-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PMmK8B3SAlHtvmi7FhqM9irkE66C5QnyQHaRlZLROytNOD++VkxL5DV72sdu20hV mxB4QwVl614LLIcKBwEqBg== 0000931731-99-000248.txt : 19990616 0000931731-99-000248.hdr.sgml : 19990616 ACCESSION NUMBER: 0000931731-99-000248 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL COURIER TECHNOLOGIES INC CENTRAL INDEX KEY: 0000774055 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 870461856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-20771 FILM NUMBER: 99646653 BUSINESS ADDRESS: STREET 1: 136 HEBER AVE P O BOX 8000 STREET 2: SUITE 204 CITY: PARK CITY STATE: UT ZIP: 84060 BUSINESS PHONE: 4356553617 MAIL ADDRESS: STREET 1: 136 HEBER AVE STREET 2: SUITE 204 CITY: PARK CITY STATE: UT ZIP: 84060 FORMER COMPANY: FORMER CONFORMED NAME: DATAMARK HOLDING INC DATE OF NAME CHANGE: 19950124 FORMER COMPANY: FORMER CONFORMED NAME: EXCHEQUER INC /DE/ DATE OF NAME CHANGE: 19950111 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ----------------------- FORM 10-Q/A ----------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------- [ ] 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 DIGITAL COURIER TECHNOLOGIES, 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) 136 Heber Avenue, Suite 204 P.O. Box 8000 Park City, Utah 84060 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (435) 655-3617 Check whether the registrant (1) has filed all reports required to be filed by Sections 13 and 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- APPLICABLE ONLY TO CORPORATE ISSUERS: The Registrant has only one class of stock issued and outstanding which is Common Stock with $.0001 par value. As of April 30, 1998, 7,027,626 of the Registrant's Common Shares were issued and outstanding. DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (As Restated) (Unaudited) ASSETS
March 31, June 30, 1998 1997 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 6,946,635 $ 4,938,404 Trade accounts receivable, net of allowance for doubtful accounts of $0 1,449 -- Inventory 10,291 -- Other current assets 516,302 74,742 Net current assets of discontinued operations -- 105,739 ------------ ------------ Total current assets 7,474,677 5,118,885 ------------ ------------ PROPERTY AND EQUIPMENT: Computer and office equipment 5,992,855 5,210,607 Furniture, fixtures and leasehold improvements 737,965 724,717 Vehicles -- 29,059 ------------ ------------ 6,730,820 5,964,383 Less accumulated depreciation and amortization (1,603,457) (510,307) ------------ ------------ Net property and equipment 5,127,363 5,454,076 ------------ ------------ INVESTMENT 750,000 -- ------------ ------------ NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS -- 709,063 ------------ ------------ OTHER ASSETS 1,317,439 38,636 ------------ ------------ $ 14,669,479 $ 11,320,660 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. 2 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (As Restated) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30, 1998 1997 ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 166,493 $ 1,086,474 Current portion of capital lease obligation 960,777 -- Accrued liabilities 471,361 408,103 Other current liabilities 33,000 -- ------------ ------------ Total current liabilities 1,631,631 1,494,577 ------------ ------------ CAPITAL LEASE OBLIGATION, net of current portion 1,359,877 -- ------------ ------------ 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; 8,834,475 and 8,560,932 shares outstanding, respectively 883 856 Additional paid-in capital 23,231,651 23,272,606 Accumulated deficit (11,554,563) (13,447,379) ------------ ------------ Total stockholders' equity 11,677,971 9,826,083 ------------ ------------ $ 14,669,479 $ 11,320,660 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. 3 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (As Restated) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
1998 1997 ----------- ----------- NET SALES $ 385,671 $ -- COST OF SALES 258,144 -- ----------- ----------- GROSS MARGIN 127,527 -- ----------- ----------- OPERATING EXPENSES: General and administrative 1,126,179 388,405 Research and development 454,218 1,050,463 Selling 188,861 341,400 ----------- ----------- Total operating expenses 1,769,258 1,780,268 ----------- ----------- LOSS FROM CONTINUING OPERATIONS (1,641,731) (1,780,268) ----------- ----------- OTHER INCOME (EXPENSE): Interest and other income 27,140 120,259 Interest expense (53,537) -- ----------- ----------- Other income (expense), net (26,397) 120,259 ----------- ----------- LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (1,668,128) (1,660,009) INCOME TAX BENEFIT (Note 3) 2,733,829 -- ----------- ----------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 1,065,701 (1,660,009) ----------- ----------- DISCONTINUED OPERATIONS: Income (loss) from operations of discontinued direct mail marketing subsidiary, net of income tax benefit (provision) of $30,329 and ($72,540), respectively (50,548) 120,901 Gain on sale of direct mail marketing subsidiary, net of income tax provision of $ 2,636,831 4,394,717 -- Loss from operations of discontinued Internet service provider subsidiary, net of income tax benefit of $12,419 and $72,540, respectively (20,698) (2,381,246) Gain on sale of Internet service provider subsidiary, net of income tax provision of $139,746 232,911 -- ----------- ----------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,556,382 (2,260,345) ----------- ----------- NET INCOME (LOSS) $ 5,622,083 $(3,920,354) =========== =========== NET INCOME (LOSS) PER COMMON SHARE (Note 4): Income (loss) before discontinued operations: Basic $ 0.12 $ (0.20) Diluted $ 0.12 $ (0.20) =========== =========== Net income (loss): Basic $ 0.64 $ (0.46) Diluted $ 0.64 $ (0.46) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 8,763,505 8,479,376 Diluted 8,832,086 8,479,376 =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (As Restated) FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
1998 1997 ----------- ----------- NET SALES $ 405,158 $ -- COST OF SALES 323,201 -- ----------- ----------- GROSS MARGIN 81,957 -- ----------- ----------- OPERATING EXPENSES: General and administrative 2,885,042 770,072 Research and development 1,301,285 2,158,057 Selling 1,167,222 1,272,853 ----------- ----------- Total operating expenses 5,353,549 4,200,982 ----------- ----------- LOSS FROM CONTINUING OPERATIONS (5,271,592) (4,200,982) ----------- ----------- OTHER INCOME (EXPENSE): Interest and other income 115,823 410,440 Interest expense (108,746) (650) ----------- ----------- Other income, net 7,077 409,790 ----------- ----------- LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (5,264,515) (3,791,192) INCOME TAX BENEFIT (Note 3) 2,684,000 -- ----------- ----------- LOSS BEFORE DISCONTINUED OPERATIONS (2,580,515) (3,791,192) ----------- ----------- DISCONTINUED OPERATIONS: Income from operations of discontinued direct mail marketing subsidiary, net of income tax provision of $66,827 and $158,203, respectively 111,377 263,672 Gain on sale of direct mail marketing subsidiary, net of income tax provision of $2,636,831 4,394,717 -- Loss from operations of discontinued Internet service provider subsidiary, net of income tax benefit of $159,404 and $158,203, respectively (265,674) (2,295,583) Gain on sale of Internet service provider subsidiary, net of income tax provision of $139,746 232,911 -- ----------- ----------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,473,331 (2,031,911) ----------- ----------- NET INCOME (LOSS) $ 1,892,816 $(5,823,103) =========== =========== NET INCOME (LOSS) PER COMMON SHARE (Note 4): Loss before discontinued operations: Basic $ (0.30) $ (0.46) Diluted $ (0.29) $ (0.46) =========== =========== Net income (loss): Basic $ 0.22 $ (0.71) Diluted $ 0.21 $ (0.71) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 8,660,717 8,242,116 Diluted 8,862,132 8,242,116 =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 5 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (As Restated) FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited) Increase (Decrease) in Cash
1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,892,816 $ (5,823,103) Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on sale of direct mail marketing and Internet service operations (7,404,205) -- Depreciation and amortization 1,126,854 115,015 Acquired research and development -- 2,232,961 Stock issued in lieu of compensation 61,250 -- Amortization of goodwill 30,838 -- Loss on disposition of equipment 11,196 -- Changes in operating assets and liabilities, net of effect of acquisition and dispositions: Trade accounts receivable 98,563 (2,207) Inventory 193,886 -- Net current assets of discontinued operations -- 73,592 Other current assets (282,348) (48,828) Other assets (24,675) (33,331) Accounts payable (805,328) 16,364 Accrued liabilities (203,570) 54,132 Other current liabilities 33,000 -- ------------ ------------ Net cash used in operating activities (5,271,723) (3,415,405) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investment (750,000) -- Purchase of property and equipment (802,414) (2,675,116) Increase in net non-current assets of discontinued operations -- (608,118) Proceeds from sale of equipment 20,938 -- ------------ ------------ Net cash used in investing activities (1,531,476) (3,283,234) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of direct mail marketing and Internet services operations 6,857,300 -- Net proceeds from the issuance of common stock and other contributed capital -- 1,829,555 Net proceeds from sale and lease back of equipment 2,750,000 -- Principal payments on capital lease obligation (429,346) -- Principal payments on notes payable (288,812) (43,201) Acquisition of common stock (200,000) -- Proceeds from borrowings 86,000 -- Net proceeds from the exercise of common stock options 22,418 -- ------------ ------------ Net cash provided by financing activities 8,797,560 1,786,354 ------------ ------------ NET INCREASE (DECREASE ) IN CASH 1,994,361 (4,912,285) CASH AT BEGINNING OF PERIOD 4,952,274 13,159,404 ------------ ------------ CASH AT END OF PERIOD $ 6,946,635 $ 8,247,119 ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 6 DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS The accompanying interim condensed financial statements as of March 31, 1998 and June 30, 1997 and for the three and nine months ended March 31, 1998 and 1997 are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The financial statements are condensed and, therefore, do not include all disclosures normally required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's annual financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997. The results of operations for the three and nine months ended March 31, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 1998. Subsequent to the Company filing its Quarterly Report on Form 10-Q for the period ended March 31, 1998 with the Securities and Exchange Commission ("SEC"), the Company has restated certain amounts previously reported. Changes have been madein the method used for valuing the shares of common stock issued in connection with the acquisitions of Sisna, Inc. and Books Now, Inc. (see Note 2). Previously, the Company had used a 25 percent discount from the quoted market price due to the shares being restricted and the Company's stock thinly traded. The restated amounts in the accompanying financial statements reflect the shares of common stock valued at the quoted market price on the dates of the acquisitions. The impacts of the restatement on income (loss) before discontinued operations and net income (loss) are as follows:
Previously Previously Reported Restated Reported Restated ----------------------------------- --------------------------------- Three Months ended March 31, 1998 1997 - -------------------------------------------------------------------------------------- --------------------------------- Income (loss) before discontinued operations $ 1,069,607 $ 1,065,701 $ (1,660,009) $ (1,660,009) Net income (loss) $ 5,625,989 $ 5,622,083 $ (3,362,114) $ (3,920,354) Diluted income (loss) per share: Income (loss) before discontinued operations $ 0.12 $ 0.12 $ (0.20) $ (0.20) Net income (loss) $ 0.64 $ 0.64 $ (0.40) $ (0.46) Nine Months ended March 31, 1998 1997 - -------------------------------------------------------------------------------------- --------------------------------- Income (loss) before discontinued operations $ (2,576,609) $ (2,580,515) $ (3,791,192) $ (3,791,192) Net income (loss) $ 1,896,722 $ 1,892,816 $ (5,264,863) $ (5,823,103) Diluted income (loss) per share: (Loss) before discontinued operations $ (0.30) $ (0.29) $ (0.46) $ (0.46) Net income (loss) $ 0.21 $ 0.21 $ (0.64) $ (0.71)
7 NOTE 2 - ACQUISITIONS AND DISPOSITIONS Sisna, Inc. On January 8, 1997, the Company completed the acquisition of Sisna, Inc. ("Sisna") pursuant to an Amended and Restated Agreement and Plan of Reorganization (the "Agreement"). Pursuant to the Agreement, the Company issued 325,000 shares of its common stock valued at $2,232,961 in exchange for all of the issued and outstanding shares of Sisna. The issuance of the common shares was recorded at the quoted market price on the date of acquisition. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair market value of the acquired assets less liabilities assumed was $2,232,961, which was allocated to acquired in-process research and development and expensed at the date of the acquisition. Sisna has not been profitable since its inception. 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 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. These bonuses were earned and expensed as the employees completed certain computer installations. The employment agreements also included noncompetition provisions for periods extending three years after the termination of employment with the Company. In March 1998, the Company sold the operations of Sisna to Mr. Smith, Sisna's former owner (and a director of the Company at the time of the sale) and certain other buyers in exchange for 35,000 shares of the Company's common stock at a value of $141,904. Mr. Smith and the other buyers received tangible assets of $55,547 of accounts receivable, $35,083 of prepaid expenses, $47,533 of computer and office equipment, and $9,697 of other assets and assumed liabilities of $33,342 of accounts payable, $101,951 of notes payable, and $243,320 of other accrued liabilities. The sale resulted in a pretax gain on the sale of $372,657. The sales price to Mr. Smith was determined by arms' length negotiations between Mr. Smith and the independent Directors and was approved by the Board of Directors with Mr. Smith abstaining. The operations of Sisna have been included in the accompanying condensed consolidated financial statements from the acquisition date in January 1997 through the sale in March 1998 as discontinued operations. The Sisna revenues were $143,982 and $219,226 and the losses from operations were $33,117 and $2,453,786 during the three months ended March 31, 8 1998 and 1997, respectively, and the Sisna revenues were $555,685 and $219,226 and the losses from operations were $425,078 and $2,453,786 during the nine months ended March 31, 1998 and 1997, respectively. Books Now, Inc. In January 1998, the Company acquired all of the outstanding stock of Books Now, a seller of books through advertisements in magazines and over the Internet. The shareholders of Books Now received 100,000 shares of the Company's common stock upon signing the agreement, valued at $312,500 and can receive 87,500 additional shares per year for the next three years based on performance goals established in the agreement. The issuance of the common shares was recorded at the quoted market price on the date of acquisition. The annual number of shares could increase up to a maximum of 175,000 shares if the Company's average stock price, as defined, does not exceed $8.50 per share at the end of the three-year period. The Company granted certain piggyback registration rights and a one time demand registration right with regard to the shares received under the agreement. The Company also entered into a three-year employment agreement with the president of Books Now that provides for base annual compensation of $81,000 and a bonus on pretax income ranging from 5% to 8% based on the level of earnings. The acquisition was accounted for as a purchase and the results of operations of Books Now are included in the accompanying condensed consolidated financial statements since the date of acquisition. The tangible assets acquired included $261 of cash, $21,882 of inventory and $50,000 of equipment. Liabilities assumed included $112,335 of notes payable, $24,404 of capital lease obligations and $239,668 of accounts payable and accrued liabilities. The excess of the purchase price over the estimated fair market value of the acquired assets of $616,764 was recorded as goodwill and is being amortized over a period of five years. In November 1998, the Company and the former owner reached a severance agreement, wherein, the former owner and President of Books Now is to receive severance payments equal to one year's salary ($81,000). Additionally, the Company agreed to issue 205,182 shares of the Company's common stock valued at $1,051,558, based on the quoted market price of the shares on the date of the severance agreement, to the former shareholders of Books Now. Because the operations of Books Now were not achieving the performance criteria, both the $81,000 of cash and the $1,051,558 of common stock will be recorded as selling expense in the three months ending December 31, 1998. The following pro forma information for the three and nine months ended March 31, 1997 and the nine months ended March 31, 1998 presents the Company's pro forma results of operations as if the acquisition of Books Now had occurred at the beginning of each period. 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 that applicable period or of the results which may occur in the future. 9
Pro Forma Pro Forma Pro Forma Three Months Nine Months Nine Months Ended Ended Ended March 31, 1997 March 31, 1997 March 31, 1998 (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- Net sales $ 103,185 $ 224,114 $ 632,017 Income (loss) from continuing operations (1,838,630) (4,369,944) (5,427,685) Net income (loss) (3,980,309) (5,995,472) 1,729,319 Net (loss) per common share from continuing operations: Basic and diluted (0.21) (0.52) (0.49) Net income (loss) per common share: Basic and diluted (0.46) (0.72) 0.19
Sale of Direct Mail Advertising Operations In March 1998, the Company sold its direct mail advertising operations to Focus Direct, an unrelated Texas corporation. Pursuant to the asset purchase agreement, Focus Direct purchased all assets, properties, rights, claims and goodwill, of every kind, character and description, tangible and intangible, real and personal wherever located of the Company used in the Company's direct mail operations. Focus Direct also agreed to assume certain liabilities of the Company related to the direct mail advertising operations. Pursuant to the agreement, Focus Direct agreed to pay the Company $7,700,000 for the above described net assets. Focus Direct paid the Company $6,900,000 at closing and will pay an additional $700,000 by June 30, 1999. The total purchase price was adjusted for the difference between the assets acquired and liabilities assumed at November 30, 1997 and those as of the date of closing. This sale resulted in a pretax gain of $7,031,548. The purchaser acquired tangible assets consisting of approximately $495,000 of accounts receivable, $180,000 of inventory, $575,000 of furniture and equipment, and $10,000 of other assets, and assumed liabilities of approximately $590,000 of accounts payable and $320,000 of other accrued liabilities. The direct mail advertising operations have been reflected as discontinued operations in the accompanying condensed consolidated financial statements for the three and six month periods ended December 31, 1997. The direct mail advertising revenues were $2,932,946 and $5,479,782 and the pretax income from operations was $148,523 and $259,081 during the three and six months ended December 31, 1997, respectively. 10 NOTE 3 - INCOME TAXES The income tax benefits for the three and nine months ended March 31, 1998 of $2,733,829 and $2,684,000, respectively, result from the tax effect of the gain on sale of direct mail marketing and Internet service operations being offset with net operating loss carryforwards which were not previously recorded by the Company. NOTE 4 - EARNINGS (LOSS) PER SHARE In accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share" which became effective December 15, 1997, basic net income per common share was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share takes into consideration the dilutive effects of outstanding stock options. During periods in which the Company incurs a net loss, the inclusion of the common stock equivalents would decrease the net loss per share and therefore have not been added to basic weighted average shares. The calculation of the weighted average number of common shares outstanding is as follows: Three Months Ended Nine Months Ended March 31, 1998 March 31, 1998 -------------- -------------- Weighted average number of shares for basic net income per common share 8,763,505 8,759,900 Stock Options 68,581 201,415 --------- --------- Weighted average number of shares for diluted net income per common share 8,832,086 8,961,315 ========= ========= Three Months Ended Nine Months Ended March 31, 1997 March 31, 1997 -------------- -------------- Weighted average number of shares for basic net income per common share 8,479,376 8,242,116 Stock Options -- -- --------- --------- Weighted average number of shares for diluted net income per common share 8,479,376 8,242,116 ========= ========= 11 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 marketing business had provided substantially all of the Company's revenues. The direct mail advertising business was sold in March 1998 and the operations of the direct mail marketing operations have been classified as discontinued operations in the accompanying consolidated financial statements. 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 this proprietary service in the fourth quarter of fiscal 1997. WorldNow Online 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. By providing free web hosting services and revenue opportunities to local television stations, WorldNow Online obtains free television commercial advertising driving Internet traffic to the WorldNow Online website. WorldNow Online provides and aggregates national content and advertising for its local television station affiliates, who augment the national content with highly relevant local content and advertising. Although the Company believes it will sign affiliate agreements with television stations in up to 100 markets, WorldNow Online has to date only signed affiliate agreements with television stations in twenty four markets. In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an Internet service provider headquartered in Salt Lake City, Utah, for an acquisition price of $2,232,961. In December, 1997, the Board of Directors reviewed the performance of Sisna in conjunction with a review of the strategic opportunities available to the Company. Among the conclusions of the Board were the following: (a) The Internet Service Provider business had become very competitive during the previous six months, with major corporations such as US West, America Online, MCI and others aggressively marketing their internet access offerings; (b) the margins in the ISP business were declining, as fixed-price, unlimited time access had become prevalent, and (c) Sisna's losses on a monthly basis were increasing with no apparent near-term prospect of 12 profitability. For these reasons, the Board concluded that it was in the best interests of the Company to sell Sisna. The Board solicited offers to buy Sisna over a period of three months, but due to Sisna's continuing losses of over $40,000 per month, no offers materialized. In February 1998, the Board considered terminating the operations of Sisna to cut the Company's losses, Mr. Henry Smith, a director of the Company and one of the former owners of Sisna, offered to assume the ongoing cost of running Sisna. After arms-length negotiations between the independent members of the Board and Mr. Smith, the Company agreed to sell the operations of Sisna to Mr. Smith. In March 1998, the Company sold the operations of Sisna to Mr. Smith and certain other buyers in exchange for 35,000 shares of the Company's common stock, valued at $141,904 based on the stock's quoted fair market value. Mr. Smith and the other buyers received tangible assets of $55,547 of accounts receivable, $35,083 of prepaid expenses, $47,533 of computer and office equipment, and $9,697 of other assets and assumed liabilities of $33,342 of accounts payable, $101,951 of notes payable, and $243,320 of other accrued liabilities, resulting in a pretax gain on the sale of $372,657. The sales price to Mr. Smith was determined by arms' length negotiations between Mr. Smith and the independent directors and was approved by the Board of Directors, with Mr. Smith abstaining. Sisna's results of operations are included in the accompanying consolidated statements of operations as discontinued operations In January 1998, the Company acquired all of the outstanding stock of Books Now, a seller of books through advertisements in magazines and over the Internet. The shareholders of Books Now received 100,000 shares of the Company's common stock upon signing the agreement, valued at $312,500 and can receive 87,500 additional shares per year for the next three years based on performance goals established in the agreement. The issuance of the common shares was recorded at the quoted market price on the date of acquisition. The annual number of shares could increase up to a maximum of 175,000 shares if the Company's average stock price, as defined, does not exceed $8.50 per share at the end of the three-year period. The Company granted certain piggyback registration rights and a one time demand registration right with regard to the shares received under the agreement. The Company also entered into a three-year employment agreement with the president of Books Now that provides for base annual compensation of $81,000 and a bonus on pretax income ranging from 5% to 8% based on the level of earnings. Results of Operations Three months ended March 31, 1998 compared with three months ended March 31, 1997, and nine months ended March 31, 1998 compared with nine months ended March 31, 1997. 13 Net Sales Net sales for the three months ended March 31, 1998 were $385,671. The Books Now, Inc. acquisition accounted for $141,160 of the net sales and a one time sale of a turn-key Internet computer system accounted for $240,854. Net sales from WorldNow Online during the three months ended March 31, 1998 were minimal. There were no net sales from continuing operations during the three months ended March 31, 1997. Net sales for the nine months ended March 31, 1998 were $405,158. The Books Now, Inc. acquisition accounted for $141,160 of net sales and a one time sale of a turn-key Internet computer system accounted for $240,854. Net sales from WorldNow Online during the nine months ended March 31, 1998 were minimal. There were no net sales from continuing operations during the nine months ended March 31, 1997. Cost of Sales Cost of sales for the computer online operations during the three months ended March 31, 1998 were $258,144 or 66.9% of computer online marketing sales. Cost of sales for the computer online operations during the nine months ended March 31, 1998 were $323,201 or 79.8% of computer online marketing sales. Cost of sales as a percentage of sales was less during the three months ended March 31, 1998 than during the nine months ended March 31, 1998 due to higher markups on the sale of a turn-key internet computer system. Operating Expenses General and administrative expense increased 189.9% to $1,126,179 during the three months ended March 31, 1998 from $388,405 during the three months ended March 31, 1997. The increase in general and administrative expense was due to the addition of administrative and support staff, depreciation expense, as well as increased related facilities costs, associated with WorldNow Online. General and administrative expense increased 274.6% to $2,885,042 during the nine months ended March 31, 1998 from $770,072 during the nine months ended March 31, 1997. The increase in general and administrative expense was due to the addition of administrative and support staff, depreciation expense, as well as increased related facilities costs, associated with WorldNow Online. Selling expense decreased 44.7% to $188,861 during the three months ended March 31, 1998 from $341,400 during the three months ended March 31, 1997. The decrease in selling expense was due to reductions in the sales and marketing staff of WorldNow Online. 14 Selling expense decreased 8.3% to $1,167,222 during the nine months ended March 31, 1998 from $1,272,853 during the nine months ended March 31, 1997. The decrease in selling expense was due to reductions in the sales and marketing staff of WorldNow Online. Research and development costs decreased 56.8% to $454,218 during the three months ended March 31, 1998 from $1,050,463 during the three months ended March 31, 1997. Research and development costs have decreased due to reduced levels of activity currently required for the development of WorldNow Online. To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality, features and content of the WorldNow online main site. Research and development costs decreased 39.7% to $1,301,285 during the nine months ended March 31, 1998 from $2,158,057 during the nine months ended March 31, 1997. Research and development costs have decreased due to reduced levels of activity currently required for the development of WorldNow Online. To remain competitive, the Company must continue to enchance and improve the responsiveness, functionality, features and content of the WorldNow online main site. During the three months ended March 31, 1998 the Company sold its direct mail marketing and Internet service operations for pretax gains of $7,031,548 and $372,657, respectively. During the three months ended March 31, 1998 the direct mail marketing operations incurred a pretax loss of $80,877 as compared to a pretax profit of $193,441 during the three months ended March 31, 1997. During the three months ended March 31, 1998 the Internet service operations incurred a pretax loss of $33,117 as compared to a pretax loss of $2,453,786 during the three months ended March 31, 1997. The Internet service operations loss incurred during the three months ended March 31, 1997 included a charge of $2,232,961 for acquired research and development. During the nine months ended March 31, 1998 the Company sold its direct mail marketing and Internet service operations for pretax gains of $7,031,548 and $372,657, respectively. During the nine months ended March 31, 1998 the pretax profit from the direct mail marketing operations was $178,204 as compared to a profit of $421,875 during the nine months ended March 31, 1997. During the nine months ended March 31, 1998 the Internet service operations incurred a pretax loss of $425,078, as compared to a loss of $2,453,786 during the nine months ended March 31, 1997. The Internet service operations loss incurred during the nine months ended March 31, 1997 included a charge of $2,232,961 for acquired research and development. Liquidity and Capital Resources Prior to calendar year 1996, the Company satisfied its cash requirements through cash flows from operating activities and borrowings from financial institutions and related parties. However, in order to fund the 15 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 net proceeds of $16,408,605 during fiscal year 1997, including the exercise of warrants. In October 1997, the Company entered into a three year sale and leaseback agreement which provided the Company with $2,750,000 in additional working capital. The Company was required to place $250,000 in escrow upon signing this agreement. In March 1998, the Company sold the net assets of DataMark Systems, Inc. its direct mail marketing subsidiary. To date the Company has received $6,857,300 from the sale of these net assets and will receive an additional $700,000 in June 1999. Operating activities used $5,271,723 during the nine months ended March 31, 1998 compared to $3,415,405 during the nine months ended March 31, 1997. The increase in cash used by operating activities during the nine months ended March 31, 1998 as compared to 1997 was primarily attributable to increased costs associated with WorldNow Online. Cash used in investing activities was $1,531,476 and $3,283,234 during the nine months ended March 31, 1998 and 1997, respectively. During the nine months ended March 31, 1998, the Company's investing activities included the investment in CommTouch, Ltd. of $750,000 and acquisition of equipment for $802,414. During the nine months ended March 31, 1997, the Company acquired $2,675,116 of equipment and invested $608,118 in net non-current assets of discontinued operations. Cash provided by financing activities was $8,797,560 during the nine months ended March 31, 1998 as compared to $1,786,354 during the nine months ended March 31, 1997. The increase in cash provided was attributable to the net receipt of $6,857,300 from the sale of direct mail marketing net assets in March 1998, $2,750,000 from the sale leaseback agreement entered into in October 1997 and $86,000 from loan proceeds. This increase in cash provided during the nine months ended March 31, 1998 was offset in part by principal repayments on the capital lease obligation and other notes payable totaling $718,158 and the payment of $200,000 for the retirement of common stock owned by a previous officer of the Company's direct mail advertising subsidiary. During the nine months ended March 31, 1997, the Company received $1,829,555 of net proceeds from the issuance of common stock and other contributed capital offset by $43,201 in principal repayments on notes. Management projects that there will not be sufficient cash flows from operating activities during the next twelve months to provide capital for the Company to implement its marketing strategy for WorldNow Online. As of March 31, 1998, the Company had $6,946,635 of cash. The Company is attempting to obtain additional debt or equity funding. If adequate funding is not available, the 16 Company 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. In April 1998, the Company purchased 1,800,000 shares of its common stock held by a previous officer of the Company in exchange for $1,500,000. Year 2000 Issue Computer systems, software applications, and microprocessor dependent equipment may cease to function properly or generate erroneous data when the year 2000 arrives. The problem affects those systems or products that are programmed to accept a two-digit code in date code fields. To correctly identify the year 2000, a four-digit date code field will be required to be what is commonly termed "year 2000 compliant." To date, the Company has invested approximately $60,000 in an effort to certify all aspects of its business are year 2000 compliant. The areas of its business which have been targeted for compliance testing are operations and software products and services. The Company conducted the certification process over a three-month period in which all software products and service components under direct control certified year 2000 compliant. For the operational components and remaining software and services that are under the control of third party organizations, the Company has sought their efforts to provide written confirmation and evidence of compliance. The Company may realize operational exposure and risk if the systems for which it is dependent upon to conduct day-to-day operations are not year 2000 compliant. The potential areas of software exposure include: o electronic data exchange systems operated by third parties with whom the Company transacts business, o server software which the Company uses to present content and advertising to its customers and partners, and o computers, software, telephone systems and other equipment used internally. In October 1997, the Company initiated the review and assessment of all of its computerized hardware and internal-use software systems to ensure that such systems will function properly in the year 2000 and beyond. During the last two years, its computerized information systems have been substantially upgraded to be year 2000 compliant. The Company has not yet developed a contingency plan in the event that any non-compliant critical systems are not remedied by the year 2000, nor has it formulated a timetable to create such a contingency plan. It is possible that 17 costs associated with year 2000 compliance efforts may exceed current projections of an additional $40,000 to reach total compliance. In such a case, these costs could have a material impact on the Company's financial position and results of operations. It is also possible that if systems material to the Company's operations have not been made year 2000 compliant, or if third parties fail to make their systems compliant in a timely manner, the year 2000 issue could have a material adverse effect on its business, financial condition, and results of operations. This would result in an inability to provide functioning software and services to the Company's clients in a timely manner, and could then result in lost revenues from these clients, until such problems are resolved by the Company or the responsible third parties. Forward-Looking Information Statements regarding the Company's expectations as to future revenue from its business strategy, and certain other statements presented herein, constitute forward-looking information 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 expectations. In addition to matters affecting the Company's industry generally, factors which could cause actual results to differ from expectations include, but are not limited to (1) the Company has only generated minimal revenue from its Internet businesses, and has not generated and may not generate the level of sales, users or advertisers anticipated, and (2) the costs to market the Company's Internet services. 18 Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith Exhibit 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATAMARK HOLDING, INC. Date: June 14, 1999 By /s/ Mitchell Edwards ---------------------------------- Mitchell Edwards Chief Financial Officer 19 EX-27 2 FDS --
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