1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM N/A to N/A
COMMISSION FILE NUMBER: 2-99344-D
DATAMARK HOLDING, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0422824
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
348 East Winchester Street, Suite 220
Salt Lake City, Utah 84107
(Address of principal executive offices)
(801) 268-2202
(Issuer's telephone number)
Check whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
2
The Registrant has only one class of stock issued and outstanding which is
Common Stock with no par value. As of March 31, 1996, 6,079,953 of the
Registrant's Common Shares were issued and outstanding.
3
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, March 31,
1995 1996
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . .$ 39,005 $ 226,109
Trade accounts receivable. . . . . . . . . . . . 450,814 332,378
Notes receivable from officers . . . . . . . . . 1,000 1,000
Accounts receivable - stock subscriptions. . . . 0 4,500,000
Notes receivable from shareholders . . . . . . . 719,000 0
Inventory. . . . . . . . . . . . . . . . . . . . 107,921 86,460
Income taxes receivable. . . . . . . . . . . . . 9,304 9,304
---------- ----------
Total Current Asset. . . . . . . . . . . . . . . 1,327,044 5,155,251
---------- ----------
Property and Equipment
Computer Equipment . . . . . . . . . . . . . . . - 694,346
Automobiles. . . . . . . . . . . . . . . . . . . 32,866 40,525
Printing equipment . . . . . . . . . . . . . . . 227,289 243,556
Office equipment . . . . . . . . . . . . . . . . 231,684 182,348
Furniture, fixtures and leasehold improvements . 48,800 123,752
----------- ----------
Total Property and Equipment. . . . . . . . . . 540,639 1,284,527
Less: Accumulated depreciation . . . . . . . . . (320,808) (472,708)
----------- ----------
Net Property and Equipment. . . . . . . . . . . 219,831 811,819
----------- ----------
Other Assets . . . . . . . . . . . . . . . . . 9,771 41,709
----------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . $1,556,646 $6,008,779
============= ===========
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LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, March 31,
1995 1996
------------- -----------
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . $ 225,617 $ 600,529
Accounts payable commissions . . . . . . . . . 0 450,000
Accrued liabilities. . . . . . . . . . . . . . 59,336 84,453
Deferred revenue . . . . . . . . . . . . . . . 12,220 -
Accrued income taxes . . . . . . . . . . . . . 13,250 13,250
Notes payable - related parties . . . . . . . 151,166 234,422
Notes payable - current portion . . . . . . . 71,299 27,054
--------- ----------
Total Current Liabilities . . . . . . . . . . . 532,888 1,409,708
--------- ----------
Long-Term Note Payable . . . . . . . . . . . . 25,332 520,796
--------- ----------
Stockholders' Equity
Preferred stock - $0.0001 par value; 2,500,000
shares authorized; no shares issued. . . . . . - -
Common stock - $0.0001 par value; 20,000,000
shares authorized; 5,539,953 and 6,079,953
shares issued and outstanding, respectively. . 554 608
Additional paid-in capital . . . . . . . . . . . 1,187,913 5,502,906
Deferred offering costs. . . . . . . . . . . . . (74,799) (134,862)
Retained earnings (deficit). . . . . . . . . . . (115,242) (1,290,377)
---------- ------------
Total Stockholders' Equity. . . . . . . . . . . . 998,426 4,078,275
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY . . . . . . . . . . . . . . . . . . . . . $1,556,646 $6,008,779
============ ===========
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DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
-----------------
1995 1996
------- ------
Net Sales. . . . . . . . . . . . . . . . . . $ 859,779 $ 939,539
Operating Costs and Expenses
Postage. . . . . . . . . . . . . . . . . . . . 360,306 346,790
Materials and printing . . . . . . . . . . . . 245,714 315,659
Selling expense. . . . . . . . . . . . . . . . 110,823 161,406
Research and development . . . . . . . . . . . 152,421 590,351
General and administrative . . . . . . . . . . 74,414 165,309
---------- ----------
Total Operating Costs and Expenses. . . . . .. 943,678 1,579,515
---------- ----------
Income (Loss) From Operations. . . . . . . . . (83,899) (639,976)
---------- -----------
Other Income (Expense), Net
Other income . . . . . . . . . . . . . . . . . 0 0
Interest income. . . . . . . . . . . . . . . . 0 0
Interest expense . . . . . . . . . . . . . . . (6,625) (24,587)
----------- ----------
Total Other Income (Expense), Net . . . . . . . (6,625) (24,587)
----------- ----------
Income (loss) Before Income Taxes . . . . . . . (90,524) (664,563)
Provision for (Benefit From) Income Taxes . . . (987) 0
----------- ----------
Net Income (Loss) . . . . . . . . . . . . . . . $ (89,537) $ (664,563)
=========== ==========
Net Income (Loss) Per Common and
Common Equivalent Share. . . . . . . . . . . . $ (.02) $ (.12)
=========== ==========
Weighted Average Common and Common
Equivalent Shares Used in Per Share
Calculation. . . . . . . . . . . . . . . . . . 4,936,263 5,539,953
=========== ==========
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DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months
Ended March 31,
1995 1996
-------- --------
Net Sales. . . . . . . . . . . . . . . . . . $ 2,521,658 $2,949,610
Operating Costs and Expenses
Postage. . . . . . . . . . . . . . . . . . . 1,022,030 1,134,934
Materials and printing . . . . . . . . . . . 712,323 881,509
Selling expense. . . . . . . . . . . . . . . 310,018 497,473
Research and development . . . . . . . . . . 360,580 1,063,163
---------- ----------
General and administrative . . . . . . . . . 215,776 507,462
---------- ----------
Total Operating Costs and Expenses. . . . . . 2,620,727 4,084,541
---------- ----------
Income (Loss) From Operations . . . . . . . . (99,069) (1,134,931)
---------- ----------
Other Income (Expense), Net
Other income . . . . . . . . . . . . . . . . . - -
Interest income. . . . . . . . . . . . . . . . - -
Interest expense . . . . . . . . . . . . . . . (20,441) (40,203)
--------- ----------
Total Other Income (Expense), Net. . . . . . . (20,441) (40,203)
--------- ----------
Income (loss) Before Income Taxes. . . . . . . (119,510) (1,175,134)
Provision for (Benefit From) Income Taxes. . . - -
Net Income (Loss). . . . . . . . . . . . . . . $ (119,510) $ (1,175,134)
========= ===========
Net Income (Loss) Per Common and
Common Equivalent Share . . . . . . . . . . . $ (.01) $ (.21)
========== ===========
Weighted Average Common and Common
Equivalent Shares Used in Per Share
Calculation. . . . . . . . . . . . . . . . . . 4,936,263 5,539,953
========== ==========
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DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended March 31,
1995 1996
-------- --------
Cash Flows From Operating Activities:
Cash received from customers . . . . . . . . $ 2,645,664 $ 3,055,826
Cash paid to suppliers and employees . . . . (2,480,421) (3,501,320)
Interest received. . . . . . . . . . . . . . 5,121 -
Interest paid. . . . . . . . . . . . . . . . (23,167) (40,203)
Income taxes paid. . . . . . . . . . . . . . (141) -
----------- ----------
Net Cash Provided by (Used by)
Operating Activities . . . . . . . . . . . . 147,056 (485,697)
----------- -----------
Cash Flows From Investing Activities
Payments for property and equipment. . . . . (143,871) (753,720)
(Increase) in other assets . . . . . . . . . (5,346) (31,938)
Decrease in note receivable from officer. . 46,000 -
--------- ---------
Net Cash (Used by) Investing Activities. . . (103,217) (785,658)
--------- ---------
Cash Flows From Financing Activities
Proceeds from issuance of common stock
and other contributed capital. . . . . . . 68,500 1,029,000
Borrowings from related parties. . . . . . . 13,500 133,256
Borrowings for equipment purchases . . . . . - 498,980
Principal payments of notes payable to
related parties. . . . . . . . . . . . . . (53,044) (50,000)
Principal payments of notes. . . . . . . . . (27,076) (17,815)
Borrowings under line-of-credit loan
agreement. . . . . . . . . . . . . . . . . - 19,054
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Principal payments on line-of-credit
loan agreement . . . . . . . . . . . . . . - (49,000)
Payments for deferred offering costs . . . . (65,363) (105,016)
---------- ------------
Net Cash Provided by Financing
Activities. . . . . . . . . . . . . . . 63,483 1,458,459
---------- ------------
Net Increase (Decrease) in Cash. . . . . . . (19,644) 187,104
Cash At Beginning of Period. . . . . . . . . 89,655 39,005
---------- ------------
Cash At End of Period. . . . . . . . . . . . $ 70,011 $ 226,109
========== ============
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income (loss). . . . . . . . . . . . . . $ (115,120) $(1,175,134)
Depreciation . . . . . . . . . . . . . . . . 55,324 161,730
Changes in current assets and liabilities:
Accounts receivable. . . . . . . . . . . . . 151,805 118,436
Employee receivables . . . . . . . . . . . . (4,832) -
Inventory. . . . . . . . . . . . . . . . . . (22,204) 21,461
Accounts payable . . . . . . . . . . . . . . (121,862) 374,913
Accrued liabilities. . . . . . . . . . . . . 1,771 25,117
Deferred revenue . . . . . . . . . . . . . . (27,797) (12,220)
Accrued income taxes . . . . . . . . . . . . (141) -
Prepaid expense. . . . . . . . . . . . . . . (13,612) -
Net Cash Provided By Operating Activities $ 147,056 $ (485,697)
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DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements as of March 31, 1996 and for
the three and nine months ended March 31, 1996 and 1995 are unaudited and, in
the opinion of management, all adjustments necessary for a fair presentation
have been included, and consist only of normal recurring adjustments. The
financial statements are condensed and, therefore, do not include all
disclosures normally required by generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
annual financial statements. Because of the seasonal nature of the Companies'
business, the results of operations for the three and nine months ended March
31,1996 and 1995 are not indicative of the results to be expected for the
entire fiscal year. Certain previously reported amounts have been reclassified
to conform to the March 31, 1996 presentation. These reclassifications had no
effect on previously reported net income.
NOTE 2 -- SEGMENT INFORMATION
Information regarding the Companies operations for the nine months ended
March 31, 1996, as well as identifiable assets at March 31, 1996, relating
to the direct mail marketing industry and the computer online marketing
industry, is as follows:
Computer Corporate Interest
Direct Mail Online Revenue and Interest
Marketing Marketing Expense, Net Total
Net Sales $2,949,610 $ - $ - $2,949,610
Income (Loss)
Before
Income Taxes 201,215 (1,336,146) (40,203) (1,175,134)
Depreciation 49,680 112,050 - 161,730
Property and
Equipment
Purchases 94,759 679,072 - 773,831
Identifiable
Assets at
March 31, 1996 700,020 5,308,759 - 6,008,779
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company began operations in 1987 to provide highly targeted business
to consumer advertising through direct mail. Since the Company's founding
the direct mail business has provided substantially all of its revenues and
the Company intends to continue to grow its direct mail business.
In fiscal 1994 the Company began developing its own proprietary advertiser
funded national online network - ValuOne Online. Since fiscal 1994 the
Company has devoted significant resources towards the development of ValuOne
Online and anticipates launching the service in the fourth quarter of fiscal
1996. The Company believes that in the future the revenues of ValuOne Online
could surpass those of the direct mail business.
The Company charges fees based primarily on the number of mailings provided
to each customer. Support services which are typically bundled with the
mailing include targeting and profiling the mailing audience, designing and
printing the mailing, and analyzing the results of the mailing campaign.
The cost of postage is a significant element of any direct mail campaign.
Recent increases in postal rates will increase the costs of direct mailings.
Although management believes that the rate increase will not have a material
long term effect on demand, there is no assurance that rate increases will
not depress the number or reduce the profitability of mailings by the Company.
Additionally, fluctuations in the price of paper or other materials may
adversely impact the profitability of mailings by the Company in the future.
In May, 1996 the Company completed its private placement of $17,000,000
which was placed predominantly with major institutions. See "Liquidity and
Capital Resources" below.
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the quarters and nine months ended March 31, 1995 and 1996.
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Three Months Ended Nine Months Ended
March 31, March 31,
1995 1996 1995 1996
------- ------ ------ ------
>
Net Sales. . . . . 100.0% 100.0% 100.0% 100.0%
Operating expenses
Postage. . . . . 41.9 36.9 40.50 38.5
Materials and printing 28.6 33.6 28.2 30.0
Selling expenses 13.0 17.2 12.3 16.9
Research and development 17.7 62.8 14.3 36.0
General and administrative 8.7 17.6 8.6 17.2
------ ------ ------ ------
Total operating expenses 109.9 168.1 103.9 138.5
------ ------ ------- ------
Income (loss) from
operations (9.8) (68.1) (3.9) (38.5)
------ ------- ------- -------
Total other (expense),net (0.8) (2.6) (0.8) (1.2)
------ ------- -------- --------
Income (loss) before
income taxes (1.06) (70.8) (4.7) (39.7)
Provision for (benefit
from) income taxes 0.0 0.0 0.0 0.0
Net Income (loss) (1.16)% (70.8)% (4.7)% (39.7)%
Period Ended March 31, 1995 Compared with Period Ended March 31, 1996
Net sales for the nine months ended March 31, 1996 (the "1996
Period") increased by 11.7% to $2,949,610 from $2,521,658 for the nine months
ended March 31, 1996 (the "1995 Period"). Net sales growth resulted
primarily from an increase in the number of pieces mailed during the 1996
Period. The average price per piece mailed increased .05% to $.419 during
the 1996 Period from $.399 during the 1995 Period.
Postage expense as a percentage of net sales decreased slightly to 38.5%
during the 1996 Period from 40.5% during the 1995 Period. Postage expenses
includes drop shipping costs incurred during the first quarter of the current
year and the second quarter of the prior year on a limited number of orders
to avoid late mailings.
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Materials and printing expense increased 12.4% to $881,509 during the 1996
Period from $712,323 during the 1995 Period. The increase reflects the higher
number of pieces mailed during the 1996 Period. Materials and printing
expense as a percentage of net sales of 33.6% in the current year increased
slightly (1.8) over the prior year due to increases in paper costs during the
second and third quarters.
Selling expense increased substantially to $497,473 during the 1996 Period
from $310,018 during the 1995 Period. Selling expense as a percentage of net
sales increased to 16.9% during the 1996 Period from 12.3% during the 1995
period. The increase in selling expense reflects the initiation of selling
effort for ValuOne Online and the initial establishment of the Company's
direct mail regional sales program.
General and administrative expense increased substantially to $507,462
during the 1996 Period from $216,776 during the 1995 Period. General and
administrative expenses as a percentage of net sales increased to 17.2%
during the 1996 Period from 8.6% during the 1995 Period. The increase in
general and administrative expense reflects new overhead burden for both
ValuOne Online and the regional sales program.
Research and development of ValuOne Online continued during the 1996
Period and the Company expended $1,063,163 of related costs compared to
$360,580 in the 1995 Period. The Company anticipates launching ValuOne
Online during the fall of calendar 1996.
Liquidity and Capital Resources
The Company historically has satisfied its cash requirements through cash
flow from operations and borrowings from financial institutions and related
parties. However, in order to fund the expenses of developing and launching
ValuOne Online, in March, 1996 the Company began a private placement to major
institutions and other accredited investors (the "March 96 Placement").
At March 31, 1996, the Company had obtained subscription commitments for
$4,500,000 in the March 96 Placement, but had not collected the proceeds of
such subscriptions. In April 1996 the subscriptions were collected in full.
In May, 1996 the Company completed the March 96 Placement for total gross
proceeds of $17,000,000, some of which is receivable as of the date of this
report.
Operating activities consumed $518,197 of cash in the 1996 Period
compared to $147,056 in the 1995 Period. The reduction in cash flow provided
by operating activities during the current period was primarily attributable
to higher research and development costs associated with ValuOne Online.
Cash flow used in investing activities was $785,658 and $103,217 during
the 1996 Period and the 1995 Period, respectively. The Company's capital
expenditures historically have consisted of printing machinery and office
equipment. During the current fiscal year, the Company acquired $614,899 of
computer equipment for ValuOne Online. The Company anticipates using $3.0
million of cash for capital investment during 1996 to acquire initial
computer hardware for the ValuOne Online system. This cash will be provided
by the March 96 Placement.
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Cash flow provided by financing activities was $1,458,459 and $63,483
during the 1996 Period and the 1995 Period, respectively. The increase in
cash flow provided by financing activities during the 1996 Period, as compared
to the 1995 Period was primarily attributable to the proceeds of the April 95
and March 96 Placement and borrowings of $133,256 from related parties. The
Company borrowed $498,900 for computer equipment in the form of a capital lease.
During the 1996 Period, the Company increased its line-of-credit loan
agreement with a bank to a maximum of $200,000, substantially all of which
was available for future borrowings as of March 31, 1996. The Company's
financing arrangements, which are secured by substantially all of the Company's
assets and personally guaranteed by certain officers and shareholders,
require the Company to satisfy certain financial covenants and restrict the
payment of dividends.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATAMARK HOLDING, INC.
Date: May 21, 1996 By: /s/ James Egide
--------------------------
James Egide
Chief Financial Officer