,692,234) $(21,674,410) $ 4,609,393
3/31/1998 ------------ ------------ ------------ -----------
F-7
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED NOTES ACCUMULATED
OTHER RECEIVABLE DEFICIT TOTAL
COMPREHENSIVE
LOSS
------------- ------------- ------------ -----------
Balance at
3/31/1998 $ (53,923) $(1,692,234) $(21,674,410) $ 4,609,393
Options exercised - - - 80,696
Conversion of
preferred to
common - - - -
Amortization of
note receivable - 430,559 - 430,559
Translation
adjustment (28,079) - - (28,079)
Net loss - - (4,430,164) (4,430,164)
------------- ------------ ------------ -------------
Balance at
3/31/1999 $ (82,002) $(1,261,675) $(26,104,574) $ 662,405
============= ============= ============ ============
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
March 31,
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $(4,430,164) $(4,031,804)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 205,305 119,723
Allowance for doubtful accounts 11,915 8,300
Common stock issued in conjunction
with anti-dilution agreement 2,000
Foreign currency translation adjustment (28,079) 3,732
Amortization of technology advances (460,499) (474,882)
Amortization of notes receivable 430,559 447,176
Changes in assets and liabilities:
Accounts and other receivables (15,865) (23,856)
Prepaid expenses and other assets 925 (38,599)
Accounts payable and accrued liabilities 372,512 291,186
Deferred revenue 62,674 269,538
---------- ----------
Net cash used in operating activities (3,850,717) (3,427,486)
---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (275,200) (346,411)
Other assets (53,105) (3,157)
---------- ----------
Net cash used in investing activities (328,305) (349,568)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock 9,642 --
Issuance of preferred stock -- 7,916,000
Advance on technology fee -- 1,303,565
Payments on capital lease (14,896) (5,301)
---------- ----------
Net cash provided by (used in) financing
activities (5,254) 9,214,264
---------- ----------
Net increase (decrease) in cash and cash
equivalents (4,184,276) 5,437,210
Cash and cash equivalents, beginning
of period 7,353,719 1,916,509
---------- ----------
Cash and cash equivalents, end of period $3,169,443 $7,353,719
========== ==========
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
DATALINK SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
1999 1998
----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 9,958 $ 3,715
============ ============
Cash paid for income taxes $ 800 $ 800
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock options exercised in
exchange for accrued expenses $ 71,056 $ --
============ ============
Preferred stock converted to common
stock $ 374 $ --
============ ============
Preferred stock issued in exchange for
notes receivable $ -- $ 1,050,000
============ ============
Equipment exchanged for capital lease $ -- $ 81,640
============ ============
Common stock issued in accordance with
antidilution agreement $ -- $ 2,000
============ ============
Beneficial conversion feature of warrants
in association with of preferred stock $ -- $ 2,329,000
============ ============
Beneficial conversion feature for
shareholders of common stock $ -- $ 295,000
============ ============
Deemed dividends on preferred stock $ -- $ 8,083,000
============ ============
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
DATALINK SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Datalink Systems Corporation (the "Company") was formed under the laws of the
State of Nevada on June 18, 1996. On June 27, 1996, the Company went public
through an acquisition of a public corporation, Datalink Communications
Corporation ("DCC"), which was previously Lord Abbott, Inc., a Colorado
corporation formed in 1986. The Company is in the business of developing and
marketing "Web to Wireless" information products for consumer users and
business-level services utilizing the Company's XpressLink technology
platform. The Company's products and services extend the World Wide Web and
non-Web based customized information to individuals using wireless devices
such as pagers, digital cellular phones, or personal digital assistant
devices.
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.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly owned Canadian subsidiary, DSC Datalink Systems Corporation. All
significant intercompany transactions and balances have been eliminated in
consolidation. Operations of the Canadian subsidiary consist mainly of
research and development on behalf of the parent. As sales made by the
Canadian subsidiary are not significant, the Company does not believe that it
has a separately reportable segment.
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 amounts of 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 to be cash equivalents. The Company places
substantially all of its cash and cash equivalents in demand deposit accounts
with one bank and a financial services company.
F-11
<PAGE>
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents, trade and
other receivables, accounts and notes payable.
Trade receivables are with a large number of customers, dispersed across a
wide national and Canadian geographic base. The Company extends credit to its
customers in the ordinary course of business and periodically reviews the
credit levels extended to customers. The Company does not require cash
collateral or other security to support customer receivables. Provision is
made for estimated losses on uncollectible accounts.
The Company rents pagers to customers principally from one supplier under
month-to-month operating 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, net of accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets, generally three to seven years.
LONG-TERM ASSETS:
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. Adjustments resulting from translation of
financial statements are reflected as a separate component of shareholders'
equity. Net foreign currency transaction gains or losses are not material in
any of the years presented.
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
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.
F-12
<PAGE>
INCOME TAXES:
Deferred income taxes have been recorded for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts using enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances reduce deferred tax assets to the amount
expected to be realized.
REVENUE RECOGNITION:
The Company recognizes revenues from transaction fees, monthly charges, and
pager rental income from its services. Revenues are deferred until services
have been performed and expenses are recognized when goods have been received
or services provided.
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 and
services 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, 1999 and
1998, there were no capitalized software development expenditures since the
period between technological feasibility and availability have coincided and
products under development have not yet achieved technological feasibility.
Research and development expenditures are expensed as incurred.
ADVERTISING EXPENDITURES:
Advertising expenditures including production costs, of $1,571,964 and
$1,196,903 in 1999 and 1998 respectively, were charged to operations as
incurred.
BASIC AND DILUTED NET LOSS PER SHARE:
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon conversion of convertible preferred
stock (using the if-converted method) and shares issuable upon the exercise of
stock options and warrants (using the treasury stock method). In 1999 and
1998, 5,078,750 potential shares and 5,666,107 potential shares respectively
were excluded from the shares used to calculate diluted EPS as their effect is
anti-dilutive.
F-13
<PAGE>
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.
COMPREHENSIVE INCOME (LOSS):
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income ",
which was adopted by the Company in the third quarter of fiscal 1999. SFAS
130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Items to be included, which are excluded from net income (loss) include
foreign currency translations adjustments.
RECENT PRONOUNCEMENTS:
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits ", which amends previous FASB
Statements No. 87,88, and 106, and which standardizes and modifies previous
disclosure requirements. The Company does not currently have a pension plan
or sponsor any other postretirement benefits other than a "401K Savings Plan "
for which any benefits provided by the Company would be strictly voluntary.
As such, the disclosure prescribed by SFAS No. 132 is not expected to have a
material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities ", which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
The Company does not currently or intend to engage in any derivative or
hedging activities. As such, the disclosure prescribed by SFAS No. 133 is not
expected to have a material impact on the Company.
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.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following:
MARCH 31,
1999 1998
---------- ---------
Furniture and fixtures $ 167,592 $114,328
Computer and office equipment 687,788 506,470
Equipment under capital lease 81,640 81,640
Purchased Software 156,337 115,719
----------- ---------
1,093,357 818,157
F-14
<PAGE>
Less accumulated depreciation
and amortization (393,766) (188,461)
----------- ---------
$ 699,591 $ 629,696
=========== ==========
5. ADVANCES ON TECHNOLOGY SALES:
During fiscal year 1997, the Company entered into two separate transactions
involving the sale of rights to its technologies underlying two products,
QuoteXpress and MailXpress. The transactions occurred with two separate
Canadian companies and were nearly identical in nature in that they involved
the receipt of cash and notes receivable from the buyers, with the notes
receivable being collateralized by the intellectual properties being sold.
Concurrent with the sales, Datalink and the buyers entered into "Management
and Marketing Agreements" with the buyers giving the Company exclusive
worldwide rights to use, modify and sub license the source code for the
technologies and providing for fees to be paid to the buyers under certain
conditions. Any payments between parties are contingent upon each other, and
are structured in such a way to minimize the possibility that either party
will ever make payments to the other. At this time, no money has been paid to
the buyers and based upon current projections, it is anticipated that no
moneys will be paid under the remainder of the terms.
The cash payments received up front, amounting to $2,190,000 and $2,900,000
respectively, have been accounted for under the provisions of the "Emerging
Issues Task Force 88-18: Sales of Future Revenues" (EITF 88-18) and as such,
were deferred and are reflected under the balance sheet caption "Advances on
technology sales", and are being amortized to income using the interest method
over the terms of the agreements. The notes receivable due to the Company
resulting form the sales have not been recorded, as it is expected that any
fees or revenue share that otherwise might accrue to the buyers of the
technologies as a result of the management and marketing agreements would not
be sufficient to service the note receivable principle and interest payments
due Datalink. If the notes receivable due to the Company are not repaid, as
presently projected, the ownership of the intellectual properties will revert
back to the Company at the end of the agreements. Interest income on the
notes has been recognized to the extent of the amounts due to buyers under the
"Owners fee" provisions of the sales agreements, with both the interest income
and the "Owners fee" reflected in Other income, along with the amortization of
the technology advances.
6. CONVERTIBLE DEBENTURES AND WARRANTS:
The Company issued a convertible debenture in July 1996 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 effectively repriced to $3.75 (post
reverse split) per share. The warrants were repriced at an amount in excess
F-15
<PAGE>
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 was 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 LEASE:
Effective October 1997, the Company 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 with interest at 10.45% per annum. Payments, 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 lease is collaterilized by the underlying equipment included in property
and equipment with an original capitalized value of $81,640. Accumulated
depreciation on capitalized lease assets was $23,131 and $6,803 at March 31,
1999 and 1998 respectively. The combined principal and interest portions
being recognized under the capital lease for the next four years are as
follows:
Year ended March 31,
2000 $21,033
2001 21,033
2002 21,033
2003 12,269
--------
75,368
Less imputed interest (13,925)
--------
Total $61,443
========
8. INCOME TAXES:
At March 31, 1999, the Company has approximately $900,000 in Canadian net
operating loss carryforwards which expire in the years 2000 through 2005.
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
----------- ---------- ---------- ----------
$2,730,000 2012 $2,730,000 2005
3,219,000 2013 2,632,000 2005
4,446,000 2019 3,820,000 2005
----------- ----------
$10,395,000 $9,182,000
=========== ==========
F-16
<PAGE>
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
MARCH 31,
1999 1998
Deferred tax assets: ---------- ----------
Net operating loss carryforwards $5,020,000 $4,300,000
Less: valuation allowance (5,020,000) (4,300,000)
---------- ---------
$ - $ -
========== =========
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that
a tax benefit may be realized from the asset in the future. The Company has
established a valuation allowance to the extent of its deferred tax assets
since it is more likely than not that the benefit cannot be realized in the
future.
9. SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of common stock and preferred
stock.
On November 5, 1997, the Company completed the sale of units of the Company's
Series A convertible preferred stock. The units were sold in a private
placement pursuant to an agreement with an investment banking firm. A total
of 68.5 units were sold at a cost of $150,000 per unit for total gross
proceeds of $10,275,000. Each unit consisted of 40,000 shares of preferred
stock, par value $.001, 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, plus $1.05 million in a
note receivable from the CEO of the Company. Expenses and commissions related
to the private placement totaled approximately $1.3 million.
The deemed dividends on the preferred stock of $8,083,000 and on warrants of
$2,624,000 issued in conjunction with the private placement, reflect the
beneficial conversion feature, which is the difference between the proceeds
allocated to the preferred stock or warrants respectively, and the fair value
of the preferred stock or warrants (assuming immediate conversion) upon
issuance.
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.
F-17
<PAGE>
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 holders of Common Stock of record. As a
result of the split the number of shares of Common Stock into which the
Preferred Stock could be converted was reduced from 27,400,000 to 2,740,000,
and the number of shares of Common Stock issued and outstanding was 2,018,293.
All financial data and share data in this Form 10-KSB give retroactive effect
to this split, unless otherwise indicated.
CONVERTIBLE PREFERRED STOCK: Under the Company's Articles of Incorporation,
as amended in February 1998, the Company is authorized to issue 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, 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
$3.75 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
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.
F-18
<PAGE>
DETACHABLE WARRANTS: The Company has granted the Series A preferred
stockholders 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.
1996 STOCK PURCHASE PLAN:
In September 1996, the Company adopted the 1996 Nonqualified Stock Purchase
Plan (the Nonqualified Plan). The Company has reserved 50,000 shares of its
$.01 par value common stock for issuance to eligible persons under this plan.
As of March 31, 1999, no shares had been granted under this plan.
STOCK OPTION PLAN:
In June 1996, the Company adopted the 1996 Stock Option 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, as defined under the Plan, at the date of grant
for incentive stock options. The Board of Directors also has the authority to
set exercise dates (no longer 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 over four years at a rate of 25% after year one and then
equally on a monthly basis over the next three years from the date of grant.
As of March 31, 1999, no stock appreciation rights have been granted under the
Plan.
F-19
<PAGE>
Activity for stock options under the 1996 Stock Option Incentive Plan through
March 31, 1999 is as follows:
WEIGHTED
SHARES NUMBER AGGREGATE AVERAGE
AVAILABLE OF PRICE PER EXERCISE EXERCISE
FOR GRANT OPTIONS SHARE PRICE PRICE
----------- --------- ----------- ---------- --------
Balance,
4/1/1997 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 $ 2.80-$20.00 $1,526,309 $ 4.61
Authorized - - - - -
Granted (241,452) 241,452 $ 0.75-$ 6.92 $ 568,133 $ 2.35
Canceled 76,823 (76,823) $ 2.80-$20.00 (457,012) $ 5.90
Exercised - (21,554) $ 2.44-$ 6.00 (80,696) $ 3.74
--------- ---------- ----------- ------
Balance,
3/31/1999 1,296 474,430 $ 0.75-$20.00 $1,556,734 $ 3.28
========== ========== =========== ======
The weighted average fair value of those options granted during the years
ended March 31, 1999 and 1998 was $1.61 and $4.61, respectively. Options to
purchase 263,784 and 198,632 shares were exercisable with a weighted average
exercise price of $4.01 and $4.97 at March 31, 1999 and March 31,1998
respectively.
F-20
<PAGE>
PRO FORMA STOCK-BASED COMPENSATION:
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock
Based Compensation. Accordingly, no compensation expense has been recognized
for these plans. Had compensation expense been determined on the fair value
at the grant dates for awards under these plans consistent with the method of
SFAS 123, the Company's net loss in 1999 and 1998 would have been adjusted to
the pro forma amounts indicated below:
1999 1998
Net loss available to ----------- -------------
common shareholders
As reported $(4,430,164) $(14,738,804)
Pro forma (4,710,975) (14,969,197)
Net loss per share
As reported, basic
and diluted (2.12) (7.53)
Pro forma, basic
and diluted (2.25) (7.64)
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 1999 and 1998:
1999 1998
----------- ----------
Expected dividend $ -- $ --
Expected life of option 1-4 years 1-4 years
Risk-free interest rate 4.63%-5.60% 5.60%-6.62%
Expected volatility 93.5% 90%
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,
1999:
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, 1999
$ 0.00-$ 1.00 76,500 8.8 $ 0.98 11,500 $ 1.00
$ 1.01-$ 2.00 42,500 3.4 1.13 11,000 1.13
$ 2.01-$ 3.00 56,750 9.9 2.73 1,041 2.93
$ 3.01-$ 4.00 102,869 5.7 3.85 63,643 3.93
$ 4.01-$ 5.00 186,749 7.1 4.42 176,288 4.42
$ 5.01-$ 6.00 4,000 9.1 5.91 250 6.00
$ 6.01-$ 7.00 5,000 9.1 6.30 0 0
$ 7.01-$20.00 62 0.0 20.00 62 20.00
------- --- ------ ------- ------
474,430 7.1 $ 3.28 263,784 $ 4.01
======= === ====== ======= ======
F-21
<PAGE>
10. REVENUE:
The Company has sales to customers in both Canada and the U.S. Revenue from
Canadian Sales totaled $68,224 and $103,340 and sales from United States
customers totaled $2,060,214 and $859,121 in 1999 and 1998, respectively.
11. OTHER INCOME:
Other income (expense) consists of the following items:
YEAR ENDED
DESCRIPTION 1999 1998
--------------------- ------------ -----------
Owners fee sales $(1,570,000) $(1,570,000)
of technology
Interest on note from 1,570,000 1,570,000
sales of technology
Amortization of 460,502 467,949
technology advances
Interest income 402,164 367,436
Miscellaneous (46,288) (3,956)
----------- ------------
Total Other income $ 816,378 $ 831,429
(expense) =========== ============
12. EARNINGS PER SHARE (EPS) DISCLOSURES:
NET LOSS PER SHARE:
The Company has adopted Financial Accounting Standards Board No. 128 "Earnings
Per Share " (EPS) and accordingly all prior periods have been restated. Basic
EPS is computed as net income (loss) divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and other convertible securities. Common equivalent shares are
excluded from the computation of net loss per share if their effect is
anti-dilutive.
The following is a reconciliation of the numerator (net loss) and denominator
(number of shares) used in the basic and diluted EPS calculation:
F-22
<PAGE>
MARCH 31,
1999 1998
------------ -------------
Basic EPS:
Net loss $ (4,430,164) $ (4,031,804)
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 $ (4,430,164) $(14,738,804)
============= =============
Average common shares outstanding 2,093,687 1,958,622
------------ ------------
Basic EPS $ (2.12) $ (7.53)
============ ============
Diluted EPS:
Net loss $(4,430,164) $ (4,031,804)
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 $(4,430,164) $(14,738,804)
============ ============
Average common shares outstanding 2,093,687 1,958,622
Convertible preferred - -
Warrants - -
Stock options - -
------------ -------------
Total shares 2,093,687 1,958,622
------------ ------------
Diluted EPS $ (2.12) $ (7.53)
=========== ============
In 1999 and 1998, 5,078,750 potential shares and 5,666,107 potential shares
respectively 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 $259,000 in 1999 and $123,000 in 1998.
F-23
<PAGE>
Future minimum lease payments due under these agreements are as follows for
the years ending March 31:
2000 $ 239,331
2001 231,004
2002 237,217
2003 100,829
----------
$ 808,381
==========
14. RELATED PARTY TRANSACTIONS:
Effective May 1, 1996, The Company entered into a three year employment
agreement with the Company's Chief Executive Officer. The agreement
automatically renews for one year terms unless notice is provided by either
party.
Concurrently with the execution of the employment agreement, the Company's
Chief Executive Officer entered into a Stock Purchase Agreement pursuant to
which he purchased 200,000 shares of the Common Stock of DCC (which were later
exchanged for 200,000 shares of the Company's Common Stock), and as payment
terms he executed a non-recourse promissory note in the amount of $1,500,000.
The note bears interest at 5% per annum and the principal plus interest are
due on or before April 1, 2001. As security for the note, the Chief Executive
Officer has granted the Company a security interest in the 2,000,000 shares of
Common Stock.
On June 26, 1996, the Company entered into a Loan Forgiveness Agreement with
the Chief Executive Officer which provided that the $1,500,000 promissory note
would be forgiven if he continues to serve as the Company's Chief Executive
Officer through May 1, 1999, and there are no uncured defaults by him under
this Employment Agreement on May 1, 1999.
The note, together with interest accrued thereon has been incorporated in the
balance sheet. The note plus interest is being amortized over the period of
the contract as employment. Consequently, in the years ended March 31, 1999
and 1998, expense of $585,044 has been recorded in each year as compensation
expense. At March 31, 1999, $48,331 was due and has been amortized in April
1999.
On January 2, 1997, the Company entered into a three year noncancelable lease
agreement with the Chief Executive Officer of the Company where the Company
leases office space owned by the Chief Executive Officer at an annual rate of
$100,000 or $8,333.37 per month.
In conjunction with the private placement dated November 5, 1997 the Chief
Executive Officer of the Company entered into a stock purchase agreement.
Under the terms of the agreement, the Chief Executive Officer received 280,000
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.
F-24
<PAGE>
15. COMMITMENTS AND CONTINGENCIES:
During 1999 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, 2000, with an automatic one year renewal
provision.
The Company also has a letter of credit agreement with Union Bank of
California as condition of its pager rental agreement. Under the terms of
the agreement, the letter of credit is in the amount of $200,000. Borrowings
under the letter of credit bear interest at prime plus 2% and required a
compensating balance to be on deposit at the bank of $200,000. The letter of
credit expires February 1, 2000, and is renewable. There were no amounts
outstanding under either arrangement as of March 31, 1999 or 1998.
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 1999 or 1998.
17. SUBSEQUENT EVENT
Effective May 24, 1999 the Board of Directors of the Company approved the
repricing of all of the options held by employees of the Company except for
those options held by the Company's CEO and the Company's Vice President of
Marketing. Employees with an exercise price ranging between $.75 per share
and $7.00 per share were offered the opportunity to amend their option grants
to reprice the exercise price to $2.57 per share.
F-25
<PAGE>
SCHEDULE 2
Supplementary Income Statement Information:
COLUMN A COLUMN B
ITEM CHARGED TO COSTS AND EXPENSE
- -------------------------------------- ----------------------------
Maintenance and repairs $ 10,537
Depreciation of property and equipment 190,304
Amortization of notes receivable 548,287
Advertising costs 1,571,964
Bad debt charge-offs 16,963
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 21, 1999 DATALINK SYSTEMS CORPORATION
By:/s/ Anthony N. LaPine
Anthony N. LaPine
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Anthony N. LaPine Chief Executive Officer June 21, 1999
Anthony N. LaPine and Chairman of the Board
/s/ William A. Mahan Chief Financial Officer June 21, 1999
William A. Mahan and Treasurer
/s/ Charles K. Dargan II Director June 21, 1998
Charles K. Dargan II
/s/ Frederick M. Hoar Director June 21, 1999
Frederick M. Hoar
/s/ David Ladd Director June 21, 1999
David Ladd
/s/ Robert L. Priddy Director June 21, 1999
Robert L. Priddy
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (SEC File No. 333-15399) and the Registration Statement
on Form S-3 (SEC File No. 333-71969) of our report dated May 20, 1999,
relating to the consolidated financial statements of Datalink Systems
Corporation appearing in the Annual Report on Form 10-K for the year ended
March 31, 1999.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Jose, California
June 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages F-3 and F-4 of the Company's Form 10-KSB for the fiscal year ended March
31, 1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,169,443
<SECURITIES> 0
<RECEIVABLES> 85,034
<ALLOWANCES> 21,715
<INVENTORY> 0
<CURRENT-ASSETS> 3,280,746
<PP&E> 1,093,357
<DEPRECIATION> 393,766
<TOTAL-ASSETS> 4,057,067
<CURRENT-LIABILITIES> 1,616,613
<BONDS> 0
0
2,366
<COMMON> 24,143
<OTHER-SE> 635,896
<TOTAL-LIABILITY-AND-EQUITY> 4,057,067
<SALES> 4,430,164
<TOTAL-REVENUES> 4,430,164
<CGS> 822,636
<TOTAL-COSTS> 6,552,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,430,164)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,430,164)
<EPS-BASIC> (2.12)
<EPS-DILUTED> (2.12)
</TABLE>
