SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 0-20771
DATAMARK HOLDING, INC.
(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
448 E. Winchester Street, Suite 400
Salt Lake City, Utah 84107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(801) 268-2202
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
As of September 22, 1997, 8,560,932 of the Registrant's Common Shares were
outstanding. As of September 22, 1997, the aggregate market value of voting
stock held by non-affiliates of the Registrant was approximately $20,597,000
based on the average of the closing bid and asked prices for the Registrant's
Common Shares as quoted by the NASDAQ National Market.
================================================================================
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997 Annual Meeting
of Stockholders are incorporated herein by reference, as indicated herein.
PART I
ITEM 1. BUSINESS
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SUMMARY
DataMark Holding, Inc. (proposed to be renamed "WorldNow, Inc.," and
referred to hereafter as the "Company" or "WorldNow") is an Internet company
with roots in the direct marketing industry. Through its sophisticated
technology and software and its unique business strategy, the Company is
creating a national Internet service based upon the national network television
business model.
The Company has been a national direct marketing advertising agency for
almost ten years, and began incorporating online business strategies in fiscal
1994 with the objective of becoming a national leader in the interactive online
advertising industry. While it remains a national leader for its targeted
industries in direct response advertising, the Company has recruited a highly
experienced management and technical team to design and implement a national
Internet service. This service, patterned upon the broadcast television business
model, is creating a network of interconnected Web communities that are to be
promoted by WorldNow's local television station affiliates. Numerous revenue
opportunities for both WorldNow and the WorldNow affiliates are designed into
the service and into the affiliate websites.
The Company's combined strengths of superior technology and experience in
both the broadcast television and direct marketing industries position the
Company to be a leader in the local, regional and national interactive online
advertising industry.
INTERNET STRATEGY
WORLDNOW AFFILIATE NETWORK
WorldNow is creating a national Internet service based upon the network
television business model. By providing free web hosting services and revenue
opportunities to local television stations, WorldNow obtains free television
commercial advertising driving Internet traffic to the WorldNow website.
WorldNow provides and aggregates national content and advertising for its local
television station affiliates, who augment the national content with highly
relevant local content and local advertising. It is this combination of local
content and advertising within a national network that makes WorldNow a
compelling website with revenue opportunities.
National Internet Network Strategy
WorldNow is attempting to create a national Internet-based network of
local television stations by signing affiliation agreements with television
stations in major television markets in the United States. These affiliation
agreements create "win/win" partnerships on a local and national level. WorldNow
provides free web hosting, 7x24 web maintenance, and state of the art Internet
features to its stations. It also provides incremental (and historically
non-television) revenue opportunities for each station by offering an inventory
of advertising delivery options on both the station's website and WorldNow's
website which can be sold by the station to local advertisers. In return, the
station commits to give free on-the-air television advertising and promotions to
WorldNow in order to drive local users of the Internet to the WorldNow Site.
WorldNow is taking advantage at minimal cost to WorldNow - of the extensive
infrastructure and commercial relationships of the broadcast television
industry. WorldNow is bringing the technology of the Internet revolution to the
television business model.
The WorldNow website sits "behind" the local television station
affiliate's website. Although visitors can access the WorldNow website (or its
individual pages) directly, and then select a geographic region to obtain the
localized content, the typical visitor will access the site through a local
television website. A "Main Menu" button linking the station's site to
WorldNow's site will be prominently displayed on the television affiliate's home
or front page. By clicking on this link, a visitor can then access the content
and advertising offered through the WorldNow site. Moreover, WorldNow in most
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cases will have advertising inventory on the station's front page. Thus any
traffic on the local television station's website or on WorldNow's website will
result in revenue to both WorldNow and the local station.
WorldNow is currently in contract negotiations with stations in major
television markets, including New York, San Francisco, Los Angeles, Minneapolis,
Phoenix and Portland, and expects to have over 50 affiliates across the nation
in major markets by the end of fiscal year 1998. Each of these stations will be
contractually committed to provide significant on-the-air television promotion
of the co-branded WorldNow/Affiliate websites.
The traffic and "impressions" resulting from this widespread audience
enables the WorldNow national sales force to commit national advertisers to
advertise on the WorldNow website. As viewership and television-driven "hits"
increase with additional affiliates, the WorldNow website will become
increasingly attractive to national advertisers who have previously reserved
Internet advertising to the few major "branded" websites.
Local Content
Among the most highly-trafficked sites on the World Wide Web are those
that provide compelling local content. WorldNow's business model is to partner
with the entities most qualified to provide, on a daily basis, compelling,
relevant local content - local television stations. WorldNow merges the local
and community content and advertising which its television station affiliates
provide with the national content and advertising which WorldNow provides. This
vertical approach creates a compelling and interesting site and encourages
visits and repeat traffic.
From local news, weather and sports, to entertainment, recreational and
cultural events and traffic, local television stations are in the business of
aggregating local information and disseminating it via television broadcasts.
WorldNow "piggybacks" upon this existing local infrastructure and
information-gathering business, and, at minimal cost to WorldNow, obtains this
local content for the co-branded WorldNow/Affiliate website. WorldNow, through
its affiliation agreements, is attempting to obtain the services of a large
staff of local content aggregators and experienced advertising salespersons in
most television markets, or "DMAs" (as defined by Nielsen Rating Services) in
America, at minimal incremental cost to WorldNow.
WorldNow, through its affiliation agreements, obtains advertising
inventory and prominent link buttons on its affiliates' websites. When a viewer
on the World Wide Web visits his or her local television website to obtain local
information and news, WorldNow thus begins to benefit from advertising and
commerce revenue.
National Content
WorldNow will aggregate and license national content for its website,
which enables local television affiliates to give their website visitors more
varied offerings than they can present on their own. WorldNow obtains this
national content primarily through relationships and partnerships with prominent
content providers. For example, WorldNow has entered into or is finalizing
agreements with CD Universe, BooksNow, ClassiFind, Vicinity Corp. and
FestivalFinder, leading providers of content. These relationships enable
WorldNow to offer national content while avoiding the cost of producing original
editorial content.
WorldNow will continue to add relationships with content providers in a
variety of interest areas that WorldNow believes will offer desirable
advertising opportunities. This relevant national content is effectively merged
with the local content provided by WorldNow's local television affiliates.
Television Stations
Local television stations are attracted to and benefit from the network of
station websites being created by WorldNow (the "WorldNow Affiliate Network")
for many reasons, including:
- Membership in the WorldNow Affiliate Network provides new and incremental
revenue opportunities for local television stations.
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- WorldNow offers a turnkey national/local website business strategy.
WorldNow designs and hosts the local television websites on its
state-of-the art, highly redundant, 7x24 maintained computer backbone.
This enables local television stations to have a sophisticated web
presence, without the cost, maintenance and hassle associated with
maintaining and updating a content-based website.
- WorldNow trains television sales employees in Internet advertising sales
techniques at its training center in Salt Lake City, Utah. The training
program was developed by experts from the online, broadcast, newspaper,
cable and direct marketing fields.
- Local television station websites, using the sophisticated technology
offered by WorldNow's computers, servers, routers and multi-homed and
multi-ported telecom and Internet uplinks, as well as its proprietary
software and delivery systems, can offer constantly changing local content
and virtually unlimited local advertising opportunities.
- Local television stations can tap sources of revenue that have
traditionally been the exclusive domain of other media, such as newspaper,
magazines and yellow pages.
- In most cases, stations keep 100% of the revenue from local advertising.
If the affiliate opts for WorldNow to produce online advertisements, then
WorldNow receives, as compensation, 10% of the local sales revenue.
Salespersons receive template choices for their advertisers to choose
from, and WorldNow's creative staff will produce and upload all advertiser
advertisements so that the station has no need to hire extra staff.
- Stations receive around-the-clock technical support. WorldNow offers high
quality designers and software experts to perform re-designs or any type
of Internet site development a station may request. WorldNow can work with
all forms of photographs, in addition to streaming video, delivering audio
and even simulcasting news and other programs online.
- WorldNow's business model does not de-focus the local stations' staff.
Existing staff can continue to focus on growing station revenue and
ratings.
The Revenue Model
The WorldNow Affiliate Network is unique in its ability to generate
revenues for both WorldNow and its television affiliates. Affiliate television
station sales forces, using WorldNow's sophisticated web hosting services, have
additional opportunities to sell promotional advertising to existing and new
clients. The method of delivery of WorldNow promotional advertising creates
conversion opportunities for television stations. Television salespersons can
sell compelling, interactive, informative Internet advertising to movie
theaters, retailers, restaurants, and other localized businesses who have
traditionally not been able to afford television advertising.
This new stream of revenue for television stations creates an even
stronger incentive for the stations to drive viewers to their website through
television commercials and other promotions. As traffic is directed to the
website to obtain local content, such as breaking local news stories, high
school, college or professional sports, weather, etc., advertising revenues from
both local and national advertisers increase.
The standard affiliation agreement provides that local advertising
revenues are kept by the local stations, and national advertising revenues are
retained by WorldNow. Stations will generate revenue from the local inventory on
their sites, but most of their revenue will come from the large amount of
reserved inventory on the WorldNow site. In certain cases, revenue and
cost-sharing agreements have been signed with stations. In all cases, revenues
generated from commerce (the purchase of merchandise online) from visitors to
the site will be shared.
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Television Promotion of Traffic
Each affiliate is contractually committed to advertise its own website and
the unique content and features of the WorldNow site (which resides immediately
behind the local television station's website, and is connected by a prominent
"link" button entitled "Main Menu"), in on-the-air television commercials and
spots ranging from 30-second and 15-second advertisements to shorter spots,
creeps and crawls.
At minimal cost to WorldNow, its site is being promoted daily on
television to millions of viewers. Few other websites will have such unique and
widespread marketing support. Other websites do not typically receive free
television advertising in every major Nielsen Rating Services markets, or DMAs.
The WorldNow strategy is to work toward this goal by creating the WorldNow
Online Network. Most other major websites must pay or invest in print and other
offline media in order to promote their brand and create greater demand for
their online properties.
Targeted Advertising
Advertisers are offered general or targeted advertising opportunities. As
television affiliates develop localized content to accompany WorldNow's national
content, and as the number of television affiliates increases, advertisers can
direct advertising to targeted customers by appropriate placement and delivery
throughout the WorldNow website. Moreover, advertising can be targeted
geographically, or by subject matter, or both.
Advertisers can purchase advertising on home or directory pages, or on
pages in a specific category. For example, a national car manufacturer and a
local car dealer alike can target advertisements to people who click on the
"Automotive" button on the WorldNow site, and major motion picture production
studios as well as local theaters can advertise on "Entertainment" or "Film and
Video" pages. WorldNow's unique co-branding relationship with its affiliates
permits local advertisers to reach local customers, and national advertisers to
reach customers nationwide. Such targeted impressions command higher CPMs (cost
per thousand impressions) than generalized advertisements.
WorldNow's advertising delivery consists of banner advertisements that
appear on pages throughout the website, as well as larger "category-specific
feature ads" that contain text regarding the product, in addition to streaming
audio and video capabilities. These ads become part of the "content." Hypertext
links are embedded in advertisements to enable access to the advertiser's
website. This enables visitors to obtain additional information and even
purchase goods and services from advertisers. When such traffic originates on
the WorldNow website, WorldNow and the local television affiliate obtain
advertising revenue and a percentage of online sales.
Additionally, advertisers on the WorldNow website are offered reports that
assist in measuring the penetration and effectiveness of the advertisements.
Rather than projecting impressions from sample data, advertisers can now obtain
detailed reports of impressions, as well as geodemographic information about the
impressions. This "scientific" measurement of penetration assists advertisers in
better targeting their advertising, thereby improving response rates. It also
enables WorldNow to implement a CPM pricing model which is attractive to
advertisers.
Commerce
Some of the most successful sites on the Web commingle commerce and
content. WorldNow provides both advertisers (local and national) and direct
marketers with opportunities to sell goods and services over the Internet.
WorldNow's Microsoft Merchant Server enables WorldNow to take, process and
fulfill commerce on its site. WorldNow is negotiating revenue sharing agreements
with cataloguers, direct marketers and others offering commerce on the WorldNow
site.
Although WorldNow does not anticipate significant revenue from Internet
commerce during the next fiscal year, research suggests that commerce on the
Internet will increase. When and if cyber-commerce grows, WorldNow is
well-positioned to take advantage of the opportunities such a trend will
represent.
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The Technology
The Company's computer facility in Salt Lake City features
- Systemwide redundancy
- 4 Hewlett-Packard 9000 Mainframes, Dual Pentium Pro Windows NT
- 480 GIG Storage Array
- 7010 and 7513 Cisco Routers, 100 Mb Switched Ethernet and ATM LAN
- 2 Dedicated News Servers
- 10 GIG Systemwide RAM
- Internal 155 MBPs ATM backbone at OC3 speeds
- 2 Fractional DS3s for virtually unlimited bandwidth
- Microsoft Site Server and Merchant Server
- VIVOActive (streaming video)
- RealAudio software (streaming audio)
- Internet Relay Chat
- CU-SeeMe software (videoconferencing)
This technology backbone will enable WorldNow to host and maintain the
websites of television affiliates in every market in America, host massive
e-mail services, offer sophisticated and compelling delivery options for
promotional advertising and content, and generate related streams of income.
E-Mail
WorldNow's computer center has brought additional revenue opportunities to
the Company. The Company is in the process of negotiating a joint venture
agreement with CommTouch, Inc., a leading provider of advanced and
family-friendly e-mail software.
E-Mail has become one of the most used features of the Internet. The
average Internet user spends approximately one-third of his/her Internet time
using e-mail and checking the inbox. As users of e-mail typically store
correspondence, addresses and other information in the e-mail client, users face
significant switching costs that inhibit rapid turnover of the e-mail customer
base.
According to Forrester Research, 135 million Americans will use e-mail by
the year 2000, with an equal number of users abroad. Market leaders in the
entertainment industries have realized the revenue potential of branding
consumer e-mailboxes, and many are rapidly initiating free e-mail services to
their existing customer base. It is expected that branded e-mail and direct
Internet marketing channels will reach an increasingly larger audience each
year.
Providers of e-mailboxes can realize significant strategic benefits,
including controlling a direct marketing vehicle to millions of users,
drastically reducing direct mail expenses, extending brand awareness, acquiring
a consumer database via the subscriber registration process, and generating
incremental revenues from advertisements on the e-mail service.
Pursuant to the proposed joint venture agreement with CommTouch, WorldNow
will host CommTouch's e-mail service on its computers and servers in Salt Lake
City. The joint venture will offer the award-winning Pronto e-mail package to
major companies at no charge on the condition that advertising will be permitted
in the e-mail package. The OEM can then brand the e-mail and give it away to
subscribers or customers. This free, Internet-based e-mail permits "permanent
e-mail addresses" across a variety of platforms and Internet services. Most
importantly, it provides opportunities for advertisers to reach highly targeted
audiences.
CommTouch is currently in negotiations with several large consumer and
entertainment companies with respect to the free e-mail package. The proposed
joint venture agreement is expected to provide that in return for hosting the
e-mail service and providing technical support and maintenance, WorldNow will
receive 50% of the net profits generated from advertising on the free e-mail
service.
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Additionally, the joint venture will offer certain e-mail services to the
Company's television station affiliates. As part of the WorldNow Online Network,
television stations will be able to offer e-mail to viewers in the local DMA.
Users of such e-mail become highly targetable customers for advertisers and
merchants.
Direct Internet Connections
The Company, through its subsidiary Sisna, is selling "direct connections"
to the Internet to businesses and office buildings throughout the Western United
States. Direct connections, as opposed to "dial-up" access to the Internet,
enable users to gain instant and continuous access to the Internet. As more and
more businesses and entities embrace the communication and business capabilities
of the Internet, the convenience and ubiquity of direct connections will become
increasingly attractive. Sisna, which also operates as a dial-up Internet
Service Provider ("ISP"), is actively exploiting this trend.
TARGETED MARKETING
The Company's roots are in its innovative and sophisticated targeted
marketing business. Prior to implementing an Internet model for bringing
advertisers together with targeted customers, the Company developed a direct
mail model and demographic database that continues to be profitable.
The expected that U.S. companies will spend over $57 billion on direct
mail in 1997. Though direct mail is occasionally referred to as "junk" mail, it
is one of the most measurable and predictable direct response vehicles available
today for advertisers and marketers. Advertisers seek to increase the
effectiveness of advertising by directing the advertising to persons who are
most likely to be purchasers of the product or service advertised. With direct
mail, advertising can be delivered directly in the homes of persons identified
as likely purchasers.
Through its subsidiary, DataMark Systems, Inc. ("DMS"), the Company
provides highly targeted business to consumer advertising through direct mail.
DMS is a recognized leader for its target industries in direct response
advertising via direct mail. DMS currently services some 1,200 businesses
throughout the U.S. and is currently considering expanding into Canada. DMS is a
leading direct mail provider in private for-profit and nonprofit education, and
is expanding into other industries.
DMS is a full-service direct response advertising company that provides
turn-key solutions for advertisers. These services include strategy development,
creative design, targeting the consumer or business, identifying the "offer",
segmentation research, geodemographic target utilization, list research,
printing, mail house facilities, fulfillment, and back-end analysis. DMS has
developed direct response strategies and products that are leading edge and
incorporate the most sophisticated geodemographic and targeting available.
Strategies and methodologies have been formulated, and are being implemented, to
ensure that DMS will continue to be a national leader.
The Company has announced several new products and services this year,
including the "Recruitment Management System" marketing system and a Private
Postsecondary High School Consulting and Recruitment System. Both are receiving
rapid acceptance in the marketplace.
With the advent of online services, DMS immediately began to research and
develop how online services/Internet could support the continued growth of
direct mail. Online and offline direct response advertising companies are
finding the information gained about consumers while they are online improves
mailing lists. This is causing an even greater boost in direct mail revenues
now, and should continue in the future.
As postage is the single largest cost factor in direct mail, DMS has
researched and developed direct response products that can be delivered via
e-mail and other "download" or "push" technologies. These direct response
products are incorporated in the following DMS online strategies:
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- Free web-based and PC-based e-mail for all college students throughout
the United States starting with the high-tech private proprietary
for-profit colleges, including their students, prospective students, and
graduates. This market can give the Company exposure to millions of
existing and potential highly targeted consumers who use e-mail.
- Using online "push" and "download" technology to deliver "standard"
direct mail creative materials to targeted consumers and businesses.
- Establishing advertising agreements with web sites that already
incorporate "download" and "push" technology to deliver "standard" direct
mail creative materials to properly-targeted audience.
Advertisers spend as much as $3,000 to $4,000 cumulatively per year per
targeted individual through direct mail. E-mail is the foundation of online
services and the Internet. DMS's projections indicate that a targeted consumer
through e-mail could be worth up to $120 in "direct mail e-mail" revenue per
year. Predictions are that this revenue figure will grow substantially beyond
that in the future. Consequently, the Company is implementing its strategy to
obtain large numbers of e-mail users. This could provide an opportunity for DMS
for both revenue and market visibility for the Company.
Through its direct response direct mail and online strategies, the Company
is positioned to realize substantial revenue growth. DMS's offline and online
strategies are leading edge. They position DMS as a national leader in the
direct mail industry and in the online advertising industry, as current and
future DMS strategies are implemented.
COMPETITION
The market for Internet products and services is highly competitive
and competition is expected to continue to increase significantly. In addition,
the Company expects the market for Web-based advertising, to the extent it
continues to develop, to be intensely competitive. There are no substantial
barriers to entry in these markets, and the Company expects that competition
will continue to intensify. Although the Company believes that the diverse
segments of the Internet market will provide opportunities for more than one
supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments.
The Company competes with many other providers of online national and
local content, advertising and commerce. Many companies offer competitive
websites with local information, including, among others, Sidewalk, CitySearch,
AtHand, Digital Cities, Planet Direct and America Online ("AOL"). In addition,
the Company competes with a large number of Web sites and online services
(including, among others, the Microsoft Network, AOL, and other Web navigation
companies such as Excite, Lycos and Infoseek) that offer informational and
community features, such as news, stock quotes, sports coverage, Yellow Pages
and e-mail listings, weather, news, chat services and bulletin board listings,
that are competitive with the services offered by the Company. Several
companies, including Microsoft and AOL and their affiliates, also are developing
or currently offer online information services for local markets, which compete
with the Company's local television station affiliate websites.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical and
marketing resources than the Company. In addition, providers of content and
advertising on the Internet may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft or Netscape.
In the future, the Company expects to face competition in the various
demographic and geographic markets addressed by the national network model
employed by WorldNow. This competition may include companies that are larger and
better capitalized than the Company and that have expertise and established
brand recognition in these markets. There can be no assurance that the Company's
competitors will not develop Internet products and services that are superior to
those of the Company or that achieve greater market acceptance than the
Company's offerings. Moreover, a number of the Company's current advertising
customers, licensees and partners have also established relationships with
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certain of the Company's competitors, and future advertising customers,
licensees and partners may establish similar relationships.
The Company also competes with online services and other Web site
operators, as well as traditional offline media such as television, radio and
print for a share of advertisers' total advertising budgets. The Company
believes that the number of companies selling Web-based advertising and the
available inventory of advertising space have increased substantially during the
past year. Accordingly, the Company may face increased pricing pressure for the
sale of advertisements. There can be no assurance that the Company will be able
to compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that the principal competitive factors in its markets
are brand recognition, ease of use, comprehensiveness, independence, and the
availability of targeted content and focused value added products and services.
Competition among current and future suppliers of Internet informational
services, high-traffic Web sites, as well as competition with other media for
advertising placements, could result in significant price competition and
reductions in advertising revenues. Moreover, many of the Company's current and
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company. There can be no assurance that the Company
will be able to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, operating results and
financial condition.
PROPRIETARY RIGHTS
The Company regards its patents, copyrights, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success, and
the Company relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States, and has applied for the
registration of a number of its trademarks, including "WorldNow" and "WorldNow
Online Network." Substantially all national content appearing in the Company's
online properties is licensed from third parties under short-term agreements.
EMPLOYEES
As of June 30, 1997, the Company had 114 full-time employees. The
Company's future success is substantially dependent on the performance of its
management, sales force, key technical personnel, and its continuing ability to
attract and retain highly qualified technical, sales and managerial personnel.
SEGMENT INFORMATION
Information on the Company's operating segments can be found in Part II of
this report, Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and at Note 11 to the Financial Statements.
RISK FACTORS
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company's business and
prospects:
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LIMITED OPERATING HISTORY; ANTICIPATED LOSSES
The Company's website has only been online since June 1997, and did not
commence generating advertising revenues until August 1997. Accordingly, the
Company has a limited operating history upon which an evaluation of the Company
can be based, and its prospects are subject to the risks, expenses and
uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services, including the Web-based
advertising market. Specifically, such risks include, without limitation, the
failure to sign affiliation agreements with local television stations, the
failure to continue to develop and extend the "WorldNow" brand, the rejection of
the Company's services by Web consumers and/or advertisers, the inability of the
Company to maintain and increase the levels of traffic on the WorldNow website,
the development of equal or superior services or products by competitors, the
failure of the market to adopt the Web as an advertising medium, the failure to
successfully sell Web-based advertising through the Company's recently developed
internal sales force, potential reductions in market prices for Web-based
advertising, the inability of the Company to effectively integrate the
technology and operations or any other acquired businesses or technologies with
its operations, and the inability to identify, attract, retain and motivate
qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks. As of June 30, 1997, the Company had an
accumulated deficit of $12,889,139. For the year ended June 30, 1997, the
Company incurred a loss of $9,340,816. The limited operating history of the
Company and the uncertain nature of the markets addressed by the Company make
the prediction of future results of operations difficult or impossible. The
Company believes that period to period comparisons of its operating results are
not meaningful and that the results for any period should not be relied upon as
an indication of future performance. As a result of these factors, there can be
no assurance that the Company will not incur significant losses on a quarterly
and annual basis for the foreseeable future.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the Company's limited operating history, the Company does not
have historical financial data for a significant number of periods on which to
base planned operating expenses. The Company derives substantially all of its
revenues from its targeted marketing (direct mail) subsidiary. Although the
Company expects that advertising revenue on its website will eventually be
greater than revenue from direct mail, there can be no assurance in this regard.
Moreover, the sale of advertisements on the Web is an emerging market that is
difficult to forecast accurately. The Company's expense levels are based in part
on its expectations concerning future revenue and to a large extent are fixed.
Quarterly revenues and operating results will depend substantially upon the
advertising revenues received within the quarter, which are difficult to
forecast accurately. Accordingly, the failure of television stations to sign on
as part of the WorldNow Online Network, or the cancellation or deferral of a
even a small number of advertising contracts, could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall, and any significant shortfall in revenue
in relation to the Company's expectations would have an immediate adverse effect
on the Company's business, operating results and financial condition. The
Company has high fixed costs and expenses relating to the development of the
Website. To the extent that such expenses are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition will be materially and adversely affected.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of usage of the Internet, demand for
Internet advertising, seasonal trends in Internet usage and advertising
placements, the addition or loss of television station affiliates, advertisers,
the level of user traffic on the Company's website, the advertising budgeting
cycles of individual advertisers, the amount and timing of capital expenditures
and other costs relating to the expansion of the Company's operations, the
introduction of new products or services by the Company or its competitors,
pricing changes for Web-based advertising, technical difficulties with respect
to the use of the Company's website or other media properties developed by the
Company, incurrence of costs relating to acquisitions, general economic
conditions and economic conditions specific to the Internet and online media. As
a strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
10
business combinations that could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company also
expects to experience seasonality in its business, with user traffic on the
Company's website being lower during the summer and year-end vacation and
holiday periods, when usage of the Web and the Company's services typically
decline. Additionally, seasonality may also affect the amount of customer
advertising dollars placed with the Company in the first and third calendar
quarters as advertisers historically spend less during these quarters.
Due to all of the foregoing factors, in future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web in order to support the sale of
advertising on the Company's website and the websites of its television station
affiliates. Rapid growth in the use of and interest in the Internet and the Web
is a recent phenomenon. There can be no assurance that communication or commerce
over the Internet will become widespread or that extensive content will continue
to be provided over the Internet. The Internet may not prove to be a viable
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as a reliable network
backbone, or timely development and commercialization of performance
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by such potential
growth or that the performance or reliability of the Web will not be adversely
affected by this continued growth. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Web and the Company's online
media properties. If use of the Internet does not continue to grow, or if the
Internet infrastructure does not effectively support growth that may occur, the
Company's business, operating results and financial condition would be
materially and adversely affected.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS AND BUSINESS
STRATEGY
The markets for the Company's products and media properties have only
recently begun to develop, are rapidly evolving and are characterized by an
increasing number of market entrants who have introduced or developed
information navigation products and services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for advertising on
the Internet is new and evolving, it is difficult to predict the future growth
rate, if any, and size of this market. There can be no assurance either that the
market for advertising on the Internet will develop or that demand for
WorldNow's content and promotional advertising will emerge or become
sustainable. The Company's ability to successfully sign additional affiliation
agreements with local television stations and to sell advertising on its
co-branded websites depends substantially on use of the WorldNow website. If use
of the Company's website fails to continue to grow, the Company's ability to
sign additional stations and sell advertising would be materially and adversely
affected. If the market fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if the Company's website does not achieve
or sustain market acceptance, the Company's business, operating results and
financial condition will be materially and adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that establishing and maintaining the "WorldNow" brand
is a critical aspect of its efforts to attract and expand its Internet audience
and that the importance of brand recognition will increase due to the growing
number of Internet sites and the relatively low barriers to entry. Promotion and
enhancement of the "WorldNow" brand will depend largely on the Company's success
11
in providing high quality products and services, which cannot be assured. If
consumers do not perceive the Company's existing website to be of high quality,
or if the Company introduces new features and services or enters into new
business ventures that are not favorably received by consumers, the Company will
be unsuccessful in promoting and maintaining its brand, and will risk diluting
its brand and decreasing the attractiveness of its audiences to advertisers.
Furthermore, in order to attract and retain Internet users and to promote and
maintain the "WorldNow" brand in response to competitive pressures, the Company
may find it necessary to increase substantially its financial commitment to
creating and maintaining a distinct brand loyalty among its local television
station affiliates and among consumers. If the Company is unable to provide high
quality features and services or otherwise fails to promote and maintain its
brand, or if the Company incurs excessive expenses in an attempt to improve its
features and services or promote and maintain its brand, the Company's business,
operating results and financial condition will be materially and adversely
affected.
RELIANCE ON ADVERTISING REVENUES AND UNCERTAIN ADOPTION OF THE WEB AS AN
ADVERTISING MEDIUM
The Company anticipates deriving a substantial part of its revenues from the
sale of advertisements on its Web pages under short-term contracts, and expects
to continue to do so for the foreseeable future. Most of the Company's
advertising customers will likely have only limited experience with the Web as
an advertising medium, have not devoted a significant portion of their
advertising expenditures to Web- based advertising and may not find such
advertising to be effective for promoting their products and services relative
to traditional print and broadcast media. The Company's ability to generate
significant advertising revenues will depend upon, among other things,
advertisers' acceptance of the Web as an effective and sustainable advertising
medium, the development of a large base of users of the Company's services
possessing demographic characteristics attractive to advertisers, and the
ability of the Company to develop and update effective advertising delivery and
measurement systems. No standards have yet been widely accepted for the
measurement of the effectiveness of Web-based advertising, and there can be no
assurance that such standards will develop sufficiently to support Web-based
advertising as a significant advertising medium. Certain advertising filter
software programs are available that limit or remove advertising from an
Internet user's desktop. Such software, if generally adopted by users, may have
a materially adverse effect upon the viability of advertising on the Internet.
The Company also recently completed the transition from a third-party
advertising sales agent to internal advertising sales personnel, which involves
additional risks and uncertainties, including (among others) risks associated
with the recruitment, retention, management, training and motivation of sales
personnel. As a result of these factors, there can be no assurance that the
Company will sustain or increase current advertising sales levels. Failure to so
will have a material adverse effect on the Company's business, operating results
and financial position.
In addition, there is intense competition in the sale of advertising on the
Internet, including competition from other Internet navigational tools as well
as other high-traffic sites, which has resulted in a wide range of rates quoted
by different vendors for a variety of advertising services, which makes it
difficult to project future levels of Internet advertising revenues that will be
realized generally or by any specific company. Competition among current and
future suppliers of Internet navigational services or Web sites, as well as
competition with other traditional media for advertising placements, could
result in significant price competition and reductions in advertising revenues.
There also can be no assurance that the Company's advertising customers will
accept the internal and third-party measurements of impressions received by
advertisements on the Company's website, the Company's online media properties,
or that such measurements will not contain errors.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
The Company depends substantially upon third parties for several critical
elements of its business including, among others, local television station
affiliates, telecommunications, technology and infrastructure, development of
targeted content for local websites, distribution activities and advertising
sales.
TECHNOLOGY AND INFRASTRUCTURE
The Company depends substantially upon its own computer equipment and its
maintenance and technical support to ensure accurate and rapid presentation of
12
content and advertising to the Company's customers. Any failure by the Company
to effectively maintain such equipment and provide such information could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, any termination of telecom agreements with
Sprint, or Sprint's failure to the Company's agreement upon expiration could
result in substantial additional costs to the Company in developing or licensing
replacement telecom capacity, and could result in a loss of levels of use of the
Company's navigational services.
CONTENT PROVIDERS AND DEVELOPMENT
A key element of the Company's strategy involves the implementation of
WorldNow branded content targeted for interest areas, demographic groups and
geographic areas. In these efforts, the Company has relied and will continue to
rely substantially on its content providers, as well as the content development
and localization efforts of its television station affiliates. The Company
expects to rely exclusively upon its local television station affiliates to
localize, maintain and promote their websites as well as WorldNow's website and
to sell advertising in local markets. There can be no assurance that the
Company's current or future content providers will continue to provide
interesting and useful information, or that the Company's affiliates will
effectively gather and aggregate local content. Any failure of these parties to
perform under their contracts or to deliver content could have a material
adverse effect on the Company's business, results of operations and financial
condition.
AFFILIATE ADVERTISING SALES AGENTS
Although the Company has established an internal sales force for national
accounts, the Company will rely on its local television station affiliates for
the sale of a substantial amount of advertising. There can be no assurance that
the Company's or its affiliates' advertising representatives will achieve the
Company's advertising sales objectives, or that such advertising sales will be
sufficient to offset advertising revenue guarantees that the Company may make to
its affiliates. Because advertising sales have constituted and are expected to
continue to constitute substantially all of the Company's revenues from its
Internet business, any failure of the Company's or its affiliates' sales
representatives to achieve successful advertising sales could have a material
adverse effect on the Company's business, operating results and financial
condition.
ENHANCEMENT OF THE COMPANY'S MAIN SITE
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, features and content of the Company's main site.
There can be no assurance that the Company will be able to successfully maintain
competitive user response time or implement new features and functions, such as
greater levels of user personalization, localized content filter and information
delivery through "push" methods, which will involve the development of
increasingly complex technologies.
Furthermore, enhancements of or improvements to the Company's website may
contain undetected errors that require significant design modifications,
resulting in a loss of customer confidence and user support and a decrease in
the value of the Company's brand name recognition. Any failure of the Company to
effectively improve its website, or failure to achieve market acceptance, could
adversely affect the Company's business, results of operations and financial
condition.
TECHNOLOGICAL CHANGE
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. These market
characteristics are exacerbated by the emerging nature of this market and the
fact that many companies are expected to introduce new Internet products and
services in the near future. The Company's future success will depend in
significant part on its ability to continually improve the performance, features
and reliability of the Company's website in response to both evolving demands of
the marketplace and competitive product offerings, and there can be no assurance
that the Company will be successful in doing so. In addition, the widespread
adoption of new Web functionality through developments such as the Java
programming language and increasingly personalized information filtering and
delivery could require fundamental changes in the Company's services and could
fundamentally affect the nature, viability and measurability of Web-based
13
advertising, which could adversely affect the Company's business, operating
results and financial condition.
MANAGEMENT OF POTENTIAL GROWTH
The process of managing advertising within large, potentially high traffic
Web sites such as the Company's website will become an increasingly important
and complex task. To the extent that any extended failure of the Company's
advertising management system results in incorrect advertising insertions, the
Company may be exposed to "make good" obligations with its advertising
customers, which, by displacing advertising inventory, could defer advertising
revenues and thereby have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to effectively manage the expansion of its operations, that
the Company's systems, procedures or controls will be adequate to support the
Company's operations or that Company management will be able to achieve the
rapid execution necessary to fully exploit the market opportunity for the
Company's products and media properties. Any inability to effectively manage
growth could have a material adverse effect on the Company's business, operating
results and financial condition.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES
A key element of the Company's strategy is to generate a high volume of use
of its website. Accordingly, the performance of the Company's technology is
critical to the Company's reputation, its ability to attract advertisers to the
Company's Web sites and to achieve market acceptance of these products and media
properties. Any system failure that causes interruption or an increase in
response time of the Company's website could result in less traffic to the
Company's website and, if sustained or repeated, could reduce the attractiveness
of the Company's website to advertisers. An increase in the volume of traffic to
the Company's website could strain the capacity of the software or hardware
deployed by the Company, which could lead to slower response time or system
failures, and adversely affect the number of impressions received by advertising
and thus the Company's advertising revenues. In addition, as the number of
affiliated Web pages and users increase, there can be no assurance that the
Company's infrastructure will be able to scale accordingly. The Company also
faces technical challenges associated with higher levels of personalization and
localization of content delivered to users of its services, which adds strain to
the Company's development and operational resources. The Company is also
dependent upon its own technology and link to the Internet. Any disruption in
Internet access or any failure of the Company's technology to handle higher
volumes of user traffic could have a material adverse effect on the Company's
business, operating results and financial condition. Furthermore, the Company is
dependent on hardware suppliers for prompt delivery, installation and service of
servers and other equipment used to deliver the Company's products and services.
The Company's operations are dependent in part upon its ability to protect
its operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events. The
Company does not presently have redundant, multiple site capacity in the event
of any such occurrence. Despite the implementation of network security measures
by the Company, its servers are vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering with the Company's computer
systems. The occurrence of any of these events could result in interruptions,
delays or cessations in service to users of the Company's website and those of
its affiliates, which could have a material adverse effect on the Company's
business, operating results and financial condition.
INTEGRATION OF POTENTIAL ACQUISITIONS
During fiscal 1997, the Company acquired SISNA, and evaluated several other
potential acquisitions. As part of its business strategy, the Company expects to
enter into further business combinations and/or make significant investments in,
complementary companies, products or technologies. Any such transactions would
be accompanied by the risks commonly encountered in such transactions. Such
risks include, among other things, the difficulty of assimilating the operations
and personnel of the acquired companies, the potential disruption of the
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired technology or content and rights into the Company's
products and media properties, the difficulties of integrating personnel of
acquired entities, additional expenses associated with amortization of acquired
14
intangible assets, the maintenance of uniform standards, controls, procedures
and policies, the impairment of relationships with employees and customers as a
result of any integration of new management personnel, and the potential unknown
liabilities associated with acquired businesses. There can be no assurance that
the Company would be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States, and has applied for the
registration of certain of its trademarks, including "WorldNow" and "WorldNow
Online." There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate the Company's copyrights, trademarks, trade dress and
similar proprietary rights. In addition, there can be no assurance that other
parties will not assert infringement claims against the Company.
The Company anticipates that it may be subject to legal proceedings and
claims in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by the Company and its licensees. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. The Company is not aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
effect on the Company's financial position or results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its senior management and key technical personnel. In particular, the Company's
success depends substantially on the continued efforts of its senior management
team, which currently is composed of a small number of individuals who only
recently joined the Company. The Company does not carry key person life
insurance on any of its senior management personnel. The loss of the services of
any of its executive officers or other key employees could have a material
adverse effect on the business, operating results and financial condition of the
Company.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency in the United States, other than regulations applicable to businesses
generally, and there are currently few laws or regulations directly applicable
to access to or commerce on the Internet. Due to the increasing popularity and
use of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing and characteristics and quality of products and services. For example,
the Company may be subject to the provisions of the Communications Decency Act
(the "CDA"). Although the constitutionality of the CDA, the manner in which the
CDA will be interpreted and enforced and its effect on the Company's operations
cannot be determined, it is possible that the CDA could expose the Company to
substantial liability. The CDA could also dampen the growth in use of the Web
generally and decrease the acceptance of the Web as a communications and
commercial medium, and could, thereby, have a material adverse effect on the
Company's business, results of operations and financial condition. A number of
other countries also have enacted or may enact laws that regulate Internet
content. The adoption of such laws or regulations may decrease the growth of the
15
Internet, which could in turn decrease the demand for the Company's products and
media properties. Such laws and regulations also could increase the Company's
cost of doing business or otherwise have an adverse effect on the Company's
business, operating results and financial condition. Moreover, the applicability
to the Internet of the existing laws governing issues such as property
ownership, defamation, obscenity and personal privacy is uncertain, and the
Company may be subject to claims that its services violate such laws. Any such
new legislation or regulation or the application of existing laws and
regulations to the Internet could have a material adverse effect on the
Company's business, operating results and financial condition.
LIABILITY FOR INFORMATION SERVICES
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed to
others, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature and content of such materials. Such claims
have been brought, and sometimes successfully pressed against online services in
the past. In addition, the Company could be exposed to liability with respect to
the listings that may be accessible through the Company's website, or through
content and materials that may be posted by users in classifieds, bulletin board
and chat room services offered by the Company. It is also possible that if any
information provided through the Company's services, such as stock quotes,
analyst estimates or other trading information, contains errors, third parties
could make claims against the Company for losses incurred in reliance on such
information. Also, to the extent that the Company provides users with
information relating to purchases of goods and services, the Company or its
operating subsidiaries could face claims relating to injuries or other damages
arising from such goods and services. Although the Company carries general
liability insurance, the Company's insurance may not cover potential claims of
this type or may not be adequate to indemnify the Company for all liability that
may be imposed. Any imposition of liability or legal defense expenses that are
not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on the Company's business, operating results and
financial condition.
CONCENTRATION OF STOCK OWNERSHIP
As of June 30, 1997, the present directors, executive officers, greater than
5% stockholders and their respective affiliates beneficially owned approximately
64% of the outstanding Common Stock of the Company. As a result of their
ownership, the directors, executive officers, greater than 5% stockholders and
their respective affiliates collectively are able to control all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of the Company.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been and may continue to
be subject to wide fluctuations in response to a number of events and factors,
such as quarterly variations in operating results, announcements of
technological innovations or new affiliations and services by the Company or its
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to the Company, and news reports relating to
trends in the Company's markets. In addition, the stock market in general, and
the market prices for Internet-related companies in particular, have experienced
extreme volatility that often has been unrelated to the operating performance of
such companies. These broad market and industry fluctuations may adversely
affect the trading price of the Company's Common Stock, regardless of the
Company's operating performance.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors has the authority to issue up to 2,500,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock may be
16
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change of
control of the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of Common Stock. The
Company has no present plans to issue shares of Preferred Stock.
RISKS OF DIRECT MAIL ADVERTISING
Competition. The Company competes for direct mail business with other full
service direct mail concerns, printing and mailing houses, list suppliers and
advertising agencies in general. The Company's direct mail advertising competes
with all other advertising media. Certain of the Company's competitors or
potential competitors have significantly greater financial management, technical
and marketing resources than the Company. There can be no assurance that the
Company will be able to compete successfully in the future.
Postage and Materials Costs. A significant expense in any direct mail
campaign is the cost of postage. Paper, printing and other materials costs are
also significant direct mail expenses. Although the Company believes it can pass
future increases in postage and other costs through to its customers without
significant effect on demand, there is no assurance that it will be able to do
so. Changes in the costs of any of these items may disproportionately affect
direct mail and its competitive media, limiting the Company's ability to
increase its prices.
Dependence on Proprietary School Business. The Company has historically
derived a significant part of its revenues from sales to proprietary schools.
The loss of certain key customers, or a general decline in the appeal of direct
mail advertising to proprietary schools could have a material adverse effect on
the Company's business and results of operations. The government student loan
programs which many proprietary schools rely on to finance tuition may be
restricted or curtailed, adversely affecting the viability of such schools.
DIRECTORS AND EXCUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding (i) the current directors of the
Company, who will serve until the next annual meeting of stockholders or until
their successors are elected or appointed and qualified, and (ii) the current
executive officers of the Company, who are elected to serve at the discretion of
the Board of Directors.
The Company's executive officers and directors are as follows:
Name Age Position
---- --- --------
James A. Egide* 63 Director and Chairman
Stanton D. Jones 39 Director and President
Mitchell L. Edwards 38 Director, Executive Vice
President and Secretary
J. Henry Smith 34 Director, Chief Technical Officer
of WorldNow Online Network, Inc.
C. Scott Stone* 35 Director
Kenneth M. Woolley* 51 Director
James A. Kizer 38 Senior Vice President and Chief
Operating Officer of WorldNow
Online Network, Inc.
Michael D. Bard 50 Chief Financial Officer
Chad L. Evans 44 Chief Executive Officer of
DataMark Systems, Inc.
Arthur E. Benjamin 50 President of DataMark Systems,
Inc.
*Serves on compensation and audit committees.
17
James A. Egide: Director and Chairman
Mr. Egide was appointed as a Director of the Company in January 1995 and
Chairman in September 1997. Since 1990, Mr. Egide has primarily been involved in
managing his personal investments, including multiple international and national
business enterprises. In 1978 he co-founded Carme, a public company, and served
as CEO and Chairman of the Board until 1989 when it was sold. From 1976 until
1980, Mr. Egide's primary occupation was President and Director of Five Star
Industries, Inc., a California corporation which was a general contractor and
real estate developer. His principal responsibilities were land acquisition,
lease negotiations and financing.
Stanton D. Jones: Director and President
Mr. Jones joined the Company in 1996. Mr. Jones was Vice President and
General Sales Manager of KSTU-TV, a television station in Salt Lake City owned
and operated by Fox Television Stations, Inc. from 1993 to 1996. Prior to
joining Fox, Mr. Jones was Vice-President, National Sales Manager for the Katz
Media Group where he was responsible for their west coast operations including
25 television stations and 6 media sales offices. Mr. Jones held various
management and sales positions for Katz in Los Angeles, San Francisco and New
York City from 1981 to 1993. Prior to joining Katz, Mr. Jones was an account
executive in New York City for PGW, a national TV representative firm. Mr. Jones
holds a bachelors degree in communications with an emphasis in media sales
management from BYU.
Mitchell L. Edwards: Director and Executive Vice President
Mr. Edwards has been Executive Vice President of the Company since June
1997. From 1995 until joining the Company, Mr. Edwards was Managing Director of
Law and Business Counsellors, a mergers & acquisitions and corporate finance
consulting firm with offices in California and Utah, and prior to that was a
Partner in the law firm of Brobeck, Phleger & Harrison in Los Angeles, the
largest law firm in the country focusing on high technology and emerging
companies. Mr. Edwards' practice for over 10 years has specialized in mergers &
acquisitions, corporate finance, public offerings, venture capital and other
transactions for emerging and high technology companies throughout the country.
Mr. Edwards received a J.D. from Stanford Law School, a B.A/M.A. in
International Business Law from Oxford University (Marshall Scholar), and a B.A.
in Economics from Brigham Young University (Valedictorian). He has also worked
at the White House and at the United States Supreme Court.
J. Henry Smith: Director and Chief Technical Officer of WorldNow Online
Network, Inc.
Mr. Smith has over 15 years of computer industry experience in management
capacity including high level online technology development. He was the founder
of A&S Technologies/SISNA, Inc. in 1991. He led this company from startup to
becoming a significant national Internet Service Provider. This company became a
subsidiary of DataMark Holding in January 1997. Prior to A&S Technologies, Inc.,
Mr. Smith performed all engineering functions for ValCom of Salt Lake City.
During his ten year stay with ValCom, Mr. Smith attained the coveted Circle of
Excellence award every year. Mr. Smith also engineered solutions for Hercules,
Inc., Intermountain Health Care, and various other leading organizations. Mr.
Smith graduated from the University of Utah with a degree in engineering and has
completed eight years of graduate work.
C. Scott Stone: Director
Mr. Stone has been a director of the Company since March 1, 1996. Since
February 1995, Mr. Stone has been Director of Business Operations for the West
Tennessee District of Bellsouth Mobility, a cellular telephone company. From
1992 until 1995 Mr. Stone was Regional Manager of Business Operations for
18
Bellsouth Cellular - American Cellular Communications. During 1992, Mr. Stone
was College Director and Controller for Collegiate Systems, an operator of four
proprietary colleges. From 1990 to 1992, he was a Senior Internal Auditor with
Cooper Industries, a global manufacturing concern. Earlier positions include
senior acquisition accountant with Phillips Colleges, Inc. and senior auditor
with KPMG Peat Marwick. Mr. Stone obtained his Master of Professional
Accountancy and Bachelors of Science - Accounting degrees from the University of
Southern Mississippi. Mr. Stone is a certified public accountant.
Kenneth M. Woolley: Director
Mr. Woolley has been a founder and director of several companies. Mr.
Woolley served on the Board of Directors of Megahertz Holding Corporation, the
leading manufacturer of fax/modems for laptop and notebook computers until
February 1995. Prior to the merger of Megahertz and VyStar Group, Inc. in June
1993 Mr. Woolley had served as President of the parent company. Since 1979, Mr.
Woolley has been a principal in Extra Space Management, Inc. and Extra Space
Storage, privately held companies engaged in the ownership and management of
mini-storage facilities. Since 1989, Mr. Woolley has been a partner in D.K.S.
Associates, and since 1990 a director and executive officer of Realty
Management, Inc., privately held companies engaged in the ownership and
management of apartments, primarily in Las Vegas, Nevada. Mr. Woolley is a
director of Cirque Corporation. Mr. Woolley also serves as an associate
professor of business management at Brigham Young University. Mr. Woolley holds
a B.A. in Physics from Brigham Young University, an M.B.A. and Ph.D. in Business
Administration from the Stanford University Graduate School of Business. Mr.
Woolley is available to the Company on a part-time, as needed basis.
James A. Kizer: Senior Vice President and Chief Operating Officer of
WorldNow Online Network, Inc.
Prior to joining the Company in 1997, Mr. Kizer began his career in
broadcasting in 1982 as an Account Executive at WEZV-FM in Fort Wayne, Indiana.
In September 1983, he moved to WCBD-TV in Charleston, South Carolina as an
Account Executive. In February 1986, he was appointed Director of Programming
and Promotion for WCBD. He joined Federal Broadcasting Company as an Account
Executive at WWJ-AM/WJOI-FM in Detroit, Michigan in February 1987. Subsequent to
Federal's acquisitions of its first two television stations, he was appointed
Vice President/General Manager of WLUC-TV in Marquette, Michigan in January
1988. In January 1993, he was named Vice President/General Manager of WSTM-TV in
Syracuse, New York. He was appointed to Executive Vice President and Chief
Operating Officer of Federal Broadcasting in April 1994. Mr. Kizer received his
Bachelor of Arts degree from the University of Florida in 1982.
Michael D. Bard: Chief Financial Officer
Mr. Bard joined the Company in September 1996. Mr. Bard was the Controller
for ARD, Inc., a professional services corporation located in Burlington,
Vermont from 1991 to 1996. Prior to joining ARD, Inc., Mr. Bard was Senior Vice
President, Controller for CACI, Inc. International, an information technology
company located in Fairfax, Virginia from 1976 to 1991. Mr. Bard is a certified
public accountant and holds a bachelors degree in accounting.
Chad L. Evans: Chief Executive Officer of DataMark Systems, Inc.
Mr. Evans is Chief Executive Officer and Chairman of the Board of DataMark
Systems, Inc. which is the predecessor of DataMark Holding, Inc. He was
instrumental in the start-up, operation and growth of DataMark Holding's
subsidiaries DataMark Systems, Inc. and DataMark Printing, Inc. Mr. Evans has
extensive experience and knowledge in direct response advertising strategies and
methodologies on a local, regional and national basis. These strategies have bee
incorporated in thousands of successful direct response advertising campaigns
throughout the country. Mr. Evans served as an officer and director of several
other successful firms. These include U.S. corporations and joint ventures with
large international companies. He served as Chief Executive Officer of
19
Mountainwest Technology, Inc. and its subsidiary Mountainwest Junior College and
directed its very successful growth and profitable sale. He currently serves as
a Director for Utah Industries for the Blind.
Arthur E. Benjamin: President of DataMark Systems, Inc.
Mr. Benjamin has 25 years in marketing and sales and 12 years in
proprietary school marketing and operations. He has held executive positions
with Group W, CBS, Admarketing (a national media buying service), Connecticut
Public Broadcasting, Computer Processing Institute (a group of four proprietary
schools), and Advantage Media and Marketing (a consumer ad agency). He has
overseen numerous public relations campaigns and designed and published a
regional magazine. Prior to joining the Company in January 1995 as a full time
employee, Mr. Benjamin had been President of Watterson College since 1994, in
addition to serving as CEO of MCS Technologies, Inc., a company engaged in
vocational training since 1993, and Senior Vice President/Marketing of Rhodes
Group, a company engaged in vocational training since 1989, President, Marketing
By Design (a national marketing agency) since 1981, and Travel By Design (a
national travel agency) since 1992. He is a graduate of Clark University, the
Burklyn Business School and the Career College Association leadership
conference.
Significant Employees
Sven H. Bensen: National Sales Director of DataMark Systems, Inc.
Mr. Bensen has been the National Sales Director for DataMark Systems, Inc.
since 1993 and was appointed as a Director of DataMark Systems, Inc. on January
11, 1995. He has been with DataMark since its founding and is a key player in
its success. In more than ten years as President of three successful Idaho
businesses Mr. Bensen acquired a diverse understanding of business and sales.
When he first moved to Utah he was the top producing sales executive for the
largest used car dealership in the Western United States. Mr. Bensen was
educated at Ricks Junior College in Eastern Idaho, and Utah State University, in
Logan, Utah.
Thomas L. Dearden: Director of Operations of DataMark Systems, Inc.
Mr. Dearden received his Bachelors degree (BFA) from the University of
Utah in Graphic Design and Advertising. He has been with DataMark Systems, Inc.
since 1989. Previously he served as art director and advertising manager for a
publisher and also owned and operated a small advertising agency. His expertise
includes virtually all aspects of advertising from print production to state of
the art creative. Throughout his career he has been responsible for literally
millions of pieces of direct mail. He has designed advertising campaigns for all
kinds of clients including hundreds of private educational institutions across
the nation. He has also designed campaigns for the medical, insurance, finance
and real estate fields as well as work for charitable organizations.
Richard A. Bentz: Market Research Director for WorldNow Online Network,
Inc.
Mr. Bentz has been with the Company since 1990. Mr. Bentz has served as
National director of Market Research for Mrs. Fields Cookies, Executive Director
of Market Research for RETECH (with clients such as Kentucky Fried Chicken -
Canada and Winchells Doughnuts -U.S.) and President of GEOSTATE, a national
marketing research firm. He has extensive knowledge and background in
sophisticated marketing database systems. His methodologies include the use of
demographic and lifestyle segmentation systems for site evaluation, customer /
product profiles and direct mail targeting. Mr. Bentz holds a Bachelor of
Science degree in Business Marketing from the University of Utah.
William T. Perry: Senior Vice President/Affiliate Operations of WorldNow
Online Network, Inc.
Mr. Perry has served as Senior Vice President/Affliate Operations of
WorldNow Online Network, Inc. since joining the Company in April 1997. In 1982,
20
Mr. Perry joined WDAM-TV and held many positions including Production Assistant,
Creative Director, Promotion Director, Corporate Creative Director/Director of
Creative Services and Marketing Development Director. In 1987, he joined Adcable
Incorporated as their Operations Manager and was responsible for the management
of 13 cable markets throughout Mississippi and Louisiana. From 1988 to 1992, he
was Marketing Director of Gannett Corporation, and in 1992, he joined Federal
Broadcasting Company as Vice President Director of Sales and Marketing. By 1995,
he was serving as Vice President General Manager and was responsible for
increasing the operating income by 44%. Mr. Perry received his Bachelor of
Science degree in Radio/Television/Film at the University of Southern
Mississippi.
John Rossi: Senior Vice President and Director of Sales of WorldNow Online
Network, Inc.
Mr. Rossi has served as Senior Vice President and Director of Sales of
WorldNow Online Network, Inc. since joining the Company in March 1997. Prior to
joining the Company, Mr. Rossi held positions as Director of Research for Katz
Communications, Account Executive for HR Television, PGW, Katz Sport and Katz
American, as well as Vice President and Sales Manager for two different Katz
American sales teams in New York. In 1991, Mr. Rossi became the National Sales
Manager then the Local Sales Manager for WTAE-TV, the Hearst Broadcasting ABC
affiliate. In January 1994, he joined Sinclair Broadcasting as Director of Sales
for their LMA in Pittsburgh, WPGH-TV and WPTT-TV (the Fox and UPN affiliates).
Mr. Rossi was promoted to Station Manager in July 1996. Mr. Rossi received his
degree in Business Administration from Bernard M. Baruch College in New York
City.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met except as follows: Stanton Jones, Arthur Benjamin
and Henry Smith were late in filing their Form 5's which were due within 45 days
of the fiscal year end.
ITEM 2. PROPERTIES
- ------ ----------
The Company is leasing from third parties modern office space in Murray,
Utah, a suburb of Salt Lake City, Utah, Irvine, California, Liberty, Missouri,
Overland Park, Kansas, and New York City, New York. These offices include a
software development lab and general offices. In August 1996, the Company moved
its offices to 12,000 square feet of modern office space in Murray, Utah. In May
1997, the Company acquired 11,000 square feet of additional modern office space
in a neighboring building in Murray. During the past twelve months the Company
also acquired modern office spaces, which are used as sales offices in Irvine,
California, Liberty, Missouri, Overland Park, Kansas, and New York City, New
York. All facilities are leased from third parties. The new offices are being
leased under three to five year arrangements. Some leases contain options to
renew. The computer equipment and software development facilities remain in the
previous location. The Company also leases space in suburban Salt Lake City,
Utah for its printing plant. These facilities are believed adequate for the
Company's current needs. The current total monthly rental for all facilities is
$47,776. Some of the leases are subject to annual increases for inflation
adjustments.
ITEM 3. LEGAL PROCEEDINGS
- ------ -----------------
The Company is not a party to any legal proceedings which, in its belief,
could have a material adverse effect on the Company.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
- ------ --------------------------------------------------------
On February 5, 1997, the Company's Common Stock began trading on the
NASDAQ National Market. Commencing in January 1995 and until the stock was
listed on the NASDAQ National Market, the Company's Common Stock was quoted on
the OTC Bulletin Board. During 1993 and 1994, there was no public market for the
securities of the Company's predecessor, and the Company is not aware of any
quotations for its securities during this period. In prior years, securities of
the Company's predecessor, Exchequer, were traded in the over-the-counter
market, and some sporadic unsolicited trading may have continued.
The following table reflects the high and low bid quotations reported by
the NASDAQ National Market or by the OTC Bulletin Board, as appropriate, for the
periods indicated. The quotes represent interdealer quotations, do not include
mark-up, mark-down or commissions and may not reflect actual transactions.
High Low
Fiscal Year Ended June 30, 1997 ---- ---
-------------------------------
July 1 to September 30, 1996 $16.00 $10.63
October 1 to December 31, 1996 $14.38 $ 7.00
January 1 to March 31, 1997 $11.00 $ 6.75
April 1 to June 30, 1997 $ 7.38 $ 2.75
Fiscal Year Ended June 30, 1996
-------------------------------
July 1 to September 30, 1995 $ 7.75 $ 3.75
October 1 to December 31, 1995 $ 7.50 $ 7.25
January 1 to March 31, 1996 $12.50 $ 8.00
April 1 to June 30, 1996 $21.38 $ 8.00
On September 22, 1997, the Common Stock was quoted on the NASDAQ National
Market at $5.06 bid and $5.06 asked.
As of September 22, 1997, there were approximately 674 holders of record of the
Company's Common Stock.
Dividend Policy
The Company has not paid any cash dividends since its inception. The
Company currently intends to retain future earnings in the operation and
expansion of its business and does not expect to pay any cash dividends in the
foreseeable future.
Changes in Securities
During the quarter ended June 30, 1997, the Company sold the following
securities without registration under the Securities Act of 1933 (the "Act"):
On May 6, 1997, the Company issued 50,000 shares of its common stock
to Arthur E. Benjamin, an employee of the Company, for cash
consideration of $0.50 per share. These shares were issued on the
exercise of options which had been previously granted to the
purchaser. The issuance was an offering to a single sophisticated
investor not involving a public offering and was exempt from
registration pursuant to Section 4(2) of the Act.
22
ITEM 6. SELECTED FINANCIAL DATA
- ------ -----------------------
The following Selected Financial Data should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein. The
information has been derived from the Company's audited financial statements.
For the Year Ended June 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales:
Direct mail marketing...................... $6,448,156 $4,256,887 $3,443,965 $3,017,805 $2,516,022
Computer online marketing.................. 350,654 - - - -
---------- ---------- ---------- ---------- ----------
6,798,810 4,256,887 3,443,965 3,017,805 2,516,022
---------- ---------- ---------- ---------- ----------
Cost of sales:
Postage.................................... 2,419,652 1,580,484 1,360,976 1,133,710 985,599
Materials and printing..................... 2,133,448 1,310,184 1,035,954 790,744 611,838
Computer online operations................. 436,306 - - - -
---------- ---------- ---------- ---------- ----------
4,989,406 2,890,668 2,396,930 1,924,454 1,597,437
---------- ---------- ---------- ---------- ----------
Gross margin 1,809,404 1,366,219 1,047,035 1,093,351 918,585
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development................... 6,357,157 1,565,718 560,915 89,250 -
General and administrative................. 3,026,323 1,094,375 268,765 456,039 362,494
Selling.................................... 2,258,978 700,429 466,181 440,236 459,270
Compensation expense related to issuance
of options by principal stockholder..... - 1,484,375 - - -
---------- ---------- ---------- ---------- ----------
11,642,458 4,844,897 1,295,861 985,525 821,764
---------- ---------- ---------- ---------- ----------
Other income (expense), net..................... 492,238 45,597 (18,564) (16,272) (25,108)
---------- ---------- ---------- ---------- -----------
Income (loss) before income taxes............... (9,340,816) (3,433,081) (267,390) 91,554 71,713
Benefit (provision) for income taxes............ - - 3,120 (28,556) (18,386)
---------- ---------- ---------- ---------- ----------
Net income (loss)............................... $(9,340,816) $(3,433,081) $ (264,270) $ 62,998 $ 53,327
========== ========== ========== ========== ==========
Net income (loss) per common share.............. $ (1.12) $ (.58) $ (.06) $ .01 $ .01
========== ========== ========== ========== ==========
Weighted average common shares outstanding 8,309,467 5,917,491 4,713,028 4,282,299 4,242,026
========== ========== ========== ========== ==========
As of June 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 3,624,308 $12,774,113 $ 794,156 $ 350,428 $ 224,121
Total assets 12,408,877 16,543,253 1,631,445 884,493 759,379
Long-term debt, net of current portion - - 25,332 47,248 56,179
Stockholders' equity 9,826,083 15,541,624 1,073,225 476,210 285,703
ITEM 7. 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 marketing business.
In fiscal 1994, the Company began developing its own proprietary advertiser and
end-user funded national online network, known as, WorldNow Online (formerly
named ValuOne Online). Since fiscal 1994, the Company has devoted significant
resources towards the development of WorldNow Online and launched the service in
the fourth quarter of fiscal 1997. The Company believes that in the future the
revenues of WorldNow Online could surpass those of the direct mail business.
23
In January 1997, the Company acquired Sisna, Inc. ("Sisna") an Internet service
provider headquartered in Salt Lake City, Utah. The acquisition was accounted
for as a purchase. The Company agreed to issue up to 325,000 shares (25,000 of
which are held in escrow pending the collection of trade accounts receivable) of
its common stock to acquire all of the outstanding shares of common stock of
Sisna. Sisna's results of operations from the date of acquisition (six months
ended June 30, 1997) are included in the accompanying fiscal 1997 statement of
operations.
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. Although management
believes that a postal rate increase will not have a material long-term effect
on demand, there can be no assurance that postal 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.
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for fiscal years 1997, 1996 and 1995.
1997 1996 1995
---- ---- ----
Net sales:
Direct mail marketing 94.8% 100.0% 100.0%
Computer online marketing 5.2 - -
------ ------ ------
100.0 100.0 100.0
------ ------ ------
Cost of sales:
Postage 35.6 37.1 39.5
Materials and printing 31.4 30.8 30.1
Computer online operations 6.4 - -
------ ------ ------
73.4 67.9 69.6
------ ------ ------
Gross margin 26.6 32.1 30.4
------ ------ ------
Operating expenses:
Research and development 93.5 36.8 16.3
General and administrative 44.5 25.7 7.8
Selling 33.2 16.4 13.5
Compensation expense related
to issuance of options by
principal stockholder - 34.9 -
------ ------ ------
171.2 113.8 37.6
------ ------ ------
Loss from operations (144.6) (81.7) (7.2)
------ ------ ------
Other income (expense), net 7.2 1.0 (0.6)
------ ------ ------
Loss before income taxes (137.4) (80.7) (7.8)
Benefit for income taxes - - 0.1
------ ------ ------
Net loss (137.4)% (80.7)% (7.7)%
====== ====== ======
Fiscal Year Ended June 30, 1997 Compared with Fiscal Year Ended June 30, 1996
Net Sales
Net sales for fiscal 1997 increased by 59.7% to $6,798,810 from $4,256,887 for
fiscal 1996. Net sales growth resulted primarily from a 43.3% increase in the
number of pieces mailed, to 15,746,251 pieces mailed during fiscal 1997 from
10,991,467 pieces mailed during fiscal 1996. The average price per piece mailed
increased 4.5% to $0.438 during fiscal 1997 from $0.419 during fiscal 1996. The
acquisition of Sisna in January 1997, resulted in net sales of $341,842 from
computer online operations during the six months ended June 30, 1997. Net sales
from WorldNow Online during fiscal 1997 were minimal.
24
Cost of Sales
Postage expense increased 53.1% to $2,419,652 during fiscal 1997 from $1,580,484
during fiscal 1996. The increase was attributable to a higher number of pieces
mailed during fiscal 1997 than during fiscal 1996. Postage expense as a percent
of direct mail marketing sales was 37.5% during fiscal 1997 as compared to 37.1%
during fiscal 1996.
Materials and printing expense increased 62.8% to $2,133,448 during fiscal 1997
from $1,310,184 during fiscal 1996. The increase was attributable to the 43.3%
increase in the number of pieces mailed, higher paper costs and the delivery of
more material dominant direct mail products during fiscal 1997 than during
fiscal 1996. Materials and printing expense as a percentage of direct mail
marketing sales increased to 33.1% during fiscal 1997 from 30.8% during fiscal
1996.
Cost of sales for the computer online operations were $436,306. The cost of
sales included the write-down of obsolete inventory of $114,000 and an accrual
of $140,000 for settlements on supplier contracts.
Operating Expenses
Research and development costs increased 306.0% to $6,357,157 during fiscal 1997
from $1,565,718 during fiscal 1996. Research and development expenses as a
percentage of net sales increased to 93.5% during fiscal 1997 from 36.8% during
fiscal 1996. In connection with the acquisition of Sisna, the Company allocated
the excess of the purchase price over the estimated fair value of acquired
assets less liabilities assumed of $1,674,721 to purchased research and
development, which was expensed at the date of acquisition. Research and
development expenses have increased due to increased levels of activity and
personnel associated with WorldNow Online.
General and administrative expense increased 176.5% to $3,026,323 during fiscal
1997 from $1,094,375 during fiscal 1996. General and administrative expense as a
percentage of net sales increased to 44.5% during fiscal 1997 from 25.7% during
fiscal 1996. The increase in general and administrative expense, as a percentage
of net sales, was due to the addition of administrative and support staff, as
well as increased related facilities costs associated with WorldNow Online and
the addition of administrative staff associated with the acquisition of the
Internet service provider business.
Selling expense increased 222.5% to $2,258,978 during fiscal 1997 from $700,429
during fiscal 1996. Selling expense as a percentage of net sales increased to
33.2% during fiscal year 1997 from 16.4% during fiscal 1996. The increase in
selling expense as a percentage of net sales was due to sales, marketing and
promotional expenses incurred in connection with WorldNow Online and one time
costs incurred in an attempt to obtain subscribers for WorldNow Online. The
acquisition of subscribers for WorldNow Online is not being pursued in the
future.
Segment Operating Results
Direct mail marketing net sales for fiscal 1997 increased by 51.5% to $6,448,156
from $4,256,887 for fiscal 1996. Net sales growth resulted primarily from a
43.3% increase in the number of pieces mailed, to 15,746,251 pieces mailed
during fiscal 1997 from 10,991,467 pieces mailed during fiscal 1996. The average
price per piece mailed increased 4.5% to $0.438 during fiscal 1997 from $0.419
during fiscal 1996. Net income before income taxes for fiscal 1997 increased by
96.1% to $481,201 from $245,331 for fiscal 1996. Profits increased at a greater
rate than net sales due to a reduction of operating costs as a percent of sales.
The loss before income taxes from the computer online marketing segment
increased 174.1% to $10,308,469 for fiscal 1997 from $3,761,388 for fiscal 1996.
The increase was due to continued research and development efforts, the addition
of administrative and support staff, as well as related facilities costs, and
marketing and promotional expenses incurred in connection with WorldNow Online
and the acquisition and immediate write-off of research and development acquired
with the acquisition of Sisna.
25
Net corporate interest income increased 486.3% to $486,452 during fiscal 1997
from $82,976 for fiscal 1996. The interest was earned on the proceeds from the
March 96 placement.
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30, 1995
Net Sales
Net sales for fiscal 1996 increased by 23.6% to $4,256,887 from $3,443,965 for
fiscal 1995. Net sales growth resulted primarily from a 10.7% increase in the
number of pieces mailed, to 10,991,467 pieces mailed during fiscal 1996 from
9,932,869 pieces mailed during fiscal 1995. The average price per piece mailed
increased 20.7% to $0.419 during fiscal 1996 from $0.347 during fiscal 1995.
Cost of Sales
Postage expense increased 16.1% to $1,580,484 during fiscal 1996 from $1,360,976
during fiscal 1995. The increase was attributable to a higher number of pieces
mailed during fiscal 1996 than during fiscal 1995. Postage expense as a
percentage of net sales decreased to 37.1% during fiscal 1996 from 39.5% during
fiscal 1995. The decrease in postage expense as a percentage of net sales was
primarily attributable to an increase in sales prices charged by the Company to
reflect past increases in postal rates.
Materials and printing expense increased 26.5% to $1,310,184 during fiscal 1996
from $1,035,954 during fiscal 1995. The increase was primarily attributable to a
higher number of pieces mailed during fiscal 1996 than during fiscal 1995.
Materials and printing expense as a percentage of net sales increased to 30.8%
during fiscal 1996 from 30.1% during fiscal 1995. The increase in materials and
printing expense as a percentage of net sales was attributable to higher paper
costs which were not immediately reflected in higher sales prices charged by the
Company.
Operating Expenses
Research and development of WorldNow Online increased 179.1% to $1,565,718
during fiscal 1996 from $560,915 during fiscal 1995. Research and development of
WorldNow Online as a percentage of net sales increased to 36.8% during fiscal
1996 from 16.3% during fiscal 1995.
General and administrative expense increased 307.2% to $1,094,375 during fiscal
1996 from $268,765 during fiscal 1995. General and administrative expense as a
percentage of net sales increased to 25.7% during fiscal 1996 from 7.8% during
fiscal 1995. The increase in general and administrative expense as a percentage
of net sales was due to the addition of administrative staff associated with
WorldNow Online.
Selling expense increased 50.2% to $700,429 during fiscal 1996 from $466,181
during fiscal 1995. Selling expense as a percentage of net sales increased to
16.4% during fiscal year 1996 from 13.5% during fiscal 1995. The increase in
selling expense as a percentage of net sales was due to initial marketing
expenses incurred in connection with the WorldNow Online.
In June 1996, in connection with an employment agreement with an officer of
WorldNow Online, a principal shareholder granted an option to the officer to
purchase 237,500 shares of restricted common stock from the principal
shareholder at $1.50 per share. As part of the "March 1996 Placement," (in order
to fund the expenses of developing and launching WorldNow Online, in March 1996,
the Company began a private placement to major institutions and other accredited
investors) during the year the Company sold shares of restricted common stock in
this private placement at $7.75 per share; accordingly, the Company recognized
$1,484,375 of compensation expense related to the grant of options to this
officer during fiscal 1996.
26
Segment Operating Results
Direct mail marketing net sales for fiscal 1996 increased by 23.6% to $4,256,887
from $3,443,965 for fiscal 1995. Net sales growth resulted primarily from a
10.7% increase in the number of pieces mailed, to 10,991,467 pieces mailed
during fiscal 1996 from 9,932,869 pieces mailed during fiscal 1995. The average
price per piece mailed increased 20.7% to $0.419 during fiscal 1996 from $0.347
during fiscal 1995. Income before income taxes for fiscal 1996 decreased by
29.3% to $245,331 from $347,015 for fiscal 1995. The decrease in net income was
primarily attributable to increases in selling and administrative costs
associated with the direct mail marketing segment.
The loss before income taxes from the computer online marketing segment
increased 534.6% to $3,761,388 for fiscal 1996 from $592,720 for fiscal 1995.
The increase was due to continued research and development efforts, the addition
of administrative and support staff and marketing and promotional expenses
incurred in connection with WorldNow Online.
Net corporate interest income was $82,976 for fiscal 1996. This interest was
earned on the proceeds from the March 96 placement. During fiscal 1995 the
Company incurred interest expense of $21,685.
Quarterly Results
The following tables set forth certain quarterly financial information of the
Company for each quarter of fiscal 1997 and fiscal 1996. This information has
been derived from the quarterly financial statements of the Company which are
unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited financial statements included herein and include all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the financial results for such periods. This information should
be read in conjunction with the financial statements and the notes thereto and
the other financial information appearing elsewhere herein.
For the Three Months Ended
-------------------------------------------------
Sep. 30, 1996 Dec. 31, 1996 Mar 31, 1997 Jun 30, 1997
------------- ------------- ------------ ------------
Net sales:
Direct mail marketing $ 1,481,171 $ 1,236,841 $ 1,852,710 $ 1,877,434
Computer online operations -- -- 219,226 131,428
----------- ----------- ----------- -----------
1,481,171 1,236,841 2,071,936 2,008,862
----------- ----------- ----------- -----------
Cost of sales:
Postage 524,499 486,527 695,714 712,912
Materials and printing 514,266 391,972 628,777 598,433
Computer online operations -- -- 153,595 282,711
----------- ----------- ----------- -----------
1,038,765 878,499 1,478,086 1,594,056
----------- ----------- ----------- -----------
Gross margin 442,406 358,342 593,850 414,806
----------- ----------- ----------- -----------
Operating expenses:
Research and development 679,447 806,803 2,793,601 2,077,306
General and administrative 373,463 385,287 765,854 1,501,719
Selling 391,490 357,339 516,422 993,727
----------- ----------- ----------- -----------
1,444,400 1,549,429 4,075,877 4,572,752
----------- ----------- ----------- -----------
Loss from operations (1,001,994) (1,191,087) (3,482,027) (4,157,946)
Other income (expense), net 161,493 128,839 119,913 81,993
----------- ----------- ----------- -----------
Loss before income taxes (840,501) (1,062,248) (3,362,114) (4,075,953)
----------- ----------- ----------- -----------
Net loss $ (840,501) $(1,062,248) $(3,362,114) $(4,075,953)
=========== =========== =========== ===========
Net loss per common share (1) $ (.10) $ (.13) $ (.40) $ (.48)
=========== =========== =========== ===========
Weighted average common
shares outstanding 8,110,407 8,128,649 8,479,376 8,541,152
=========== =========== =========== ===========
27
For the Three Months Ended
----------------------------
Sep. 30, 1995 Dec. 31, 1995 Mar 31, 1996 Jun 30, 1996
------------- ------------- ------------ ------------
Net direct mail marketing sales $1,074,559 $ 935,517 $ 939,534 $ 1,307,277
----------- ----------- ----------- -----------
Cost of sales:
Postage 433,766 354,378 346,790 445,550
Materials and printing 282,438 283,417 315,654 428,675
----------- ----------- ----------- -----------
716,204 637,795 662,444 874,225
----------- ----------- ----------- -----------
Gross margin 358,355 297,722 277,090 433,052
----------- ----------- ----------- -----------
Operating expenses:
Research and development 164,350 308,462 431,328 661,578
General and administrative 145,965 196,188 294,307 457,915
Selling 164,369 171,698 159,648 204,714
Compensation expense related to issuance of
options by principal stockholder -- -- -- 1,484,375
----------- ----------- ----------- -----------
474,684 676,348 885,283 2,808,582
----------- ----------- ----------- -----------
Loss from operations (116,329) (378,626) (608,193) (2,375,530)
Other income (expense), net (4,367) (11,249) (24,536) 85,749
----------- ----------- ----------- -----------
Loss before income taxes (120,696) (389,875) (632,729) (2,289,781)
Benefit (provision) for income taxes -- -- (13,161) 13,161
----------- ----------- ----------- -----------
Net loss $ (120,696) $ (389,875) $ (645,890) (2,276,620)
=========== =========== =========== ===========
Net loss per common share (1) $ (.02) $ (.07) $ (.12) $ (.38)
=========== =========== =========== ===========
Weighted average common shares outstanding 5,539,953 5,539,953 5,543,470 5,917,491
=========== =========== =========== ===========
(1)The sum of net income (loss) per share amounts for the four quarters may not
equal annual amounts due to rounding.
Liquidity and Capital Resources
The Company historically has satisfied its cash requirements through cash flows
from operating activities and borrowings from financial institutions and related
parties. However, in order to fund the expenses of developing and launching
WorldNow Online, in March 1996, the Company began a private placement to major
institutions and other accredited investors (the "March 96 Placement"). The
Company completed the March 96 Placement for total net proceeds of $16,408,605
during fiscal 1997, including the exercise of warrants.
Operating activities consumed $6,623,231 of cash in fiscal 1997, compared to
$1,098,912 in fiscal 1996. The reduction in cash flows provided by operating
activities during 1997 as compared to 1996 was primarily attributable to higher
research and development, administrative, and selling and marketing costs
associated with WorldNow Online.
Cash flows used in investing activities was $3,364,469 and $2,713,864 during
fiscal 1997 and 1996, respectively. This increase in cash used for investing
activities was primarily attributable to the acquisition of computer equipment
for WorldNow Online.
Cash flows provided by financing activities was $1,705,570 and $16,933,175
during fiscal 1997 and 1996, respectively. The decrease in cash flows provided
by financing activities during 1997 as compared to 1996 was primarily
attributable to receipt of most of the proceeds of the March 96 Placement during
fiscal 1996.
Management's current projections indicate that there will not be sufficient cash
flows from operating activities during fiscal year 1998 to provide adequate
working capital for the Company to implement its marketing strategy for WorldNow
Online. As of June 30, 1996 the Company had $4,952,274 of cash and is attempting
to obtain additional debt or equity funding. The Company believes that adequate
debt or equity funding will be available to the Company; however, if adequate
funding is not available, the Company may be required to revise its plans and
reduce future expenditures. There can be no assurance that the additional
funding will be available of if available, that it will be available on
acceptable terms or in required amounts.
28
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services for WorldNow Online. This agreement was terminated and superceded by an
agreement effective July 15, 1997. The Company has agreed to a minimum annual
usage commitment of at least $500,000 over a three-year period beginning six
months after the products and services are installed by Sprint and available for
the Company's use. In addition, on March 31, 1997, the Company signed a one-year
agreement with Sprint TELECENTERs Inc. ("STI") whereby STI will provide inbound
customer telemarketing services to the Company. The minimum program cost is
$200,000.
Subsequent to June 30, 1997, the Company has entered into a Series C Preferred
Share Purchase Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli
company, whereby the Company has agreed to invest $750,000 in CommTouch's Series
C Preferred Stock. One half of the investment was made on July 2, 1997 and the
other half was made on September 17, 1997. The Company also has an option to
make an additional $1,000,000 investment in CommTouch's Series C Preferred
Stock. CommTouch is engaged in the development, manufacture and marketing of
PC-based internetworking software.
Forward-Looking Statements
Statements regarding the Company's expectations as to demand for its
products and certain other information presented in this Form 10-K constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors which could
cause actual results to differ from expectations include, but are not limited
to, uncertainty of future profitability, uncertainty of market acceptance,
dependence on limited products, extent of regulations, and the uncertainty
regarding patents and proprietary rights and technological obsolescence.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ -------------------------------------------
The financial statements and reports of independent public accountants are
filed as part of this report on pages F-1 through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ AND FINANCIAL STATEMENT DISCLOSURE.
-----------------------------------------------------------
Effective June 28, 1996, the Registrant dismissed Hansen, Barnett &
Maxwell ("Hansen") as its certifying accountant. Hansen's reports on the
Registrant's financial statements for the years ended June 30, 1995 and 1994 did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
as to uncertainty, audit scope, or accounting principles. The Registrant's board
of directors unanimously approved dismissal of Hansen.
During the Registrant's two most recent fiscal years ended June 30, 1995
and 1994 and the interim period subsequent to June 30, 1995, there were no
disagreements, as defined in Regulation S-K Item 304, with Hansen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements would have caused Hansen to
make a reference to the subject matter of the disagreement in connection with
its reports.
On June 28, 1996, the Registrant engaged Arthur Andersen LLP ("Andersen")
to perform its audits and provide accounting services thereafter. The Registrant
did not consult with Andersen prior to such date regarding any reportable
matter.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT
- ------- -------------------------------------------------
Located in Part I as permitted by Instruction 3 to Item 401(b) of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
Incorporated by reference to the Registrant's Proxy Statement for
its 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Incorporated by reference to the Registrant's Proxy Statement for
its 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
Incorporated by reference to the Registrant's Proxy Statement for
its 1997 Annual Meeting of
Stockholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a) INDEX TO FINANCIAL STATEMENTS
Title of Documents Page No.
- ------------------ --------
DATAMARK HOLDING, INC.
- ----------------------
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at June 30, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1997, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
30
(b) Reports on Form 8-K
-------------------
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended June 30, 1997.
(c) Exhibits
--------
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
- -------- ------------------- ----------------
3.1 Articles of Incorporation, as amended +
3.2 By-laws +
10.1 Lease Agreement +
10.2 Omnibus Stock Option Plan +
21.1 Subsidiaries of the Registrant attached herewith
27.0 Financial Data Schedule attached herewith
* Incorporated by reference to the Company's Current Report on Form
8-K dated January 11, 1995.
+ Incorporated by reference to the Company's Annual Report for June
30, 1995.
31
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996 AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 30, 1997
TOGETHER WITH REPORTS OF
INDEPENDENT PUBLIC ACCOUNTANTS
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DataMark Holding, Inc.:
We have audited the accompanying consolidated balance sheets of DataMark
Holding, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DataMark Holding,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 29, 1997
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
DataMark Holding, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended June 30, 1995 of
DataMark Holding, Inc. and subsidiaries. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
DataMark Holding, Inc. and subsidiaries for the year ended June 30, 1995, in
conformity with generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
October 5, 1995
F-2
Page 1 of 2
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
CURRENT ASSETS:
Cash $ 4,952,274 $13,159,404
Trade accounts receivable, net of allowance
for doubtful accounts of $61,000 and
$0, respectively 668,743 502,996
Inventory 361,571 82,972
Other current assets 224,514 30,370
----------- -----------
Total current assets 6,207,102 13,775,742
----------- -----------
PROPERTY AND EQUIPMENT:
Computer and office equipment 5,807,690 2,752,114
Furniture, fixtures and leasehold
Improvements 872,555 188,099
Printing equipment 479,635 259,198
Vehicles 40,525 40,525
----------- -----------
7,200,405 3,239,936
Less accumulated depreciation and
Amortization (1,045,066) (476,573)
----------- -----------
Net property and equipment 6,155,339 2,763,363
----------- -----------
OTHER ASSETS 46,436 4,148
----------- -----------
$12,408,877 $16,543,253
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
Page 2 of 2
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- ------------
CURRENT LIABILITIES:
Accounts payable $ 1,482,865 $ 737,810
Accrued liabilities 896,905 192,541
Notes payable 128,024 43,201
Other current liabilities 75,000 28,077
----------- -----------
Total current liabilities 2,582,794 1,001,629
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 2,500,000
Shares authorized; no shares issued - -
Common stock, $.0001 par value; 20,000,000
Shares authorized; 8,560,932 and 8,085,407
Shares outstanding, respectively 856 808
Additional paid-in capital 22,714,366 20,585,276
Stock subscriptions receivable - (1,496,137)
Accumulated deficit (12,889,139) (3,548,323)
----------- -----------
Total stockholders' equity 9,826,083 15,541,624
----------- -----------
$12,408,877 $16,543,253
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- --------
NET SALES:
Direct mail marketing $ 6,448,156 $ 4,256,887 $3,443,965
Computer online marketing 350,654 - -
----------- ----------- ----------
Net sales 6,798,810 4,256,887 3,443,965
----------- ----------- ----------
COST OF SALES:
Postage 2,419,652 1,580,484 1,360,976
Materials and printing 2,133,448 1,310,184 1,035,954
Computer online operations 436,306 - -
----------- ----------- ----------
Total cost of sales 4,989,406 2,890,668 2,396,930
----------- ----------- ----------
GROSS MARGIN 1,809,404 1,366,219 1,047,035
----------- ----------- ----------
OPERATING EXPENSES:
Research and development 6,357,157 1,565,718 560,915
General and administrative 3,026,323 1,094,375 268,765
Selling 2,258,978 700,429 466,181
Compensation expense related to
Issuance of options by principal
Stockholder - 1,484,375 -
----------- ----------- ----------
Total operating expenses 11,642,458 4,844,897 1,295,861
----------- ----------- ----------
LOSS FROM OPERATIONS (9,833,054) (3,478,678) (248,826)
----------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 501,733 96,008 3,121
Interest expense (9,495) (50,411) (21,685)
----------- ----------- ----------
Net other income (expense) 492,238 45,597 (18,564)
----------- ----------- ----------
LOSS BEFORE INCOME TAXES (9,340,816) (3,433,081) (267,390)
BENEFIT FOR INCOME TAXES - - 3,120
----------- ----------- ----------
NET LOSS $(9,340,816) $(3,433,081) $ (264,270)
=========== =========== ==========
NET LOSS PER COMMON SHARE $ (1.12) $ (0.58) $ (0.06)
=========== =========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES 8,309,467 5,917,491 4,713,028
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F-5
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Common Stock Additional Stock Accumulated
------------ Paid-in Subscriptions Earnings
Shares Amount Capital Receivable (Deficit)
--------- ------ ----------- ------------ ------------
BALANCE, June 30, 1994 4,365,045 $436 $ 326,746 $ - $ 149,028
Issuance of common
Stock for cash 223,622 23 168,477 - -
Net effect of merger
with Exchequer I, Inc. 471,952 47 (26,262) - -
Issuance of common stock
for notes receivable 479,334 48 718,952 - -
Net loss - - - - (264,270)
--------- ---- ----------- ----------- ------------
BALANCE, June 30, 1995 5,539,953 554 1,187,913 - (115,242)
Issuance of common stock
for cash, net of
offering costs of
$1,524,538 1,992,179 199 13,914,650 - -
Stock subscriptions, net
of commissions of 214,500 21 1,496,116 (1,496,137) -
$166,238
Exercise of stock warrants 321,775 32 2,493,724 - -
Issuance of options by
principal stockholder - - 1,484,375 - -
Exercise of stock options 17,000 2 8,498 - -
Net loss - - - - (3,433,081)
--------- ---- ----------- ----------- ------------
BALANCE, June 30, 1996 8,085,407 808 20,585,276 (1,496,137) (3,548,323)
Exercise of stock options 102,400 10 78,405 - -
Collection of stock
Subscriptions receivable - - - 1,496,137 -
Exercise of stock warrants 36,125 4 279,965 - -
Issuance of common stock
for Computer software 12,000 1 95,999 - -
Issuance of common stock in
the acquisition of Sisna 325,000 33 1,674,721 - -
Net loss - - - - (9,340,816)
--------- ---- ----------- ----------- ------------
BALANCE, June 30, 1997 8,560,932 $856 $22,714,366 $ - $(12,889,139)
========= ==== =========== =========== ============
See accompanying notes to consolidated financial statements.
F-6
DATAMARK HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Increase (Decrease) in Cash
1997 1996 1995
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,340,816) $(3,433,081) $(264,270)
Adjustments to reconcile net loss to net
cash
Used in operating activities:
Depreciation and amortization 568,493 165,596 92,139
Write-off of purchased research and
development 1,674,721 - -
Compensation expense related to issuance - 1,484,375 -
of options by principal stockholder
Loss on asset dispositions - 4,736 816
Interest income added to related-party
note receivable - - (5,000)
Changes in operating assets and
liabilities, net of effect of
acquisition-
Trade accounts receivable (133,535) (52,182) 13,622
Inventory (154,448) 24,949 3,451
Other assets (237,432) 60,356 (15,875)
Accounts payable 456,278 512,193 111,054
Accrued liabilities 644,919 133,205 9,604
Other current liabilities (26,411) 941 (37,241)
----------- ----------- ----------
Net cash used in operating activities (6,548,231) (1,098,912) (91,700)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,364,469) (2,724,064) (142,956)
Proceeds from sale of equipment - 10,200 -
----------- ----------- ----------
Net cash used in investing activities (3,364,469) (2,713,864) (142,956)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
Stock and other contributed capital 358,418 16,417,105 93,701
Collection of receivables from sale of
Common stock 1,496,137 719,000 -
Proceeds from borrowings - 652,309 129,500
Principal payments on borrowings (148,985) (855,239) (39,195)
----------- ----------- ----------
Net cash provided by financing activities 1,705,570 16,933,175 184,006
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH (8,207,130) 13,120,399 (50,650)
CASH AT BEGINNING OF YEAR 13,159,404 39,005 89,655
----------- ----------- ----------
CASH AT END OF YEAR $ 4,952,274 $13,159,404 $ 39,005
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,495 $ 56,942 $ 22,333
Cash paid for income taxes - - 27,848
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES (see Note 2)
See accompanying notes to consolidated financial statements.
F-7
DATAMARK HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
DataMark Systems, Inc. ("Systems") was incorporated under the laws of the State
of Nevada on April 29, 1987. DataMark Printing, Inc. ("Printing") was
incorporated under the laws of the State of Utah on March 23, 1992. WorldNow
Online Network, Inc. ("WorldNow"), formerly DataMark Media, Inc., was
incorporated as a wholly owned subsidiary of Systems on October 3, 1994. Systems
negotiated a plan of reorganization and subscription agreement with the
shareholders of Printing (who were also greater than 80 percent shareholders of
Systems) whereby those shareholders transferred all of the outstanding shares of
common stock of Printing to Systems as an additional contribution to capital in
December 1994. No additional shares of common stock of Systems were issued in
the transaction. The business combination of Systems and Printing was accounted
for at historical cost in a manner similar to pooling-of-interests accounting.
Exchequer I, Inc. ("Exchequer"), a publicly held Delaware corporation, was
incorporated May 16, 1985. On January 11, 1995, Systems consummated a merger
agreement with Exchequer whereby Systems became a wholly owned subsidiary of
Exchequer, which changed its name to DataMark Holding, Inc. ("Holding"). The
shareholders of Systems received 2121.013 shares of Holding's common stock for
each share of Systems' common stock outstanding at the date of the merger.
Accordingly, the 2,132 shares of Systems' common stock were converted into
4,522,000 shares of Holding's common stock. The accompanying financial
statements have been restated to reflect the stock conversion for all periods
presented. The merger was accounted for as a reverse acquisition with Systems
being considered the acquiring company for accounting purposes. Prior to the
merger, Holding had no assets, $26,215 of liabilities and 471,952 shares of
common stock issued and outstanding. The reverse acquisition was accounted for
by recording the liabilities of Holding at the date of merger at their
historical cost, which approximated fair value. The operations of Holding have
been included in the accompanying consolidated financial statements from the
date of the merger. Operations of Holding were immaterial prior to the merger;
therefore, pro forma operating information is not presented.
As discussed in Note 3, on January 8, 1997, Holding acquired all of the
outstanding shares of common stock of Sisna, Inc. ("Sisna"). The acquisition of
Sisna has been accounted for as a purchase with the results of operations of
Sisna being included in the accompanying financial statements from the date of
the acquisition.
Holding, Systems, Printing, WorldNow, and Sisna are collectively referred to
herein as the "Company". All significant intercompany accounts and transactions
have been eliminated in consolidation.
F-8
NATURE OF OPERATIONS AND RELATED RISKS
The Company provides highly targeted business to consumer advertising for its
clients. The medium for such targeted advertising has been direct mail and is
being expanded to include an online network. The Company utilizes sophisticated
consumer profiling techniques to target advertising to the persons most likely
to purchase the specific product or service being marketed. The Company's
advertising programs provide highly predictable and measurable advertising
campaigns.
The Company has historically derived a significant part of its revenues from
sales to proprietary schools. The loss of certain key customers, or a general
decline in the appeal of direct mail advertising to proprietary schools could
have a material adverse effect on the Company's business and results of
operations. The government student loan programs which many proprietary schools
rely on to finance tuition may be restricted or curtailed, adversely affecting
the viability of such schools.
Sisna operates as an Internet service provider allowing its customers access to
the Internet. Through a network of franchisees, Sisna offers Internet access in
12 states. The Company utilizes Sisna to offer Internet access, as well as the
Company's WorldNow Online services.
In fiscal 1994, the Company began developing an advertiser funded national
Internet service ("WorldNow Online") which was launched in the last quarter of
fiscal 1997. The Company's strategy for WorldNow Online includes the creation of
a national Internet-based network of local television stations. WorldNow will
provide free web hosting, web maintenance and other Internet features, including
national content and advertising, to the television stations. In return, the
stations will provide local content, ranging from news, weather and sports, to
entertainment, recreational and cultural events, as well as free television
advertising and promotions in order to drive local users of the Internet to the
WorldNow site. Both WorldNow and the stations' revenues will be derived from
local and national advertising as well as related commerce conducted via the
Internet.
WorldNow has only been online since June 1997, and did not commence generating
advertising revenues until August 1997. Accordingly, the Company has a limited
operating history upon which an evaluation of the Company can be based, and its
prospects are subject to the risks, expenses and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
products and services, including the Web-based advertising market. Specifically,
such risks include, without limitation, the failure to sign affiliation
agreements with local television stations, the failure to continue to develop
and extend the "WorldNow" brand, the rejection of the Company's services by Web
consumers and advertisers, the inability of the Company to maintain and increase
the levels of traffic on the WorldNow website, the development of equal or
superior services or products by competitors, the failure of the market to adopt
the Web as an advertising medium, the failure to successfully sell Web-based
advertising through the Company's recently developed internal sales force,
potential reductions in market prices for Web-based advertising, the inability
of the Company to effectively integrate the technology and operations or any
other acquired businesses or technologies with its operations, and the inability
to identify, attract, retain and motivate qualified personnel. There can be no
assurance that the Company will be successful in addressing such risks or that
the Company will achieve or sustain profitability of WorldNow Online. The
limited operating history of the Company and the uncertain nature of the markets
addressed by the Company make the prediction of future results of operations
difficult or impossible.
As reflected in the accompanying consolidated financial statements, the Company
has incurred net losses of $9,340,816, $3,433,081 and $264,270 and the Company's
operating activities have used $6,548,231, $1,098,912 and $91,700 of cash during
the years ended June 30, 1997, 1996 and 1995, respectively. During fiscal years
1997, 1996 and 1995, the Company expended $4,682,436, $1,565,718 and $560,915 of
direct costs for the development of WorldNow Online. Management's current
projections indicate that there will not be sufficient cash flows from operating
activities during fiscal year 1998 to provide adequate working capital for the
Company to implement its marketing strategy for WorldNow Online. As of June 30,
1997, the Company had $4,952,274 of cash and is attempting to obtain additional
F-9
debt or equity funding. Management believes that adequate debt or equity funding
will be available to the Company; however, if adequate funding is not available,
management may be required to revise its plans and reduce future expenditures.
There can be no assurance that the additional funding will be available or if
available, that it will be available on acceptable terms or in required amounts.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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.
TRADE ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The allowance for doubtful accounts was $61,000 and $0 at June 30, 1997 and
1996, respectively. The increase in the allowance is due in part to the
acquisition of Sisna, which provides credit to online customers (see Note 3).
While the Company typically requires payment prior to mailing direct mail
products for customers, a portion of net sales are routinely made on credit to
institutional customers. Collateral is not generally required from these
customers.
INVENTORY
Inventory is valued at the lower of cost or market, with cost being determined
using the first-in, first-out method. Inventory consists of the following as of
June 30, 1997 and 1996:
1997 1996
-------- --------
Raw materials used in printing $ 41,486 $ 52,555
Work in process direct mail
Advertising products 64,587 -
Completed direct mail
Advertising products 11,206 30,417
Computer equipment to be resold
(see Note 10) 244,292 -
-------- -------
$361,571 $82,972
======== =======
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when
incurred. Depreciation and amortization of property and equipment are computed
using primarily an accelerated method over the estimated useful lives of the
related assets which are as follows:
Vehicles 5 years
Printing equipment 5 years
Computer and office equipment 5 - 7 years
Furniture, fixtures and leasehold
improvements 5 - 10 years
Depreciation and amortization expense was $568,493, $165,596, and $92,139 for
the years ended June 30, 1997, 1996 and 1995, respectively.
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net
income or loss.
F-10
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated balance sheets
for cash, accounts receivable, and accounts payable approximate fair values
because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's notes payable also
approximate fair value based on current rates for similar debt.
REVENUE RECOGNITION
Revenue from marketing services and related product sales is recognized at the
time of mailing the products for the customers. Revenue from providing Internet
access is recognized as the services are provided or pro rata over the service
period. The Company defers revenue paid in advance relating to future services
and products not yet mailed.
RESEARCH AND DEVELOPMENT
Research and development costs incurred in the development of WorldNow Online
have been expensed as incurred.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. These deferred tax assets
or liabilities are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted average number of
common shares outstanding during each year. Common equivalent shares consist of
the incremental common shares issuable upon exercise of outstanding stock
options and warrants that have a dilutive effect when applying the treasury
stock method. In years where losses are recorded, common stock equivalents would
decrease the net loss per share and are therefore not added to weighted average
shares outstanding.
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities consist of the following:
During the year ended June 30, 1997, the Company acquired $96,000 of computer
software in exchange for 12,000 shares of common stock. As discussed in Note 3,
the Company acquired the common stock of Sisna in exchange for 325,000 shares of
the Company's common stock.
During the year ended June 30, 1996, the Company received subscription
agreements for the purchase of 214,500 shares of common stock at $7.75 per share
amounting to $1,496,137, net of commissions of $166,238, for which payment had
not been received as of June 30, 1996 (see Note 7).
During the year ended June 30, 1995, $50,000 of notes payable to a related party
were offset against a note receivable in the same amount from the same related
party. Also during the year ended June 30, 1995, 479,334 shares of common stock
were issued for subscriptions receivable totaling $719,000.
F-11
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company adopted SFAS No. 121 for
fiscal year 1997, which had no impact on the Company's financial position or
results of operations.
In February 1997, the FASB released SFAS No. 128 "Earnings per Share." SFAS No.
128 specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for financial statements issued for all periods
ending after December 15, 1997. SFAS No. 128 simplifies the standards for
computing EPS previously found in APB Opinion No. 15 and replaces the
presentation for primary EPS and fully diluted EPS. When the Company incurs a
loss, common stock equivalents are not included as they would be anti-dilutive.
The adoption of SFAS No. 128 is not expected to have a significant impact on the
Company's calculation of its net loss per common share.
RECLASSIFICATIONS
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal year 1997 presentation.
(3) ACQUISITION OF SISNA
On January 8, 1997, Holding completed the acquisition of Sisna pursuant to an
Amended and Restated Agreement and Plan of Reorganization (the "Agreement").
Pursuant to the Agreement, Holding issued 325,000 shares of its common stock in
exchange for all of the issued and outstanding shares of Sisna. Of the shares
issued for Sisna, 25,000 shares were placed in escrow pending collection of
Sisna's accounts receivable. The acquisition has been accounted for as a
purchase. The excess of the purchase price over the estimated fair value of the
acquired assets less liabilities assumed was $1,674,721 and was allocated to
purchased research and development and expensed at the date of the acquisition.
Sisna has not been profitable since its inception. Management believes that the
amount of common stock issued for Sisna was fair and reasonable based on the
expected synergies to be achieved by combining Sisna with the Company and the
technology that was acquired. The tangible assets acquired consisted of $32,212
of trade accounts receivable, $124,151 of inventory, and $500,000 of computer
and office equipment. The liabilities assumed consisted of $10,550 of bank
overdrafts, $278,227 of accounts payable, $233,142 of notes payable, and
$134,444 of other accrued liabilities.
In connection with the acquisition, the Company entered into three-year
employment agreements with four of Sisna's key employees and shareholders. The
employment agreements are renewed automatically for one or more successive
one-year terms, unless notice of non-renewal is given by either party, may be
terminated by the Company for cause, as defined, or may be terminated by the
Company without cause. If terminated without cause, the employees are entitled
to their regular base salary up to the end of the then current term and any
bonus owed pursuant to the employment agreements. The four employment agreements
provided for aggregate base annual compensation of $280,000. The employment
agreements also provided for aggregate bonuses of $500,000, which were paid as
of the date of the acquisition, and are to be earned by the employees as certain
computer installations are completed. If the installations are not completed, a
portion of the initial bonuses is to be repaid to the Company. The employment
agreements also include noncompetition provisions for periods extending three
years after the termination of employment with the Company. The employment
agreement with one of the employees was terminated in March 1997, which
decreased the aggregate base annual compensation by $100,000 per year.
F-12
The following unaudited pro forma acquisition information for the years ended
June 30, 1997 and 1996 presents the results of operations as if the Sisna
acquisition described above had occurred at the beginning of fiscal year 1996,
after giving effect to the write-off of purchased research and development
totaling $1,674,721. The write-off of purchased research and development is a
nonrecurring charge which resulted directly from the transaction and therefore
has been excluded from the following pro forma information. The pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisition been made at the
beginning of fiscal year 1996 as described above or of the results which may
occur in the future.
1997 1996
----------- -----------
(unaudited) (unaudited)
Revenues $ 7,403,417 $ 6,540,205
Loss from operations (10,005,170) (3,733,935)
Net loss (9,520,015) (3,688,338)
Net loss per common share (1.12) (0.59)
(4) NOTES PAYABLE
Notes payable, all of which are current, consist of the following as of June 30,
1997 and 1996:
1997 1996
-------- --------
Line-of-credit agreement with a bank (assumed
in Sisna acquisition); interest at prime
plus 2 percent (10.5 percent at June 30,
1997); secured by all inventory, chattel
paper, accounts and general intangibles;
paid in full subsequent to June 30, 1997 $100,000 $ -
Note payable to an individual (assumed in Sisna
acquisition); interest at 7.5 percent, due
on demand, unsecured 28,024 -
Other; paid in full in fiscal year 1997 - 43,201
-------- -------
Total notes payable $128,024 $43,201
======== =======
(5) INCOME TAXES
The components of the net deferred tax assets as of June 30, 1997 and 1996 are
as follows:
1997 1996
----------- ----------
Net operating loss carryforwards $ 3,464,800 $ 790,300
Reserves and accrued liabilities 83,400 21,600
Other 22,000 -
----------- ---------
Total deferred tax assets 3,570,200 811,900
Valuation allowance (3,570,200) (811,900)
----------- ---------
Net deferred tax asset $ - $ -
=========== =========
F-13
As of June 30, 1997, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $9,624,000. For federal
income tax purposes, utilization of these carryforwards is limited if the
Company has had more than a 50 percent change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a change occurs in
the future. The tax net operating losses will expire beginning in 2009.
No benefit for income taxes has been recorded during the years ended June 30,
1997 and 1996. As discussed in Note 1, certain risks exist with respect to the
Company's future profitability, and accordingly, a valuation allowance was
recorded to offset the net deferred tax asset.
(6) COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its operations. The
approximate aggregate commitments under noncancelable operating leases in effect
at June 30, 1997, were as follows:
Year ending June 30,
1998 $ 706,287
1999 639,600
2000 531,632
2001 297,661
2002 124,503
----------
$2,299,683
==========
The Company incurred rent expense of $472,572, $118,923, and $53,435, in
connection with these operating leases for the years ended June 30, 1997, 1996
and 1995, respectively.
PURCHASE COMMITMENTS
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services for WorldNow Online. This agreement was terminated and superceded by an
agreement effective July 15, 1997. The Company has agreed to a minimum annual
usage commitment of at least $500,000 over a three-year period beginning six
months after the products and services are installed by Sprint and available for
the Company's use. In addition, on March 31, 1997, the Company signed a one-year
agreement with Sprint TELECENTERs Inc. ("STI") whereby STI will provide inbound
customer telemarketing services to the Company. The minimum program cost is
$200,000.
Subsequent to June 30, 1997, the Company has entered into a Series C Preferred
Share Purchase Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli
company, whereby the Company has agreed to invest $750,000 in CommTouch's Series
C Preferred Stock. One half of the investment was made on July 2, 1997 and the
other half was made on September 17, 1997. The Company also has an option to
make an additional $1,000,000 investment in CommTouch's Series C Preferred
Stock. CommTouch is engaged in the development, manufacture and marketing of
PC-based internetworking software.
LEGAL MATTERS
The Company is the subject of certain legal matters which it considers
incidental to its business activities. It is the opinion of management, after
consultation with legal counsel, that the ultimate disposition of these legal
matters will not have a material impact on the consolidated financial position,
liquidity or results of operations of the Company.
F-14
(7) CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company is authorized to issue up to 2,500,000 shares of its $.0001 par
value preferred stock. As of June 30, 1997, no preferred stock was outstanding.
The Company's Board of Directors is authorized, without shareholder approval, to
fix the rights, preferences, privileges and restrictions of one or more series
of the authorized shares of preferred stock.
COMMON STOCK ISSUANCES AND OTHER TRANSACTIONS
Prior to the reverse merger of Systems and Holding discussed in Note 1, Systems'
Board of Directors authorized private sales of restricted shares of Systems'
common stock and other equity transactions. During the year ended June 30, 1995,
Systems sold 156,955 (post merger) shares for $68,500 of cash at a price of
approximately $.44 per share. Subsequent to the merger, Holding sold 66,667
shares of common stock for $100,000 of cash at a price of $1.50 per share. Also,
as of June 30, 1995, the Company had received stock subscription agreements from
shareholders to purchase an additional 479,334 shares for $719,000 at a price of
$1.50 per share. The amounts due under the subscription agreements were paid in
fiscal year 1996.
During the year ended June 30, 1996, the Company raised additional equity
capital through private placements of its common stock. Under the private
placements, the Company offered shares of restricted common stock at an offering
price of $7.75 per share on a best efforts basis by the officers of the Company.
The Company engaged finders to introduce potential investors to the Company. The
finders received a 10 percent commission and warrants to purchase 250,000 shares
of the Company's common stock at a price of $7.75 per share. In connection with
the private offerings, the Company sold 1,992,179 shares of common stock for
$13,914,849 in proceeds, net of offering costs of $1,524,538, and received
subscriptions for an additional 214,500 shares of common stock. The proceeds
from the subscriptions of $1,496,137, net of offering costs of $166,238, were
received in fiscal year 1997. The Company also issued warrants to purchase up to
377,900 shares of the Company's common stock at $7.75 per share to certain of
the investors. During the years ended June 30, 1997 and 1996, 36,125 and 321,775
of these warrants to purchase shares of the Company's common stock were
exercised, respectively. The remaining warrants to purchase 20,000 shares of
common stock and the finders' warrants to purchase 250,000 shares of common
stock are outstanding and exercisable as of June 30, 1997.
The Company agreed with certain of the investors to use its best efforts to
register the shares purchased or subscribed and the warrants issued under the
Securities Act of 1933. The Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission (the "SEC") during fiscal year 1996
and it became effective in fiscal year 1997. The stock subscriptions receivable
of $1,496,137 as of June 30, 1996 were not due and payable to the Company until
the Form S-1 Registration Statement had been declared effective by the SEC.
As discussed in Note 3, during the year ended June 30, 1997, the Company issued
325,000 shares of its common stock in connection with the acquisition of Sisna.
Also, the Company acquired certain computer software in exchange for 12,000
shares of common stock.
(8) STOCK OPTIONS
In August 1993, Systems granted an option to an employee to purchase 150,592
(post merger) shares of common stock at $0.25 per share. These options expire on
June 30, 1999. During fiscal year 1996, the Company granted options to purchase
470,000 additional shares of common stock, of which 100,000 options were granted
to officers who provided guarantees on certain debt of the Company. These
options were exercisable at $5.00 per share and expired October 31, 1996.
F-15
Subsequent to June 30, 1997, the Company's Board of Directors authorized that
the expiration date be extended to October 31, 1998 for options to purchase
75,000 shares of common stock. The extension of the expiration date will be
reflected as a new grant in fiscal year 1998. The remaining 370,000 options
granted in fiscal year 1996 were granted as consideration to certain individuals
who provided services related to the private stock offerings. These options are
exercisable at prices ranging from $7.75 and $9.00 per share for three years. As
of June 30, 1997, 505,592 of the above options were exercisable. In addition,
during the year ended June 30, 1997 the Company granted options to purchase
65,000 shares of common stock to an employee. The respective Boards of Directors
of Holding and Systems, determined that all options were granted at fair value
at the dates of grant.
The Company has established the Omnibus Stock Option Plan (the "Option Plan")
for employees and consultants. Options granted under the Option Plan may be
incentive stock options or nonqualified stock options. The maximum number of
common shares that may be issued under the Option Plan is 780,532. Options to
purchase 510,000, 175,000 and 634,946 shares were granted under the Option Plan
during the years ended June 30, 1997, 1996 and 1995, respectively, and options
to purchase 79,835 and 341,323 shares were forfeited or canceled during the
years ended June 30, 1997 and 1996, respectively. Total outstanding options
under the Option Plan at June 30, 1997 was 779,388 of which 169,388 were
exercisable. Generally, the options granted under the Option Plan vest within
three years of the date granted. The options expire, if not exercised, from June
30, 1999 through June 1, 2002.
The following is a summary of all stock options for the years ended June 30,
1997, 1996 and 1995:
Options Outstanding
----------------------------
Number of Option Price
Shares Per Share
--------- ------------
Balance at June 30, 1994 150,592 $ 0.25
Granted 634,946 0.50-1.00
--------- ----------
Balance at June 30, 1995 785,538 0.25-1.00
Granted 645,000 5.00-9.00
Expired or canceled (341,323) .50-1.00
Exercised (17,000) .50
--------- ----------
Balance at June 30, 1996 1,072,215 0.25-9.00
Granted 575,000 3.25-7.75
Expired or canceled (179,835) 0.50-5.00
Exercised (102,400) 0.50-1.00
--------- ----------
Balance at June 30, 1997 1,364,980 $0.25-9.00
========= ==========
In June 1996, in connection with an employment agreement with an officer of
WorldNow, a principal stockholder granted an option to the officer to purchase
237,500 shares of restricted common stock from the principal stockholder at
$1.50 per share. As discussed in Note 7, during the year the Company sold shares
of restricted common stock in a private placement at $7.75 per share;
accordingly, the Company recognized $1,484,375 of compensation expense related
to this transaction during the year ended June 30, 1996.
Two principal stockholders granted options to an employee during the year ended
June 30, 1995. The options allow the employee to purchase 150,000 shares of
common stock at $0.50 per share from the stockholders. The Company did not
recognize compensation expense from these options due to the market value of the
common stock being equal to the exercise price on the date the options were
granted.
Stock-Based Compensation
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
F-16
compensation plans as they relate to employees and directors. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma information
regarding net income (loss) as if the Company had accounted for its stock
options granted to employees and directors subsequent to June 30, 1995 under the
fair value method of SFAS No. 123. The fair value of these stock options was
estimated at the grant date using the Black-Scholes option pricing model with
the following assumptions: average risk-free interest rates of 6.47 and 5.86
percent in 1997 and 1996, respectively, a dividend yield of 0 percent, a
volatility factor of the expected common stock price of 77.8 percent and a
weighted average expected life of approximately 2.6 years for the stock options.
For purposes of the pro forma disclosures, the estimated fair value of the stock
options is amortized over the estimated life of the respective stock options.
Following are the pro forma disclosures and the related impact on net loss for
the years ended June 30, 1997 and 1996:
1997 1996
---------- ----------
Net loss:
As reported $ (9,340,816) $(3,433,081)
Pro forma (10,378,303) (3,926,658)
Net loss per share:
As reported (1.12) (0.58)
Pro forma (1.25) (0.66)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to June 30, 1995, and due to the nature and timing of options
grants, the resulting pro forma compensation cost may not be indicative of
future years.
(9) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of its
employees. All employees are eligible to participate and may elect to contribute
to the plan annually. The Company has no obligation to contribute and did not
contribute additional matching amounts to the Plan during any year presented.
(10) RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1994, the Company made cash loans to two officers
totaling $46,000, which were settled during the year ended June 30, 1995, except
for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1994, the Company had borrowed money from certain officers.
Additional borrowings of $50,000 and $129,500 were made during the years ended
June 30, 1996 and 1995, respectively. Principal payments on these notes were
$1,666, $199,500, and $2,152 during the years ended June 30, 1997, 1996 and
1995, respectively. The amounts due on these loans at June 30, 1997 and 1996
were $0 and $1,666, respectively.
During the year ended June 30, 1996, the Company borrowed $500,000 from a bank
to fund computer equipment purchases. Certain officers and shareholders
guaranteed the loan. In exchange for the guarantee, such persons received a
one-year option to purchase 25,000 shares of common stock at $5.00 per share
(see Note 8).
During the year ended June 30, 1997, the Company negotiated services and
equipment purchase agreements with CasinoWorld Holdings, Ltd. and Barrons
Online, Inc., companies in which one of the Company's directors and shareholders
has an ownership interest. Under the tentative agreements, the Company will
provide software development services, configured hardware and other computer
equipment and related facilities amounting to approximately $750,000. As of June
30, 1997, the Company had acquired $244,292 of computer equipment to be resold
in connection with these arrangements which is included in inventory in the
accompanying June 30, 1997 consolidated balance sheet.
F-17
(11) SEGMENT INFORMATION
The following summarizes the Company's operations and identifiable assets as of
and for the years ended June 30, 1997, 1996 and 1995 relating to its direct mail
marketing and computer online marketing segments. Development of the Company's
computer online promotional advertising and marketing products began during the
year ended June 30, 1994.
Corporate
Computer Interest
Direct Mail Online Income
Marketing Marketing (Expense) Total
---------- ----------- --------- ----------
Year Ended June 30, 1997
- ------------------------
Net sales $6,448,156 $ 350,654 $ - $6,798,810
Income (loss) before
income taxes 481,201 (10,308,469) 486,452 (9,340,816)
Depreciation 100,981 467,512 - 568,493
Property and equipment
purchases 259,430 3,201,039 - 3,460,469
Identifiable assets at
year-end 819,343 6,381,062 - 7,200,405
Year Ended June 30, 1996
- ------------------------
Net sales 4,256,887 - - 4,256,887
Income (loss) before
income taxes 245,331 (3,761,388) 82,976 (3,433,081)
Depreciation 78,768 86,828 - 165,596
Property and equipment
Purchases 110,084 2,589,212 - 2,699,296
Identifiable assets at
year-end 559,913 2,680,023 - 3,239,936
Year Ended June 30, 1995
- ------------------------
Net sales 3,443,965 - - 3,443,965
Income (loss) before
income taxes 347,015 (592,720) (21,685) (267,390)
Depreciation 71,258 20,881 - 92,139
Property and equipment
Purchases 74,804 68,152 - 142,956
Identifiable assets at
year-end 1,490,202 66,444 - 1,556,646
Sales to a major customer accounted for 10 percent of net sales during the year
ended June 30, 1995. During the years ended June 30, 1997 and 1996, no single
customer accounted for more than 10 percent of net sales.
F-18
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.
DATAMARK HOLDING, INC.
Dated: September 24, 1997 By /s/ James A. Egide
------------------
James A. Egide, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James A. Egide Chairman of the Board September 24 , 1997
- -----------------------
James A. Egide
/s/ Stanton D. Jones President and Director September 26 , 1997
- -----------------------
Stanton D. Jones
/s/ Mitchell L. Edwards Executive Vice President, September 24 , 1997
- ----------------------- Secretary
Mitchell L. Edwards
/s/ J. Henry Smith Director, Chief Technical September , 1997
- ----------------------- Officer of WorldNow Online
J. Henry Smith Network, Inc.
Director September , 1997
- -----------------------
C. Scott Stone
Director September , 1997
- -----------------------
Kenneth Woolley
/s/ Michael D. Bard Chief Financial Officer and September , 1997
- ------------------------ Principal Accounting Officer
Michael D. Bard
/s/ James A. Kizer Senior Vice President and September , 1997
- ------------------------ Chief Operating Officer
James A. Kizer WorldNow Online Network, Inc.