-----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, R3o7Fci3kxjtax//epFEl+mPQM6Uw1iB2naLN4StV5ImLCHe2FNBDhAjTMYCgU2R 99ephvOSbOV9NTPQWB+uCw== 0000948830-98-000172.txt : 19980702 0000948830-98-000172.hdr.sgml : 19980702 ACCESSION NUMBER: 0000948830-98-000172 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATALINK SYSTEMS CORP /CA/ CENTRAL INDEX KEY: 0000832370 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 353574355 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21069 FILM NUMBER: 98658872 BUSINESS ADDRESS: STREET 1: 1735 TECHNOLOGY WAY STREET 2: STE 790 CITY: SAN JOSE STATE: CA ZIP: 95125 BUSINESS PHONE: 4083671700 MAIL ADDRESS: STREET 1: 2105 HAMILTON AVENUE STREET 2: SUITE 240 CITY: SAN JOSE STATE: CA ZIP: 95125 FORMER COMPANY: FORMER CONFORMED NAME: PLATINUM PRODUCTIONS INC /CO DATE OF NAME CHANGE: 19930803 FORMER COMPANY: FORMER CONFORMED NAME: LORD ABBOTT INC DATE OF NAME CHANGE: 19920703 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: March 31, 1998 Commission file number: 0-21069 DATALINK SYSTEMS CORPORATION ---------------------------------------------- (Name of small business issuer in its Charter) Nevada 36-3574355 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1735 Technology Drive, Suite 790, San Jose, California 95110 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (408) 367-1700 --------------------------- (Issuer's telephone number) Securities Registered Pursuant to Section 12(b) of the Act: None. Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The Issuer's revenues for its most recent fiscal year were $962,461. As of May 18, 1998, 2,018,293 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the shares held by non-affiliates was approximately $8,210,157. DOCUMENTS INCORPORATED BY REFERENCE: None. Transitional Small Business Disclosure Format (check one): Yes __ No X PART I ITEM 1. DESCRIPTION OF BUSINESS. BACKGROUND Datalink Systems Corporation (the "Company") was formed under the laws of the State of Colorado on August 15, 1986, for the purpose of creating a corporate vehicle to seek and acquire a business opportunity. On June 19, 1996, the Company changed its name from Lord Abbott, Inc. to Datalink Systems Corporation, effected a one for three hundred reverse split, and changed its domicile to Nevada. In August of 1988, the Company completed a public offering in which it received net proceeds of approximately $240,000. On June 27, 1996, the Company issued 1,646,532 shares (as adjusted for the 1 for 10 reverse split effective on February 9, 1998) of its $0.01 par value Common Stock to the holders of 100% of the outstanding Common Stock of Datalink Communications Corporation ("DCC") in an exchange transaction in which DSC became a wholly owned subsidiary of the Company. On November 5, 1997, the Company completed the sale of units of the Company's Series A Convertible Preferred Stock. The units were sold in a private placement pursuant to an agreement with an investment banking firm. A total of 68.5 units were sold at a cost of $150,000 per unit for total gross proceeds of $10,275,000. Each unit consisted of 40,000 shares of Preferred Stock, par value $0.01, and each share of Preferred Stock is now convertible into one share of Common Stock. Also included with each unit was a detachable Common Stock purchase warrant to purchase 20,000 shares of the Company's Common Stock at a purchase price of $5.00 per share. The Company received approximately $8.0 million in cash, net of expenses, and $1.05 million in a note receivable from an officer of the Company. Expenses and commissions related to the private placement totaled approximately $1.3 million. On January 8, 1998, shareholders holding 10,582,523 shares (pre-split) of the Company's $.001 par value Common Stock (the "Common Stock"), and 141,558 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock"), signed written consents approving a one for ten (1 for 10) reverse split of the Company's outstanding Common Stock and an increase in the number of shares of Common Stock which may be acquired upon the exercise of options under the Company's 1996 Stock Option Plan from 300,000 to 500,000 after the reverse split. On January 8, 1998, there were 20,182,925 shares of Common Stock issued and outstanding, and 2,740,000 shares of Preferred Stock outstanding. On January 15, 1998 the Board of Directors of the Company approved a 1 for 10 reverse stock split. The 1 for 10 reverse stock split was effected on February 9, 1998, and applied to all shareholders of record. Subsequent to the split the number of shares of Common Stock into which the Preferred Stock could be converted was reduced from 27,400,000 to 2,740,000, and the number of shares of Common Stock issued and outstanding was 2,018,293. All financial data and share data in this Form 10-KSB give retroactive effect to this split, unless otherwise indicated. 2 Unless the context otherwise requires, the term "Company" as used herein refers to Datalink Systems Corporation and its wholly owned subsidiaries Datalink Communications Corporation, and DSC Datalink Systems Corporation. The Company is in the business of developing and marketing information services for business and personal use, utilizing wireless and other emerging information delivery technologies. The Company has developed an information filtering, matching and messaging software engine which is utilized in each of the Company's services. DESCRIPTION OF BUSINESS GENERAL Except for the historical information contained herein, this Report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section under "General" and "Risk Factors" as well as in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company is a Silicon Valley based information service company using proprietary intelligent agent technology to link the Internet to wireless communications technologies. The Company provides a new way to access, receive and send information with a complete line of Internet enabled services for the paging, PCS and digital cellular industries. The Company's technology combines features from Yahoo and PointCast and expands them to an Internet to Wireless platform. The Company has been featured on CNBC, CNN and ABC, and received SmartMoney Magazine's award as the number one wireless service of its kind. The Company's Internet to Wireless technology delivers both Internet and telecommunications technologies to the consumer. The ability to request information, search a database and receive the information back on the handset or pager can add value to information because the consumers receive the exact content that is personal and important to them, whether they want it instantly, scheduled for later or triggered by a defined event. The Company's services are used by consumers and professionals at home, on the road and in the office. INDUSTRY BACKGROUND With the current growth of digital technology such as personal communications services (PCS), there will be continued demand for communications with data features and faster and easier access to information. The Company has both the technology and capability to become a major contender in providing information services to this market. The Pelorus Group forecasts that with the increase in mobile workers there will be a significant increase in demand for wireless data services. They predict the number of mobile workers will increase from 40.5 million today to 62.5 million workers by 2001. By the year 2002, the Strategic Group projects there will be over 500 million cellular and PCS subscribers worldwide, more than tripling the end-year 1996 cellular and PCS subscriber base of nearly 140 million. This projection contends that there is considerable pent-up demand for wireless services. For example, of 871 non-cellular users surveyed, 24% said they wished they had wireless of any form. And, within that group, 16% said they 3 are considering a wireless purchase, such as cellular or two-way messaging via PCS. The Pelorus Group corroborates the Yankee Group's predictions. Currently, according to the Pelorus Group, the total number of all business subscriptions in wireless data communications is 23 million subscribers. This is further divided into 19 million business subscribers for pagers (alerting only); 1.4 million for text messaging (short text messages on alphanumeric pagers); 680,000 data users (a subset of cellular users); 489,000 specialized data networks; and 1.45 million corporate private networks. The total 1995 revenue base for wireless data was nearly $2.5 billion. One-way paging was $1.7 billion (or 68% of the total). Messaging-computing support was $536 million (21%) and private networks accounted for 11%. According to the Strategic Group, wireless e-mail subscribers will grow from an estimated 1.5 million in 1997 to 15.6 million by the year 2001. The Group said 72% of wireless users and 40% of nonusers are interested in two-way wireless e-mail. This, according to the study, represents a total market potential of 44.3 million users. Wireless technology breaks down into one-way data, and two-way voice and/or data communications. One-way communications is best typified by current paging services. Some 40 million Americans carry pagers today, with more than half of those consumers using pagers for personal reasons. Opportunities also exist for the Company to deliver its services using a variety of other existing and future personal communications technologies. New services and enhanced versions of the Company s initial services will be subsequently offered, and will utilize the capabilities of future one-way and two-way mobile data technologies such as Digital Cellular Short Message Service (SMS), PCS, NPCS, GSM, digital cellular, Addressable Cable TV and other emerging communications technologies as they become available. Future technology developments in the wireless messaging industry are expected to evolve and drive subscriber growth as users demand more sophisticated services and devices. Wireless technology breaks down into one-way and two-way communications. One-way communications is best typified by paging services. Industry sources indicate that there are approximately 40 million pagers in service in the United States--representing a penetration rate in excess of 15% of the population. While paging has been historically a one-way communications service, technology advances are now providing two-way capability for wireless messaging. In 1994, the FCC enhanced the potential for two-way messaging by allocating and auctioning new frequencies for two-way paging services. With the advent of two-way technology, the opportunity exists for the development of two-way messaging products and services that will include inexpensive stored voice and data acknowledgment paging services that complement the cellular and broadband personal communication services offerings. It is expected that the enhanced functionality of two-way messaging will attract new subscribers through value-added services such as voice messaging, wireless origination and delivery of e-mail, integration of wireless devices into corporate wide area and local area networks, database access and transaction services. The wireless industry in general and wireless messaging in particular are expected to experience significant subscriber growth into the next decade. 4 RISK FACTORS Shareholders or investors in shares of the Company's Common Stock should consider the following risk factors, in addition to other information in this Report. 1. LIMITED OPERATING HISTORY, OPERATING LOSSES AND FLUCTUATIONS. The Company's operating results historically have been, and may continue to be, subject to significant quarterly and annual fluctuations. For example, for the year ended March 31, 1998, the Company had a net loss available to common shareholders of approximately $14,738,804 and had an accumulated deficit of approximately $21,674,410. As a result, the Company's operating results in any quarter may not be indicative of its future performance. Factors affecting operating results include: market acceptance of new products; timing of significant orders; changes in pricing by the Company or its competitors; timing of product announcements by the Company, its customers or its competitors; order cancellations, increases in production and engineering costs associated with new products. The impact of these and other factors on the Company's revenues and operating results in any future period cannot be forecasted with certainty. The Company's expense levels are based, in part, on its expectations as to future revenues. Management anticipates that the Company's average monthly revenue per subscription will decline in the foreseeable future due to increased competition and a higher mix of subscribers added through third party resellers. 2. RESEARCH AND DEVELOPMENT EXPENDITURES. The Company expects that its net sales of existing information services may achieve approximate break-even within the next eighteen months. However, any positive cash flow from the Company's existing information services will be substantially used to fund development of the Company's next generation of information services, including without limitation, adapting existing information services to two-way messaging technology. There can be no assurance that revenue growth will be sufficient to fund research and development activities of the Company. Any failure to achieve revenue projections will have a material adverse effect on the Company's business, operating results and financial condition. Consequently, there can be no assurance that the Company's consolidated operations will ever become profitable. 3. NO ASSURANCE THAT GROWTH STRATEGY WILL BE ACHIEVED. The Company has recently commenced operations in the United States and as of April 30, 1998 had a customer base of approximately 3,000 users. The Company anticipates it will be profitable if it can expand its customer base to 10,000 users. However, there can be no assurances the Company can achieve the desired growth. 4. FUTURE CAPITAL NEEDS. The Company's capital requirements will depend on numerous factors, including the progress of the Company's research and development efforts with regard to next generation information services, market acceptance of the Company's products, and resources the Company devotes to marketing and distribution of its products. The Company's capital requirements will also depend on the extent of the resources required to expand engineering and development capacity and facilities, the extent to which the Company generates market acceptance and demand, and other factors. The timing and amount of such capital requirements cannot accurately be predicted. The Company may be required to raise additional funds through private or public financing, collaborative arrangements or other relationships. There can be no assurance that the Company will not require additional funding or that such additional funding, if required, will be 5 available on terms attractive to the Company, if at all. Additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements may require the Company to relinquish rights to certain of its technologies, products or marketing territories. 5. MARKET ACCEPTANCE. As stated above, the Company's customer base in the United States was approximately 3,000 on April 30, 1998. The Company's success will be dependent upon the consumers and third party resellers' active acceptance of the current information technology as developed by the Company and future generations developed by the Company. The Company is unable to predict how quickly, if at all, its products will be accepted. Any delay in market acceptance may have a material adverse effect on the Company's business, operating results and financial condition. 6. INTENSE COMPETITION. The telecommunications and information services industry is a very competitive industry, and the Company will be competing with larger companies with greater resources. The telecommunication and information services industry is characterized by rapid technological progress and intense competition from numerous organizations. New developments are expected to continue at a rapid pace. Many of the Company's competitors have significantly greater research and development, marketing, financial and human resources than the Company and represent significant long-term competition. If any of such competitors were to devote additional resources to the wireless information business or focus its strategy on the Company's marketing and product niches, the Company's results of operations could be adversely affected. There can be no assurance that in the future the Company will be able to develop and market products on a timely basis with sufficient features in order to remain competitive. Furthermore, there can be no assurance that other current and potential customers will not acquire or develop capacity to compete directly with the Company. Any such factors may have a material adverse effect on the Company's business, operating results and financial condition. Continuing technological advances in the communications industry and regulatory and legislative developments make it impossible to predict the extent of future competition in the businesses in which the Company operates. Such technological advances and regulatory and legislative developments may, for example, make available other alternatives to the services provided by the Company, thereby creating additional sources of competition. Certain competitors may also be able to use their substantial financial resources to increase the already substantial pricing competition in the markets in which the Company operates, which may have an adverse effect on the Company's results of operations. There can be no assurance that the Company's competitors will not succeed in developing services which are more effective than those developed by the Company or which would render the Company's technology and products less competitive or even obsolete. 7. ADVERSE EFFECT OF SUBSCRIBER DISCONNECTIONS. The Company expects subscriber turnover as subscribers cancel for various reasons. The results of operations of information service providers such as the Company are significantly adversely affected by subscriber disconnections. In order to realize net growth in active subscribers, disconnected users must be replaced, and additional users must be added. However, the sales and marketing costs associated with attracting new subscribers are substantial relative to the costs of providing service to existing customers, and expenses associated with each new subscription exceed the sales price and service initiation fee 6 received by the Company. There can be no assurance that the Company can replace subscribers that discontinue service and as such the loss of subscribers and the uncertainty regarding attracting and retaining new subscribers may have a material adverse effect on the Company's business, operating results and financial condition. 8. ABILITY TO DEVELOP NEW PRODUCTS AND TECHNOLOGICAL CHANGES. The markets served by the Company are characterized by rapid technological change resulting in dynamic customer demands and frequent new product and service introductions. The Company's markets can change rapidly as a result of innovation in computer hardware, software and communication technology. The Company's future results will depend in part on its ability to make timely and cost-effective enhancements and additions to its technology and introduce new services that meet customer demands. Maintaining flexibility to respond to technological and market dynamics may require substantial expenditures. An integral part of the Company's technology has been its proprietary software. Early releases of software often contain errors or defects. There can be no assurance that, despite extensive testing by the Company, errors will not be found in the Company's new product releases and services prior to or after commencement of commercial deployment, resulting in product redevelopment costs and loss of, or delay in, market acceptance. Once these products, processes and initiatives are introduced, no assurance can be given that they will be generally accepted and used, or that they will fill the strategic role that the Company intends for them. 9. DEPENDENCE ON KEY PERSONNEL. Since the first fiscal quarter of 1997, the Company has experienced a significant expansion in its overall level of business, including research and development, marketing, technical support and sales. This expansion in the scope of the Company's business and operations has resulted in a need for significant investment in infrastructure and systems. The Company's future operating results will therefore depend on its ability to successfully implement operating and financial procedures and controls, to improve coordination among different operating functions, to strengthen management information systems and to continue to hire additional personnel, particularly in its customer service and engineering departments. Although new management has taken actions intended to improve these areas, there can be no assurance that the Company will be able to manage these activities and implement these additional systems and controls successfully, and any failure to do so could have a material adverse effect upon the Company's operating results. In addition, the Company has recently effected changes in its management team. The success of the Company will be dependent, to a significant extent, upon the ability of the management team under the direction of Anthony LaPine to successfully achieve the revenue and performance goals of the Company. There can be no assurance that the Company's new management team and other new personnel can successfully manage the Company's rapidly evolving business, and failure to do so would have a material adverse effect upon the Company's operating results. 10. OWNERSHIP OF MAILXPRESS TECHNOLOGY. On June 14, 1996, the Company entered into an agreement with Shalcor Investments, Inc. ("Shalcor") whereby the Company sold and Shalcor purchased the MailXpress software. On August 21, 1996, the Company entered into an agreement with Shalcor in which Shalcor granted to the Company an exclusive, worldwide right to use, modify and sublicense the MailXpress software in exchange for the management and marketing of the software by the Company. The term of the agreement continues 7 until August 31, 2001, and can be extended for two additional two-year terms. However, Shalcor may terminate the agreement before such time, if the Company is in material default of the agreement and fails to cure such default. Any termination of such agreement could have a material adverse effect on the operations of the Company. 11. OWNERSHIP OF QUOTEXPRESS TECHNOLOGY. On May 6, 1997, the Company entered into an agreement with 605285 Ontario, Inc. ("Ontario "), whereby the Company sold and Ontario purchased QuoteXpress software. Also on May 6, 1997, the Company entered into an agreement with Ontario in which Ontario granted to the Company an exclusive, worldwide right to use, modify and sublicense the QuoteXpress software in exchange for the management and marketing of the software by the Company. The term of the agreement continues until August 31, 2007, and can be extended for two additional two-year terms. However, Ontario may terminate the agreement before such time, if the Company is in material default of the agreement and fails to cure such default. Any termination of such agreement could have a material adverse effect on the operations of the Company. 12. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that the Company will be able to protect its technology adequately or that competitors will not be able to develop similar technology independently. Patents may not be issued with respect to the Company's pending patent applications, and its issued patents may not be sufficiently broad to protect the Company's technology. No assurance can be given that any patent issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide adequate protection to the Company's products. In addition, the Company has only limited patent rights outside the United States, and the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The Company may from time to time be notified by third parties that it may be infringing patents owned by such third parties. If necessary, the Company may have to seek a license under such patent or modify its products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that the Company could so avoid infringement of such patents, in which case the Company's business, operating results and financial condition could be materially adversely affected. 13. LIMITED PUBLIC MARKET FOR COMPANY'S COMMON STOCK. Although there presently exists a limited market for the Company's Common Stock, there can be no assurance that the market will become more active or that the market can be sustained. The investment community could show little or no interest in the Company in the future. As a result of this limited liquidity purchasers of the Company's securities may have difficulty in selling such securities should they desire to do so. The Common Stock currently trades on the NASD's Bulletin Board. The Company has applied for listing on the NASDAQ Small Cap Market and is currently undergoing a detailed review by the NASDAQ Listings Qualifications Board. 14. DIVIDENDS. No dividend has been paid on the Common Stock since inception and none is contemplated at any time in the foreseeable future. 8 15. SHARES ELIGIBLE FOR FUTURE SALE. Of the shares of the Company's Common Stock outstanding, 1,673,868 are "restricted securities" and under certain circumstances may in the future be sold in compliance with Rule 144 adopted under the Securities Act of 1933, as amended. Future sales of those shares under Rule 144 could depress the market price of the Common Stock in any market which may exist. 16. PREFERRED STOCK. The Company is authorized to issue 500,000 shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued in series from time to time with such designation, rights, preferences and limitations as the Board of Directors of the Company may determine by resolution. The potential exists, therefore, that Preferred Stock might be issued which would grant dividend preferences and liquidation preferences to preferred shareholders over common shareholders. Unless the nature of a particular transaction and applicable statutes require such approval, the Board of Directors has the authority to issue these shares without shareholder approval. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company without any further action by shareholders. There are currently 274,000 shares of Preferred Stock outstanding convertible into 274,000 shares of Common Stock. THE BUSINESS The Company is in the business of developing and marketing information services for business and personal use, utilizing wireless and other emerging information delivery technologies. The Company has developed an information filtering, matching and messaging software engine which is utilized in each of the Company's services. The Company's current information services include QuoteXpress, SplitXpress, CommodityXpress, MailXpress and MessageX. Four of the Company's five services provide information filtered according to individual customers' criteria, and deliver it using a variety of wireless and wire-line based data communications media; SplitXpress provides a broadcast of corporate action information. Information delivered using wireless media will typically be either short form, or will simply be notification of more lengthy information which will be subsequently delivered using a less costly wire-line connection. Initially, one-way alphanumeric paging will be primarily utilized for wireless delivery, with other wireless data services including two-way messaging and PCS and digital cellular short message service being supported as these technologies are rolled out. Wire-line based delivery mechanisms will include fax and the Internet, with future technologies such as addressable cable TV being supported as they become available. THE PRODUCTS QUOTEXPRESS QuoteXpress provides detailed financial market quotations to investors via an alphanumeric pager within seconds of the specified event. Each end user may customize their service to his or her own portfolio and track a variety of indices or valuation characteristics, trading volume fluctuations, price fluctuations or price floors or ceilings. 9 The QuoteXpress system monitors world wide financial market information, which potentially extends to over 200,000 issues traded on more than 100 exchanges in 30 countries. Monitored data include market index information and business company news from a variety of sources. This information is compared with customer profiles which indicate the specific issues, market indices and other information that each customer wishes to track together with customer specific reporting criteria that trigger the generation and transmission of messages. These reporting criteria include customer specific high and low threshold values, price change values, and daily levels for each issue. When QuoteXpress determines a match between the customer reporting criteria and the financial market information, it automatically transmits a message to the customer's alphanumeric pager. One of the most significant features of QuoteXpress is that the system monitors real time ticker data for all North American exchanges and generates and transmits customer messages virtually instantaneously. As a result, messages are typically received by users close to real time, within less than two minutes of the triggering event being reported on the ticker, with typical reporting delays of less than 120 seconds (this delay being due almost entirely to the message processing delays inherent in most paging and wireless data networks). QuoteXpress quotation messages can include the following information: * Stock symbol * Last trade price * Bid and ask prices * Daily high and low * Volume traded * Daily price change and price change indicator from previous day's close * Last trade size * QuoteXpress message code (indicated why message was sent - i.e. which "alert" threshold was exceeded) * Time of message receipt QuoteXpress also has a feature called "Intra-day." Intra-day provides quote updates at predetermined times throughout the day. A customer can pre-program up to 58 delivery "time windows" associated with a quote. The customer can enter a desired quote symbol and then select from volume, price or daily change for that stock. To date, the principal users of real time financial markets information have been professionals involved in the financial industry such as stock brokers and fund managers. These individuals typically require instant access to a wide variety of data for the purpose of providing price quotations to clients or performing detailed analysis of historical market data. For example, a stock broker is often called upon to provide an instant price quotation to a client for an issue traded on any of the North American, Asian or European markets. It is to meet these requirements, that traditional financial markets information systems such as brokers quotation terminals, have been designed. 10 In contrast, individual investors are typically interested in a relatively small number of issues which comprise their portfolio, and additional issues that they may be considering buying or trading. Rather than requiring price quotations on demand, individual investors require to be alerted whenever unusual price movement occurs, or threshold prices representing buy or sell targets are achieved. QuoteXpress is primarily targeted at the individual investor market sector, and in particular at investors who trade their investments frequently. The Company's research has indicated that a high percentage of the Company's initial customer base will be comprised of upwardly mobile business professionals in the 30 to 50 year age bracket, having above average incomes, who are early adopters of technology. The Company intends to make future enhancements to QuoteXpress that will include (i) the ability to monitor additional financial markets and information, including futures and options; and (ii) enhanced functionality to utilize the capabilities of two-way wireless data and allowing users to adjust their filtering criteria, utilizing their wireless device. COMMODITYXPRESS CommodityXpress tracks commodity feeds from the Chicago Board of Trade, Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Cotton Exchange and the coffee, sugar and cocoa exchange. Real-time alerts are generated when a price for a given commodity exceeds a customer's preprogrammed setting. These "alert" criteria include: - fixed increases or decreases in the price of the commodity - relative high and low market price thresholds of a particular commodity CommodityXpress also has a feature called Intra-day. Intra-day provides commodity updates at predetermined times throughout the day. A customer can preprogram up to 58 delivery "time windows" associated with a commodity. The customer can enter a desired commodity symbol and then select from volume, price or daily change for that commodity. CommodityXpress is primarily targeted at the individual futures trader sector. The customer base is comprised of mobile professionals between 30 to 50 years of age with above average incomes. SPLITXPRESS SplitXpress is a monitoring tool that notifies a customer, in real-time, of stock split news, buybacks, takeovers, mergers and surprise earnings announcements and more. The system utilizes advanced computer algorithms to search for major market news and, using state-of-the-art satellite technology, sends the information to a customer's alphanumeric pager or PCS phone. Target customers of SplitXpress are the QuoteXpress and CommodityXpress segments combined. MAILXPRESS MailXpress caters specifically to e-mail users, and allows an e-mail user to be notified of incoming computer mail via an alphanumeric pager. The service also allows a customer to filter incoming e-mail, so that he or she is 11 only notified of mail that meets defined criteria such as the name of the sender, subject matter, etc. MailXpress also offers the ability for users to retrieve their e-mail by having it sent to a fax machine or by using the world wide web. The Company currently offers two versions of MailXpress--the MailXpress Alphanumeric and MailXpress Numeric. MAILXPRESS ALPHANUMERIC is a wireless communication service that alerts the customer of critical e-mail via their alphanumeric pager or PCS phone. MailXpress Alphanumeric provides a filtering system which allows the end user to select desired messaging format and criteria for alerts. MailXpress Alphanumeric is also designed to designate the subscriber a new MailXpress address or the option of utilizing their existing e-mail address. When retrieving e-mail, the subscriber can receive the complete text of the e-mail from any fax machine or obtain a text-to-voice reading from any touch-tone phone. MAILXPRESS NUMERIC alerts the customer of critical e-mail via their numeric pager. MailXpress Numeric provides a filtering system which allows the end user to select desires messaging format and criteria for alerts. Like the alphanumeric version, MailXpress Numeric is designed to designate the subscriber a new MailXpress address or the option of utilizing their existing e-mail address. When retrieving e-mail, the subscriber can receive the complete text of the e-mail from any fax machine or obtain a text-to-voice reading from any touch-tone phone. The Company intends to develop additional functionality for MailXpress, including (i) the ability for users to adjust their e-mail filtering criteria using their wireless device; and (ii) the ability for users to request that a portion or the entire text of an e-mail message be delivered directly to their wireless device. MESSAGEX. MessageX allows anyone with Internet access to send text messages directly to a MessageX user's alphanumeric pager or PCS phone. The sender does not need to know complex account numbers, PIN numbers or access codes. By eliminating the requirement of the sender to know PIN numbers or carrier specific message sending details, MessageX greatly simplifies the process of sending messages to users of PCS phones or pagers. All the sender needs to know is the MessageX user's e-mail address. MessageX uses proprietary patent pending technology developed by Datalink. FUTURE INFORMATION AND COMMUNICATION SERVICES The Company plans to build on its current product line, and to develop a variety of new one-way and two-way services which offer more capabilities at increasingly lower prices. The Company's core technologies have been developed with the future in mind. The Company's information filtering, matching and messaging software engine, which is utilized in each of the Company's services, has been developed in a manner to facilitate development of a variety of one-way and two-way information services. As a result, the Company is able to develop new information systems in significantly less time than if such systems were designed from the conceptual stage. 12 The Company has a variety of future products planned or under development, which are designed to utilize one and two-way alphanumeric paging technology and other two-way wireless technologies as they become available for the consumer market. These products could address a variety of areas including the following: * Additional financial markets information including futures, options and currencies * Company news * Weather reports including general and specialty weather information for a variety of areas including agriculture and aviation * General news clipping notification and fax-back or e-mail (Internet) services * Horse racing odds and results * General sports results and odds * Local entertainment information * General life style information OWNERSHIP OF MAILXPRESS TECHNOLOGY On June 14, 1996, the Company entered into an agreement with Shalcor Investments, Inc. ("Shalcor") whereby the Company sold and Shalcor purchased the MailXpress software. On August 21, 1996, the Company entered into an agreement with Shalcor in which Shalcor granted to the Company an exclusive, worldwide right to use, modify and sublicense the MailXpress software in exchange for the management and marketing of the software by the Company. The term of the agreement continues until August 31, 2001, and can be extended for two additional two-year terms. However, Shalcor may terminate the agreement before such time, if the Company is in material default of the agreement and fails to cure such default. Any termination of such agreement could have a material adverse effect on the operations of the Company. OWNERSHIP OF QUOTEXPRESS On May 6, 1997, the Company entered into an agreement with 605285 Ontario, Inc. ("Ontario"), whereby the Company sold and Ontario purchased QuoteXpress software. Also on May 6, 1997, the Company entered into an agreement with Ontario in which Ontario granted to the Company an exclusive, worldwide right to use, modify and sublicense the QuoteXpress software in exchange for the management and marketing of the software by the Company. The term of the agreement continues until August 31, 2007, and can be extended for two additional two-year terms. However, Ontario may terminate the agreement before such time, if the Company is in material default of the agreement and fails to cure such default. Any termination of such agreement could have a material adverse effect on the operations of the Company. SALES AND MARKETING STRATEGY The Company's customers include individuals, large and small companies, and other organizations who have a need for timely information -- while still 13 retaining mobility and accessibility to complete their routine activities. This information falls into several broad categories, including: - FINANCIAL INFORMATION SERVICES, targeted at professionals and individual investors interested in monitoring the financial markets and the stock performance of individual companies. - LIFESTYLE INFORMATION SERVICES, targeted at a broad range of mobile individuals who are interested in lifestyle-oriented information, such as weather forecasts, sports updates, horoscopes and lotteries. - MESSAGING SERVICES, which provides a broad range of mobile individuals the ability to stay in contact with important information, individuals and events. The Company utilizes a number of direct and indirect distribution channels to market its services, including direct response advertising, Internet marketing (through the Company's Internet website) and alliances with a variety of channel partners in the financial information services, stock brokerage, wireless paging, PCS and other defined market segments. Management believes this diversified approach to marketing and sales is necessary for the Company to establish itself and product brands in a rapidly-changing marketplace, and develop a dominant position there. In order to expand its customer base as rapidly as possible, the Company has established, and intends to continue to establish, strategic alliances with key suppliers of complementary products and services to those offered by the Company, and other major suppliers in the wireless communications industry. COMPETITION The Company is participating in a highly competitive industry, with competition from a broad range of both large and small service providers. Certain of the companies have far greater financial, technical and marketing resources than the Company. Industry participants offering a service which competes with QuoteXpress include Data Broadcasting Corporation, Reuters, Intelligent Information Incorporated and Notable Technologies. The Company believes it can distinguish QuoteXpress from competing products based on its unique filtering capabilities and real-time delivery. Industry participants offering a service which competes with MailXpress include Interpage Network Services, InterNet Page, CompuServe, PageMart, Metrocall, CID Technologies, Infinite Technologies, Innosoft International, Inc., Norwood Ltd. and GTE Socket Communications. EMPLOYEES At March 31, 1998, the Company had 49 full-time employees, approximately 19 of whom were engaged in sales and customer support, 7 in marketing, 8 in finance and administration, and 15 in engineering. No employees of the Company are covered by a collective bargaining agreement. 14 ITEM 2. DESCRIPTION OF PROPERTY. The Company's sales, marketing and customer support facilities are located in San Jose, California. The Company occupies a 6,000 square foot headquarters facility under a lease which expires on August 31, 2002. The monthly rent for this facility is approximately $17,000. The Company's research and development group is located in Vancouver, British Columbia, where the Company leases approximately 2,200 square feet for a monthly rent of approximately $5,000 under a lease which expires August 31, 2000. The rent for the Vancouver office increases approximately 10% per year. On January 2, 1997, the Company entered into a three year lease with Mr. LaPine and his wife whereby the Company leases from the LaPine's 4,000 square feet of office space located in the LaPine's home at an annual rate of $100,000 or $8,333.37 per month. The lease terminates if Mr. LaPine's employment with the Company is terminated. The Company believes its existing facilities will be adequate to meet the Company's needs for the foreseeable future, however, the Company anticipates further expansion and development within its space to accommodate its increased activities. Should the Company need additional space, management believes it will be able to secure such additional space at commercially reasonable rates. ITEM 3. LEGAL PROCEEDINGS. There are no pending legal proceedings in which the Company is a party, and the Company is not aware of any threatened legal proceedings involving the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On January 8, 1998, shareholders holding 10,582,523 shares (pre-split) of the Company's $.001 par value Common Stock (the "Common Stock"), and 141,558 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock"), signed written consents approving a one for ten (1 for 10) reverse split of the Company's outstanding Common Stock and an increase in the number of shares of Common Stock which may be acquired upon the exercise of options under the Company's 1996 Stock Option Plan from 300,000 to 500,000 after the reverse split. 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET INFORMATION. The Company's Common Stock trades in the over-the-counter market, under the symbol "DASY". The following table sets forth the high and low bid quotations for the Company's Common Stock for the periods indicated as reported by the OTC Bulletin Board since June 25, 1996, when the Company's Common Stock resumed trading for the first time in the last three years. These prices are believed to be inter-dealer quotations and do not include retail mark-ups, mark-downs, or other fees or commissions, and may not necessarily represent actual transactions. QUARTER ENDED HIGH BID LOW BID ------------------ -------- ------- June 30, 1996 $40.00 $30.00 September 30, 1996 $21.25 $21.25 December 31, 1996 $30.125 $25.00 March 31, 1997 $21.88 $20.00 June 30, 1997 $ 5.31 $5.31 September 30, 1997 $ 5.10 $4.70 December 31, 1997 $ 3.55 $3.45 March 31, 1998 $ 6.56 $6.44 A 1 for 10 reverse stock split became effective February 9, 1998. Share bid prices have been adjusted to reflect this split. (b) HOLDERS. As of March 31, 1998, the Company had approximately 876 beneficial holders of the Company's Common Stock. (c) DIVIDENDS. The Company has never paid a cash dividend on its Common Stock and does not expect to pay a cash dividend in the foreseeable future. (d) RECENT SALES OF UNREGISTERED SECURITIES. None. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. RESULTS OF OPERATIONS Net sales increased from $196,891 in 1997 to $962,461 in 1998. The net increase in sales is due to the development of a sales and marketing strategy, the release of new products, and the development of an effective direct sales force. The Company was a development stage company prior to the current fiscal year, and as such was in the process of developing a sales and marketing strategy, establishing a market presence, developing and refining products and creating and developing a direct sales force. The following table illustrates the comparative sales of products by product type for each of the last two years. NET SALES FOR THE FISCAL YEAR ENDED PRODUCT MARCH 31, 1998 MARCH 31, 1997 INCREASE - ----------------- ---------------- ---------------- -------- QuoteXpress $786,974 $ 196,891 $590,083 SplitXpress 166,700 0 166,700 CommoditiesXpress 7,085 0 7,085 Other 1,702 0 1,702 -------- --------- -------- Totals $962,461 $ 196,891 $765,570 16 During the fiscal year the Company recruited executives to complete the sales and marketing strategic plan. These individuals were able to identify key accounts and markets. Together with the engineering and research and development staff, these executives were able to develop a financial product portfolio. The executives also have developed the direct sales force. Advertisements have been developed for the appropriate media. The engineering department has completed development of the SplitXpress and ComomoditiesXpress products, completed an upgrade (in August 1997) of the QuoteXpress product, and has begun development of a number of new products which are scheduled for release in the fiscal year ended March 31, 1999. COST OF REVENUES AND GROSS MARGIN The cost of revenues has increased from the prior year, due to the increase in net sales. Cost of revenues represents the costs necessary to provide the services to customers, and as more services are provided to more customers, the costs of providing those services rises. Examples of this type of costs are the costs to obtain data feeds from the exchanges, costs to maintain the customer service department and pager rental costs. The following table shows the net sales, cost of revenues and gross margin for the years ended March 31, 1998 and 1997: YEARS ENDED MARCH 31, INCREASE 1998 1997 $ % -------- -------- -------- ------- Net sales $962,461 $196,891 $765,570 388.8% Cost of revenues $530,545 $159,058 $371,487 233.6% Gross margin $431,916 $ 37,833 $394,083 1041.6% As indicated in the table, the increase in sales has not caused a proportional increase in the cost of revenues. This is due to the fact that as the Company increases its sales, economies of scale are achieved, and the Company operates more efficiently. In effect, each dollar of net sales costs less to produce. OPERATING EXPENSES: Operating expenses have increased from the prior year. Operating expenses are separated into three categories: research and development, sales and marketing and general and administrative. The following table illustrated the changes in these three categories of operating expenses. YEAR ENDED MARCH 31, INCREASE (DECREASE) DESCRIPTION 1998 1997 $ % - -------------- ---------- ---------- ---------- -------- Research and Development $ 755,080 $ 544,585 $ 210,495 38.7 % Sales and Marketing 2,133,635 1,023,492 1,110,143 108.5 % General and Administrative 2,406,434 3,907,438 (1,501,004) (38.4)% ---------- ---------- ---------- ----- Totals $5,295,149 $5,475,515 $ (180,366) ( 3.3)% 17 Research and development expenses are expenses incurred to develop new products and to develop product enhancements for current products. These expenses are incurred in the Company's engineering offices located in Vancouver B.C. Research and development expenses increased during the fiscal year ended March 31, 1998 when compared to the year ended March 31, 1997. This increase was due to the Company incurring costs for product enhancements for the MailXpress product as well as for the QuoteXpress product. Additionally, SplitXpress and CommoditiesXpress were completed and launched during the fiscal year. A number of products are close to release, and it is anticipated that they will be launched in fiscal year ended March 31, 1999. Sales and marketing expenses consist of costs incurred to market the Company's products through media development, advertising in such media as television and financial publications, attendance at trade shows, and the costs required to develop an effective sales and marketing strategy. Also included in this category are costs for the maintenance of both an inside sales staff, and an outside key account sales force. Sales and marketing costs have increased when compared with the prior fiscal year. Prior to the current fiscal year, the Company had only one product to market and it was marketed through a direct sales force. Advertising was done in a limited number of publications, and a minimal number of employees were maintained in the marketing and sales department. During the fiscal year ended March 31, 1998, the Company hired 14 additional marketing and sales staff, did market research, developed new sales and marketing materials for QuoteXpress and created sales and marketing materials for the new products, SplitXpress and CommoditiesXpress. Television advertising was initiated and additional written publications were selected for advertising. General and administrative expenses are classified as costs incurred in the development and operation of the infrastructure of the organization. These consist of accounting costs, legal costs, rent, depreciation of Company fixed assets, utilities and other overhead related costs. Also included in this category are salaries of all administrative personnel, and the recruitment costs necessary to obtain those individuals. Costs associated with this category have decreased during the fiscal year ended March 31, 1998 when compared to the fiscal year ended March 31, 1997. This change is due to the fact that the Company incurred considerable costs when the administrative function was being established in the fiscal year 1997. These costs were of a one-time nature and included the costs of providing equity related incentives in exchange for services which were charged to general and administrative expense. The reduction in equity related incentives from 1997 to 1998 has been partially offset due to the fact that the Company has grown considerably in the last year, and has moved to a larger facility, hired additional staff and increased expenditures for utilities and other costs related to increases in space and personnel. NON-OPERATING REVENUES AND EXPENSES Non-operating revenues and expenses consist of interest income, amortization of technology advance deferred revenue and owners fees and associated interest income related to the sale of technology. The following table illustrates the changes in the other income (expense) account. 18 YEAR ENDED MARCH 31, INCREASE (DECREASE) DESCRIPTION 1998 1997 $ % - ----------- ------------ ---------- ---------- -------- Owners fee sales of technology $(1,570,000) $(273,750) $1,296,250 473.5% Interest income sales of technology 1,570,000 273,750 1,296,250 473.5% Amortization of technology advance 467,949 136,201 331,748 243.6% Interest income 367,436 136,070 231,366 170.0% Miscellaneous (3,956) (144,000) 140,044 97.3% ----------- --------- ---------- ----- Totals $ 831,429 $ 128,271 $ 703,158 548.2% The Company completed the sale of the QuoteXpress and MailXpress technologies to Canadian corporations. These transactions resulted in an increase in the owners fee and related interest income. The cash received in advance is being treated as a deferred revenue item and being recognized over the life of the agreement. Interest income has increased due to interest earned on cash deposited from the private placement, as well as interest earned on the note receivable from the officer of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company completed a private placement during the fiscal year ended March 31, 1998. As a result of the private placement, the Company netted approximately $8,000,000. The Company also completed the sale of the QuoteXpress product, a provision of which was an up-front payment of approximately $1,300,000 and was recorded as deferred revenue to be recognized over the life of the agreement. The sources and uses of cash during the years ended March 31, 1998 and 1997 are as follows: YEAR ENDED MARCH 31, INCREASE 1998 1997 (DECREASE) ----------- ----------- ----------- Cash used in operating activities $(3,429,486) $(2,491,162) $ 938,324) Cash used in investing activities (349,568) (295,096) (54,472) Cash provided by financing activities 9,216,264 4,345,211 4,871,053 ----------- ----------- ----------- Net increase in cash and cash equivalents $ 5,437,210 $ 1,558,953 $ 3,878,257 As of March 31, 1998 the Company had cash and cash equivalents in the amount of $7,353,719. Working capital has increased from $1,467,334 as of March 31, 1997, to $6,181,340 as of March 31, 1998. The Company has a letter 19 of credit with a bank in the amount of $200,000 and has obtained a credit line subsequent to year end in the amount of $1,000,000. Management believes that it has sufficient working capital for at least the next twelve months. The Company has no material commitments for capital expenditures. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the millenium (year 2000) approaches. The "year 2000" problem is pervasive and complex, as virtually every computer operation will be affected in the same way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test its systems for year 2000 compliance. It is anticipated that all reprogramming efforts will be completed by March 31, 1999, allowing adequate time for testing. This process includes getting confirmations from the Company's primary vendors that plans are being developed or are already in place to address processing of transactions in the year 2000. However, there can be no assurance that the systems of other companies on which the Company's systems rely will also be converted in a timely manner, or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Management is in the process of completing its assessment of the year 2000 compliance costs; however, based on information to date (excluding the possible impact of vendor systems), management does not believe that it will have a material effect on the Company's earnings. ITEM 7. FINANCIAL STATEMENTS. The financial statements are set forth on pages F-1 through F-25 hereto. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required. 20 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The directors and executive officers of the Company and its wholly-owned subsidiary, their ages and positions held in the Company are as follows: NAME AGE POSITIONS AND OFFICES HELD - ----------------- --- ------------------------------------ Anthony N. LaPine 55 President, Chief Executive Officer and Director Thomas C. Bland 45 Chief Financial Officer and Treasurer Sara A. Fiscus 30 Secretary Marshall Geller 58 Director Fred Hoar 50 Director David Ladd 51 Director There is no family relationship between any Director or executive officer of the Company. All Directors and Officers will hold office until the next Annual Meeting of Shareholders. The following sets forth biographical information as to the business experience of each Officer and Director of the Company for at least the past five years. ANTHONY N. LAPINE has served as President, Chief Executive Officer and a Director of the Company since June 27, 1996. Mr. LaPine's career began at IBM in 1964, where his technical achievements earned him several patents and "outstanding contribution" awards. His Data Synchronization invention (Patent 3,701,039) remains the state of the art in today's disk drives. In 1969, he was recruited as one of the founders of Memorex's Equipment Group where he was instrumental in giving birth to the floppy disk drive. He subsequently played a major role in Memorex's turnaround. After Memorex's first billion dollar revenue year, he was instrumental in the sale of Memorex to Burroughs, now Unisys. In 1981 Mr. LaPine was recruited to re-engineer Irwin/Olivetti where he orchestrated the invention of the first removal cartridge tape backup in personal computers. This development opened a new billion dollar market catapulting the company to profitability and an initial public offering. In 1983, he formed LaPine Technology, raising $30 million and launched the new 3-1/2 inch Winchester disk drive technology. He led his company's growth to a profitable $60 million in sales before selling the company to his alliance partners, Prudential and Kyocera, in 1987. In 1987 he formed The LaPine Group, a private investment and turnaround management firm which he owned and operated until December 1994. From December 1994 to June 1996, he served as CEO of Andor International, a company launched by Gene Amdahl. After reorganizing the company, Mr. LaPine negotiated its sale to the Fortel Group where he now serves as Chairman. He lectures in the Graduate School of Business at the University of San Francisco. He has served as Chairman of the Hoover Institution's Council on Economic Development and as a strategic advisor to the Russian government on the transition to capitalism. In 1993, he received the San Jose State University "Alumni Award of Distinction" and is 21 the recipient of the Santa Clara University 1994 "Distinguished Engineering Alumni Award." He received a BSEE Cum Laude from San Jose State University in 1965, an MSEE from Santa Clara University in 1971, and an MBA from the University of San Francisco in 1986. THOMAS C. BLAND has served as the Company's Chief Financial Officer since March 15, 1997, after consulting for the Company since August 1996. Mr. Bland has extensive experience in technology companies. He has served as an advisor, founder and chief financial officer to numerous software, internet and biotechnology companies. He also has extensive experience in mergers and acquisitions, SEC reporting, and start-up financing. Mr. Bland's career began with Ernst & Young and Coopers & Lybrand where he was a Senior Manager, where he specialized in small business and start-up technology companies. He then established his own consulting practice where he served as a contract Chief Financial Officer for software, internet and biotechnology companies which were in the start-up phase of their development. He assisted a number of the company founders and entrepreneurs in writing their business plans, developing their operating systems, drafting their financial projections, establishing product pricing and financial reporting, as well as assisting them in obtaining funding. Mr. Bland has a Bachelor of Science degree from the University of California, a Master of Science from the University of Arizona, and is a Certified Public Accountant. He belongs to numerous professional organizations, including the American Institute of Certified Public Accountants, and the State Society of C.P.A.'s. SARA A. FISCUS has served as the Company's Corporate Secretary since March 31, 1998 and has been the Company's In-House Counsel since October 1, 1997. Prior to joining the Company, Ms. Fiscus served as the Director of International Business Development at PC Quote, Inc. from January 1, 1997 to September 9, 1997 and the Program manager of PC Quote International from February 22, 1996 to December 31, 1996. Ms. Fiscus received her law degree form the University of Wisconsin Law School in August of 1995 while on an exchange program at Diego Portales University in Santiago, Chile and became a member of the Wisconsin State Bar in February of 1996. She received Bachelor of Arts Degrees in English Literature and Classics from the University of Kansas in December of 1990. MARSHALL GELLER has served as a Director of the Company since November 1997. He is currently the Chairman, Chief Executive Officer and Founding Partner of Geller & Friend Capital Partners, Inc., which was formed in November 1995. From 1991 to October 1995, Mr. Geller was the Senior Managing Partner and founder of Golenberg & Geller, Inc., a merchant banking and investment company. From 1988 to 1990, he was the Vice-Chairman of Gruntal & Company, a New York Stock Exchange investment banking firm. From 1967 through 1988, Mr. Geller was Senior Managing Director for Bear Stearns & Company. While with Bear Stearns, Mr. Geller was the Managing Partner in charge of all areas of Corporate Finance, Public Finance, Institutional Equities and Debt for Bear Stearns offices in Los Angeles, San Francisco, Chicago and Hong Kong. He was also a director of Shun Loong-Bear Stearns offices in Los Angeles, San Francisco, Chicago and Hong Kong. He was also director of Shun Loong-Bear Stearns Far East and Sun Hung Kai-Bear Stearns, both leading Chinese investment banking firms. Mr. Geller also helped pioneer Bear Stearns' equity and investment banking business in Japan, Hong Kong and China. 22 Marshall Geller formerly served as Interim Co-chairman of Hexcel Corporation (NYSE: HXL) and is currently on the Board of Directors. Mr. Geller was formerly interim President and Chief Operating Officer of Players International, Inc. (PLAY), and now serves on its board and is Chairman of its Investment Committee. Mr. Geller also serves as Vice Chairman on the board of Value Vision International, Inc. (VVTV), and serves as Chairman of its Investment Cabletel Communications Corporation (AMEX: TTV). He has served on the board of numerous charitable organizations, ranging from the Coro Foundation to the Jewish Federations of Los Angeles, San Francisco and Chicago, to The Center for the Partially Sighted. Mr. Geller has served on the Illinois Task Force on Financial Services, an organization created by Governor James R. Thompson to analyze and suggest needed changes in the State Financial Services Regulations. Mr. Geller also served on former Mayor of Los Angeles, Tom Bradley's Advisory Board to the California Corporation Commissioner, assisting in the study of securities and real estate industries. FRED HOAR has served as a Director of the Company since March 1998. He has over 35 years of experience in public affairs, financial relations and marketing. He has shaped and implemented communications strategies for some of America's seminal technology-based companies, including Apple, Fairchild, Genentech and RCA. Mr. Hoar joined Boston-based Miller Communications, a leading international high-tech public relations agency, in 1989. He subsequently became president of Miller/Shandwick Technologies West, with responsibility for offices in Silicon Valley, Los Angeles and Dallas. In 1997 he was named to the additional position of chairman of Shandwick Technologies. The agency's clients include Compaq Computers, Hewlett Packard, Kodak, Microsoft, Philips Electronics and Xerox. In the early 1980's, Hoar was vice president of communications for Apple Computer, directly involved in taking the company public and launching the Lisa and Macintosh computers. He also served as vice president, communication and marketing services for Fairchild Camera & Instrument; vice president, corporate communications for Genentech; director, worldwide communications for Raychem; and division vice president, public affairs and advertising for RCA. Mr. Hoar holds a B.A. degree cum laude in American history and literature from Harvard College and an M.A. in editorial journalism from the University of Iowa. He began his career with the Associated Press and as an instructor in English and journalism at the University of Northern Iowa. A frequent speaker on marketing, communications and technology, Fred Hoar has addressed such groups as The Conference Board, the Churchill club, the Business Hall of Fame, Technologic Partners, Dataquest, the Semiconductor Industry Association, the AEA, the IABC, Robertson Stephens, Lehman Brothers and the Association for Corporate Growth. Fred Hoar is a trustee of Golden Gate University and a member of the advisory board of the Santa Clara University School of Business and the San Jose Business Journal, the Enterprise Network, the Harvard Club of Silicon Valley and Junior Achievement. DAVID LADD has served as a Director of the Company since March 1998. He is a telecommunications expert, who finds and cultivates new telecommunications companies. He is currently Vice President in the New 23 Ventures Group of Lucent Technologies, where his primary responsibility is to help commercialize Bell Labs technology in partnerships with Silicon Valley venture capitalists and entrepreneurs. He joined Mayfield fund in 1998 as a partner. In addition, he has also held senior management positions at a number of telecommunications companies, including Rolm Corp., Octel Communications Corp. and VMX Inc. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Based solely on a review of Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year, and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year and certain written representations, no persons who were either a Director, Officer or beneficial owner of more than 10% of the Company's Common Stock, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth information regarding the executive compensation for the Company's President and each other Executive Officer who received compensation in excess of $100,000 for the fiscal years ended March 31, 1998 and 1997. No executive officer received any compensation for the year ended March 31, 1996.
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS ----------------------------- --------------------------- SECURI- TIES UNDERLY- OTHER RE- ING ALL ANNUAL STRICTED OPTIONS/ OTHER NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN- POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION - ------------------ ---- -------- ----- ------ -------- -------- ------- ------- Anthony LaPine, 1998 $140,000 -0- 11,000 -0- 200,000 -0- -0- President and 1997 $195,000 -0- 11,000 -0- 70,000 -0- -0- Chairman of the Board Nicholas Miller 1998 $135,000 -0- 9,000 -0- 50,000 -0- -0- 1997 $180,000 -0- 12,000 -0- 70,000 -0- -0- ---------------- Mr. Miller resigned as Director and Secretary of the Company and as Chief Executive Officer, President and Director of DSC DataLink Systems, the Company's wholly owned Canadian subsidiary in February 1998. Represents car allowance. 24 Represents warrants to purchase shares of the Company's stock at $3.75 which vest over a three-year period.
OPTION GRANTS IN LAST FISCAL YEAR There were no option grants made to the above officers during the last fiscal year. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES SECURITIES VALUE OF UNDERLYING UNEXERCISED SHARES UNEXERCISED IN-THE-MONEY ACQUIRED OPTIONS/WARRANTS/ OPTIONS/WARRANTS/ ON SARs AT FY-END SARs AT FY-END EXERCISE EXERCISABLE/ EXERCISABLE/ NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE - --------------- ------- -------- ---------------- ---------------- Anthony LaPine -0- -0- 70,000 / 0 0 / 0 Nicholas Miller -0- -0- 70,000 / 0 0 / 0 EMPLOYMENT AGREEMENTS Effective May 1, 1996, the Company entered into a three year employment agreement with Anthony LaPine, the Company's President, pursuant to which he receives a base salary of $140,000 per year, plus discretionary increases in accordance with the Company's normal review procedures. In addition, subject to the achievement of certain mutually agreed upon performance goals, Mr. LaPine will be paid an annual bonus equal to 86% of his base salary. Mr. LaPine also receives a $1,000 per month car allowance. In the event that the Company terminates this agreement prior to the expiration of the three year term for other than cause or disability, or if Mr. LaPine terminates the agreement for "good reason" (as defined in the agreement), the Company is required to continue paying the salary and other benefits for the remainder of the term of the agreement. Mr. LaPine also receives full health, dental, vision and disability insurance. Concurrently with the execution of the employment agreement, Mr. LaPine entered into a Stock Purchase Agreement pursuant to which he purchased 200,000 shares of the Common Stock of Datalink Communications Corporation (which were later exchanged for 200,000 shares of the Company's Common Stock), and as payment therefor, Mr. LaPine executed a non-recourse promissory note in the amount of $1,500,000. The note bears interest at 5% per annum and the principal plus interest are due on or before April 1, 2001. As security for the note, Mr. LaPine granted the Company a security interest in the 200,000 shares of Common Stock. On May 20, 1996, the Company entered into a Loan Forgiveness Agreement with Mr. LaPine which provided that Mr. LaPine's $1,500,000 promissory note would not be forgiven if Mr. LaPine has continued to serve as the Company's Chief Executive Officer through May 1, 1999, and there are no uncured defaults by Mr. LaPine under his Employment Agreement on May 1, 1999. On January 2, 1997, the Company entered into a three year lease with Mr. LaPine and his wife whereby the Company leases from the LaPine's 4,000 square 25 feet of office space located in the LaPine's home at an annual rate of $100,000 or $8,333.37 per month. The lease terminates if Mr. LaPine's employment with the Company is terminated. The Company and Arundel Holdings, Inc., a company owned by Nicholas R. Miller and his wife, are parties to an Advisor Agreement having a three-year term which commenced May 1, 1996. The Advisor Agreement provided that Mr. Miller would receive a base salary of $180,000 per year, plus discretionary increases in accordance with the Company's normal review procedures. In addition, subject to the achievement of certain mutually agreed upon performance goals, Mr. Miller was to be paid an annual bonus equal to 100% of his base salary. Mr. Miller also received a $1,000 per month car allowance. On September 17, 1996, the Company entered into a Directors Agreement with Mr. Miller pursuant to which Mr. Miller served as a Director of the Company. The agreement provided that the Company would indemnify Mr. Miller to the fullest extent permitted by the Company's Articles of Incorporation and applicable laws. The agreement also granted Mr. Miller options to purchase 70,000 shares of the Company's Common Stock at $4.40 per share. On February 12, 1998, the Company and Mr. Nicholas Miller, former Chairman, terminated the Advisor Agreement with Arundel Holdings, Inc. The termination was effected by a mutual release agreement which provides for the following: a) full payment of past due advisory fees and expenses; b) modification to the warrants granted to Mr. Miller under the November 5, 1997 private placement so that Mr. Miller is to receive only 50,000 warrants of the 200,000 warrants originally agreed upon. c) continuance until April 30, 1999 of Mr. Miller's right to exercise the 70,000 shares in his option grant. EMPLOYEE STOCK OPTION PLAN During June 1996, the Board of Directors adopted the Employee Stock Option Plan (the "Plan") which was approved by the Company's shareholders on June 14, 1996. The Plan initially authorized the issuance of options to purchase up to 300,000 shares of the Company's $.01 par value Common Stock, and was amended on January 8, 1998 to authorize options to purchase up to 500,000 shares of the Company's $.01 par value Common Stock. The Plan allows the Board to grant stock options from time to time to employees, officers and directors of the Company. The Board has the power to determine at the time the option is granted whether the option will be an Incentive Stock Option (an option which qualifies under Section 422 of the Internal Revenue Code of 1986) or an option which is not an Incentive Stock Option. Vesting provisions are determined by the Board at the time options are granted. The option price for any option will be no less than the fair market value of the Common Stock on the date the option is granted. During the fiscal year ended March 31, 1998, the Company's Board of Directors granted a total of 144,555 options to a total of 35 employees, directors and consultants. 26 On June 17, 1997, the Board of Directors of the Company approved the repricing of Mr. LaPine's and Mr. Miller's outstanding options from an exercise price of $22.00 per share to an exercise price of $4.40 per share. On the same date, the Board also approved the repricing of all of the options held by the other employees of the Company from an exercise price of $20.00 per share to an exercise price of $4.00 per share. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of March 31, 1998, the stock ownership of each person known by the Company to be the beneficial owner of five percent or more of the Company's Common Stock, each director individually, and all officers and directors as a group. Each person has sole voting and investment power over the shares except as noted.
AMOUNT AND NAME AND ADDRESS NATURE OF BENE- PERCENT OF BENEFICIAL OWNERS FICIAL OWNERSHIP OF CLASS - -------------------- ---------------- -------- Anthony LaPine 575,000 24.0% 1735 Technology Drive San Jose, California 95110-1333 Orbis Pension Trustees Ltd. 266,640 11.7% One Connaught Place London, England W11DY J.F. Shea Co. Inc. as Nominee 266,640 11.7% 1997-60 Edmund H. Shea Jr. VP 655 Brea Canyon Road Walnut, CA 91789 Commonwealth Associates 140,000 6.8% 830 Third Avenue New York, NY 10022 Marshall Geller 27,760 1.4% 1735 Technology Drive, Suite 790 San Jose, CA 95110-1333 Fredrick M. Hoar 10,000 * 1735 Technology Drive, Suite 790 San Jose, CA 95110-1333 David Ladd 10,000 * 1735 Technology Drive, Suite 790 San Jose, CA 95110-1333 Nicholas Miller 323,334 14.9% 1590-1500 West Georgia Street Vancouver, B.C. Canada V6G 2Z6 27 Peter A. Allard 324,917 15.3% Seawatch, The Garden St. James, Barbados British West Indies All Officers and Directors 652,760 26.4% as a Group (6 Persons) ___________________ * Less than one percent. Includes 200,000 shares owned directly by Mr. LaPine; 280,000 shares underlying convertible preferred shares; 70,000 shares underlying currently exercisable options held by Mr. LaPine; and 25,000 shares underlying currently exercisable options held by Mr. LaPine's wife, Pamela LaPine. Does not include 340,000 shares underlying warrants which are not exercisable within 60 days. Includes 266,640 shares of Common Stock underlying convertible preferred shares. Does not include 133,320 shares underlying warrants which are not exercisable within 60 days. Includes 266,640 shares of Common Stock underlying convertible preferred shares. Does not include 133,320 shares underlying warrants which are not exercisable within 60 days. Includes 100,000 shares held directly and 40,000 shares underlying convertible preferred stock. Includes 10,000 shares underlying currently exercisable options and 17,760 shares of Common Stock underlying convertible preferred shares. Does not include 18,880 shares underlying warrants which are not exercisable within 60 days. Represents shares underlying currently exercisable options. Includes 94,584 shares held directly by Mr. Miller; 15,000 shares held by Arundel Holdings, a company owned by Mr. Miller and his wife; 93,750 shares held by Mr. Miller's wife; 50,000 shares underlying currently exercisable warrants; and 70,000 shares underlying currently exercisable options. Includes 214,917 shares held directly by Mr. Allard; 10,000 shares held by Euphemia Trust; and 100,000 shares underlying currently exercisable warrants. Includes 30,000 shares underlying currently exercisable options held by other executive officers.
The Company knows of no arrangement or understanding, the operation of which may at a subsequent date result in a change of control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ACQUISITION OF DATALINK COMMUNICATIONS CORPORATION On June 27, 1996, the Company issued 1,646,532 shares of its $0.01 par value Common Stock to the holders of 100% of the outstanding common stock of Datalink Communications Corporation ("DCC") in an exchange transaction in which DSC became a wholly-owned subsidiary of the Company. 28 The stock issuances were made pursuant to an Agreement Concerning the Exchange of Common Stock ("Agreement") between the Company and DSC. The terms of the Agreement were the result of negotiations between the managements of the Company and DCC. However, the Company's Board of Directors did not obtain any independent "fairness" opinion or other evaluation regarding the terms of the Agreement, due to the cost of obtaining such opinions or evaluations. Pursuant to the Agreement, Mark Moldenhauer, the former President and a Director of the Company, sold back to the Company at closing 153,333 shares of the Company's Common Stock for $10,000. Pursuant to the Agreement, at Closing, the Company issued to Westridge Capital Limited, as a finder's fee, a Debenture in the principal amount of $130,000 which was convertible into 130,000 shares of the Company's Common Stock at $1.00 per share. On October 11, 1996, Westridge Capital Limited converted its Debenture into 130,000 shares of the Company's Common Stock. TRANSACTIONS INVOLVING THE COMPANY During July 1996, the Company completed a transaction in which it sold to an unaffiliated investor Peter Allard a Convertible Debenture in the principal amount of $2,000,000. The Debenture matures on July 1, 1998, and is convertible at any time prior thereto into shares of the Company's Common Stock at $20.00 per share. Mr. Allard was also issued a warrant to purchase up to 100,000 shares of the Company's Common Stock at $25.00 per share at any time prior to July 15, 1998. Mr. Allard also received certain registration rights. On October 14, 1996, Peter Allard exercised his right to convert the Debentures and the Company issued for 100,000 shares of its Common Stock. In connection with the closing of the Peter Allard transaction in July 1996, the Company issued 10,000 shares of its Common Stock to the Euphemia Trust for services rendered in connection with the transaction. Peter Allard beneficially owns the shares issued to Euphemia Trust. In September 1997, the Company entered into a settlement agreement with Peter Allard which recomputed the stock issued to Mr. Allard in the July 1996 Convertible Debenture. The settlement agreement provided for the issuance of an additional 10,000 shares of the Company's fully-paid non-assessable Common Stock and a five year warrant, commencing on December 1, 1997, to purchase 10,000 shares of the Company's Common Stock at $3.75 per share. In August 1997, the Board of Directors approved the issuance of warrants to Anthony N. LaPine and Nicholas R. Miller as of the Initial Closing Date of the private offering of Series A Convertible Preferred Stock and Warrants. Mr. LaPine received warrants to purchase 200,000 shares of Common Stock at $3.75 per share. These will vest over a three-year period in equal installments of one-third of the total shares on each anniversary of the date of grant, and expire five years from the Initial Closing of the Offering. Mr. Miller received Warrants to purchase 200,000 shares of Common Stock at $3.75 per share; however, the number of Warrants was subsequently reduced to 50,000 when Mr. Miller's Advisory Agreement was terminated. The above Warrants were approved pursuant to the requirements of the Company's letter of intent with the placement agent for the private offering. Anthony LaPine purchased seven (7) Units in the Company's 1997 private offering in exchange for a promissory note in the amount of $1,050,000 payable to the Company and secured by certain of Mr. LaPine's assets other than his personal residence and contents. The 7 Units included a total of 280,000 shares of preferred stock and 140,000 Warrants. 29 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) 3. EXHIBITS. EXHIBIT NUMBER DESCRIPTION LOCATION - ------- ----------- -------- 3 Articles of Incorporation and Incorporated by reference to Bylaws Exhibit Nos. 2 and 3 to the Registrant's Form 8-A filed on July 22, 1996 (No. 0-21069) 10.1 Agreement Concerning the Incorporated by reference to Exchange of Common Stock Exhibit No. 10 to the Regis- Between Datalink Systems trant's Form 8-K dated June 27, Corporation and Datalink 1996 Communications Corporation 10.2 Application Software Purchase Incorporated by reference to Agreement between Datalink Exhibit No. 10.1 to the Regis- Systems Corporation and trant's Form 8-K dated August Shalcor Investments 26, 1996 10.3 Management and Marketing Incorporated by reference to Agreement between Datalink Exhibit No. 10.2 to the Regis- Systems Corporation and trant's Form 8-K dated August Shalcor Investments 26, 1996 10.4 8% Secured Term Note Incorporated by reference to Exhibit No. 10.3 to the Regis- trant's Form 8-K dated August 26, 1996 10.5 Employment Agreement with Incorporated by reference to Nicholas Miller dated May 1, Exhibit 10.5 to the Regis- 1996 trant's Form 10-K dated March 31, 1997 10.6 Employment Agreement with Anthony Incorporated by reference to LaPine dated May 1, 1996 Exhibit 10.6 to the Regis- trant's Form 10-K dated March 31, 1997 10.7 Amendment No. 1 to Employment Incorporated by reference to Agreement with Anthony LaPine Exhibit 10.7 to the Regis- dated January 1, 1997 trant's Form 10-K dated March 31, 1997 10.8 Lease Agreement with Anthony Incorporated by reference to and Pamela LaPine dated January 2, Exhibit 10.8 to the Regis- 1997 trant's Form 10-K dated March 31, 1997 30 10.9 Loan Forgiveness Agreement with Incorporated by reference to Anthony LaPine dated June 28, 1996 Exhibit 10.9 to the Regis- trant's Form 10-K dated March 31, 1997 10.10 Directors Agreement with Nicholas Incorporated by reference to Miller dated September 17, 1996 Exhibit 10.10 to the Regis- trant's Form 10-K dated March 31, 1997 10.11 Application Software Purchase Incorporated by reference to Agreement between Datalink Systems Exhibit 10.1 to the Regis- Corporation and 605285 Ontario Inc. Form 8-K dated May 6, 1997 10.12 Management and Marketing Agreement Incorporated by reference to between Datalink Systems Corpora- reference to Exhibit 10.2 tion and 6045285 Ontario to the Registrant's Form 8-K dated May 6, 1997 10.13 6% Secured Term Note Incorporated by reference to Exhibit No. 10.3 to the Registrant's Form 8-K dated May 6, 1997 22 Subsidiaries of the Registrant Incorporated by reference to Exhibit 22 to the Registrant's Form 10-K dated March 31, 1997 24.1 Consent of Coopers & Lybrand, LLP Filed electronically herewith 27 Financial Data Schedule Filed electronically herewith (b) REPORTS ON FORM 8-K. None. 31 INDEX TO FINANCIAL STATEMENTS PAGE(S) Report of Independent Accountants . . . . . . . . . . . . . . F-2 Financial Statements: Consolidated Balance Sheets, March 31, 1998 and 1997 . . F-3 Consolidated Statements of Operations for the years ended March 31, 1998 and 1997. . . . . . . . . . . . . . F-4 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1998 and 1997. . . . . . . F-5 - F-8 Consolidated Statements of Cash Flows for the years ended March 31, 1998 and 1997. . . . . . . . . . . . . . F-9 - F-10 Notes to Financial Statements. . . . . . . . . . . . . . F-11 - F-25 F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of Datalink Systems Corporation: We have audited the accompanying consolidated balance sheets of Datalink Systems Corporation and its subsidiary as of March 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Datalink Systems Corporation as of March 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. San Jose, California May 7, 1998 F-2 DATALINK SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS March 31, ASSETS 1998 1997 CURRENT ASSETS: ----------- ----------- Cash and cash equivalents $ 7,353,719 $ 1,916,509 Trade receivables (net of allowance for doubtful accounts of $9,800 in 1998 and $1,500 in 1997) 65,241 49,685 Other receivables 500 4,733 Prepaid expenses 42,537 5,432 ----------- ----------- Total current assets 7,461,997 1,976,359 Property and equipment, net 629,696 321,368 Other assets 23,625 14,741 ----------- ----------- Total assets $ 8,115,318 $ 2,312,468 =========== =========== LIABILITIES Current liabilities: Bank overdraft $ - 21,521 Accounts payable 236,469 131,188 Accrued liabilities 300,450 93,024 Deferred revenue 269,538 - Current portion of capital lease obligation 13,699 - Current portion of advances on technology sales 460,501 263,292 ----------- ----------- Total current liabilities 1,280,657 509,025 Advances on technology sales, net of current portion 2,162,628 1,531,154 Obligations under capital leases, net of current portion 62,640 - ----------- ----------- Total liabilities 3,505,925 2,040,179 =========== =========== Commitments and contingencies (Notes 7, 13 and 15) SHAREHOLDERS' EQUITY: Preferred Stock: $.01 par value: Authorized: 500,000 shares in 1998 and 1997; Issued and outstanding: 274,000 in 1998 and none in 1997 2,740 - Common Stock: $.01 par value in 1998; Authorized: 8,000,000 shares in 1998 and 5,000,000 shares in 1997; issued and outstanding: 2,018,293 shares in 1998 and 1,918,293 shares in 1997 20,183 19,183 Additional paid-in capital 28,007,037 8,335,777 Foreign currency translation adjustment (53,923) (57,655) Notes receivable (1,692,234) (1,089,410) Accumulated deficit (21,674,410) (6,935,606) ----------- ----------- Total shareholders' equity 4,609,393 272,289 ----------- ----------- Total liabilities and shareholders' equity $ 8,115,318 $ 2,312,468 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-3 DATALINK SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended March 31, -------------------------- 1998 1997 ------------ ----------- Revenue $ 962,461 $ 196,891 Cost of revenue (530,545) (159,058) Research and development (755,080) (544,585) Sales and marketing (2,133,635) (1,023,492) General and administrative (2,406,434) (3,907,438) Other income (note 11) 831,429 128,271 ------------ ----------- Net loss $ (4,031,804) $(5,309,411) Deemed dividends on preferred stock (8,083,000) - Beneficial conversion feature of warrants in association with preferred stock (2,624,000) - ------------ ----------- Net loss available to common shareholders $(14,738,804) $(5,309,411) ============ =========== Basic (7.53) (3.01) Diluted (7.53) (3.01) Shares used in per share calculation, Basic and Diluted 1,958,622 1,763,638 The accompanying notes are an integral part of these consolidated financial statements. F-4 DATALINK SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK STOCK ------------------------ -------------------- SUB- SHARES AMOUNT SHARES AMOUNT CRIPTION APIC ----------- ----------- ----------- -------- --------- ---------- Balance at 3/31/1996 - - 1,453,501 $14,535 271,049 $1,638,583 Common stock subscription exercised April, May 1996, $7.50 per share - - 27,105 271 (271,049) 270,778 Shares issued April, May 1996, $7.50 per share - - 35,933 359 - 296,641 Shares issued for finder's fee, May 1996, $7.50 per share - - 100,667 1,007 - 753,993 Shares repurchased in June 1996, $0.10 per share - - (153,333) (1,533) - (8,467) Shares issued for options exer- cised November 1996, to Feb- ruary 1997, $20.00 per share - - 2,720 27 - 54,373 Debentures con- verted to shares (Note 6) - - 240,000 2,400 - 3,397,600 Stock issued for public relations services, Febru- ary 1997, $10.00 per share - - 10,000 100 - 99,900 Compensation ex- pense for options granted (Note 9) - - - - - 152,892 Note receivable, May 1996 (Note 14) - - 200,000 2,000 - 1,568,750 Note receivable amortization - - - - - - Stock issued for services, March, 1997, $22.70 per share - - 1,700 17 - 38,546 Compensation ex- pense - - - - - 72,188 Translation ad- justments - - - - - - Net loss - - - - - - ---------- ----------- ---------- ------- ------- ----------- F-5 Balance at 3/31/1997 - - 1,918,293 $19,183 - $8,335,777 Common Stock issued in ex- change for notes receivable 8/20/1997 - - 10,000 100 - 99,900 Notes receivable canceled and com- mon stock returned 9/23/1997 - - (10,000) (100) - (99,900) Peter Allard is- sued antidilu- tive shares 11/15/1997 - - 100,000 1,000 - 1,000 Notes receivable issued to officer in exchange for preferred shares 28,000 280 - - - 1,049,720 11/5/1997 Preferred shares issued in con- junction with private placement 11/5/1997 246,000 2,460 - - - 7,913,540 Beneficial conver- sion for preferred shareholders - Warrants - - - - - 2,329,000 Beneficial conver- sion for preferred shareholders - Preferred Stock - - - - - 8,083,000 Beneficial conver- sion for Peter Allard - - - - - 295,000 Translation adjust- ment - - - - - - Amortization of Notes receivable - - - - - - Net loss - - - - - - ---------- ----------- ---------- ------- ------- ----------- Balance at 3/31/1998 274,000 $ 2,740 2,018,293 $20,183 - $28,007,037 ========== =========== ========== ======= ======= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 DATALINK SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED NOTES TRANSLATION DEFICIT RECEIVABLE ADJUSTMENT TOTAL ------------- ------------ ----------- ----------- Balance at 3/31/1996 $ (1,626,195) $ - $ 3,185 $ 301,157 Common stock subscription exercised April, May 1996, $.75 per share - - - - Shares issued April, May 1996, $.75 per share - - - 297,000 Shares issued for finder's fee, May 1996, $.75 per share - - - 755,000 Shares repurchased for June 1996, $.01 per share - - - (10,000) Shares issued for options exer- cised November 1996, to Feb- ruary 1997, $2.00 - - - 54,400 per share Debentures con- verted for shares (Note 7) - - - 3,400,000 Stock issued for public relations services, Febru- ary 197, $1.00 per share - - - 100,000 Compensation ex- pense for options granted (Note 10) - - - 152,892 Note receivable, May 1996 (Note 8) - (1,568,750) - 2,000 Note receivable amortization - 479,340 - 479,340 Stock issued for services, March, 1997, $2.27 per share - - - 38,563 Compensation ex- pense - - - 72,188 Translation ad- justments - - (60,840) (60,840) Net loss (5,309,411) - - (5,309,411) ------------ ------------ --------- ------------ F-7 Balance at 3/31/1997 $ (6,935,606) $(1,089,410) $(57,655) $ 272,289 Common Stock issued in ex- change for notes receivable 100,000 8/20/1997 - - - Notes receivable canceled and com- mon stock returned 9/23/1997 - - - (100,000) Peter Allard is- sued antidilu- tive shares 11/15/1997 - - - 2,000 Notes receivable issued to officer in exchange for preferred shares 11/5/1997 - (1,050,000) - - Preferred shares issued in con- junction with private placement 11/5/1997 - - - 7,916,000 Beneficial conver- sion for preferred shareholders - Warrants (2,329,000) - - - Beneficial conver- sion for preferred shareholders - Preferred Stock (8,083,000) - - - Beneficial conver- sion for Peter Allard (295,000) - - - Translation adjust- ment - - 3,732 3,732 Amortization of Notes receivable - 447,176 - 447,176 Net loss for the year (4,031,804) - - (4,031,804) ------------ ------------ --------- ------------ Balance at 3/31/1998 $(21,674,410) $ (1,692,234) $ (53,923) $ 4,609,393
The accompanying notes are an integral part of these consolidated financial statements. F-8 DATALINK SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED MARCH 31, ------------------------ 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $(4,031,804) $(5,309,411) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of technology advance (474,882) (136,201) Depreciation and amortization 570,631 537,413 Common Stock issued for services - 2,388,643 Changes in operating assets and liabilities: Accounts receivable (15,556) (33,623) Other current assets (38,599) 6,002 Accounts payable and accrued liabilities 291,186 129,015 Deferred revenue 269,538 (73,000) ---------- ---------- Net cash used in operating activities (3,429,486) (2,491,162) ---------- ---------- Cash flows from investing activities: Purchase of property and equipment (346,411) (280,355) Deposits (3,157) (14,741) ---------- ---------- Net cash used in investing activities (349,568) (295,096) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of Common Stock - 2,430,564 Net proceeds from the issuance of Preferred Stock 7,918,000 - Repurchase of Common Stock - (10,000) Advance on technology fee 1,303,565 1,924,647 Payments on capital lease (5,301) - ---------- ---------- Net cash provided by financing activities 9,216,264 4,345,211 ---------- ---------- Net increase in cash and cash equivalents 5,437,210 1,558,953 ---------- ---------- Cash and cash equivalents, beginning of year 1,916,509 357,556 ---------- ---------- Cash and cash equivalents, end of year $7,353,719 $1,916,509 ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. F-9 DATALINK SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEAR ENDED MARCH 31, ------------------------ 1998 1997 ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of Common Stock in exchange for services performed -- $ 855,000 Issuance of stock option in exchange for services performed -- 152,892 Issuance of Common Stock in exchange for employee compensation -- 110,751 Common Stock issued in exchange for debentures exercised -- 1,270,000 Issuance of Common Stock in exchange for stock subscription -- 271,049 Foreign currency translation adjustment -- (60,840) Common Stock issued in exchange for note receivable $1,050,000 $1,568,750 Equipment purchased with capital lease 81,640 -- Common Stock issued in accordance with antidilution agreement $ 1,000 -- Beneficial conversion feature for shareholders of Preferred Stock 10,412,000 -- Beneficial conversion feature for shareholders of Common Stock 295,000 -- The accompanying notes are an integral part of these consolidated financial statements. F-10 DATALINK SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY: DataLink Systems Corporation (formerly Lord Abbott, Inc., a publicly traded shell corporation) (the Company), is engaged in providing wireless communication services. On June 27, 1996 the Company completed the acquisition of 100% of the outstanding common stock of Datalink Communication Corporation (DCC) a U.S. corporation in exchange for shares of the Company's Common Stock. The Company issued a total of 1,646,532 shares of its $0.01 par value Common Stock to the shareholders of DCC. For accounting purposes, the acquisition has been treated as the acquisition of the Company by DCC with DCC as the acquiror (reverse acquisition). The historical financial statements prior to June 27, 1996 are those of DCC. Since the Company prior to the reverse acquisition was a public shell corporation no pro-forma information giving effect to the acquisition is required. All shares and per share data have been restated to reflect the stock issuance and stock split. In anticipation of the above acquisition, the Company changed its domicile from the State of Colorado to the State of Nevada, changed its name from Lord Abbott, Inc. to Datalink Systems Corporation, and effected a 1-for-300 reverse stock split. On January 16, 1996, shareholders of DSC Datalink Systems Corporation (a company in the development stage) (a Canadian Corporation) (DSC) exchanged 100% of their shares for 100% of the shares in DCC. As a result, DSC Datalink Systems Corporation became a wholly owned subsidiary company of DCC. For accounting purposes, the acquisition has been treated as the acquisition of DCC by DSC with DSC as the acquiror (reverse acquisition). Prior to the acquisition of DSC, there were no material operations in DCC; consequently the historical information provided covering the period from June 15, 1993 to June 27, 1996 (date of the reverse acquisition) is that of DSC. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects. BASIS OF PRESENTATION: Revenues are deferred until services have been performed, and expenses are recognized when goods have been received or services provided. PRINCIPALS OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary DSC Datalink Systems Corporation. All significant intercompany transactions and balances have been eliminated in consolidation. F-11 USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with original maturities of three months or less from the date of purchase to be cash equivalents. The Company places substantially all of its cash and cash equivalents in a demand deposit account with one bank. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade and other receivables, accounts and notes payable. Trade receivables are with a large number of customers, dispersed across a wide national and Canadian geographic base. The Company extends credit to its customers in the ordinary course of business and periodically reviews the credit levels extended to customers. Provision is made for estimated losses on uncollectible accounts. The Company rents pager inventory principally from one supplier. Management believes that other suppliers could provide similar inventory on comparable terms. A change in supplier, however, could cause a delay and a possible loss of sales, which would affect operating results adversely. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which are generally three to seven years. Maintenance and repairs are charged to expense as incurred; expenditures for additions, improvements and replacements are capitalized. Upon disposal of fixed assets, the accounts are relieved of the related costs and accumulated depreciation and resulting gains or losses are reflected in operations. The Company assesses its ability to recover the net book value of property and equipment. The carrying value of assets determined to be impaired are written down to net realizable value. FOREIGN CURRENCY TRANSLATION: Exchange adjustments resulting from foreign currency transactions are generally recognized in operations where adjustments resulting from translation of financial statements are reflected as a separate component of shareholder's equity. Net foreign currency transaction gains or losses are not material in any of the years presented. F-12 INCOME TAXES: Deferred income taxes have been recorded for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts using enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances reduce deferred tax assets to the amount expected to be realized. REVENUE RECOGNITION: The Company recognizes revenues from transaction fees, monthly charges, and pager rental income from its QuoteXpress, SplitXpress and CommoditiesXpress systems. Revenues are recognized when the services are performed. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of cash and cash equivalents, receivables and payables are a reasonable estimate of their fair value due to their short-term nature. RESEARCH AND DEVELOPMENT EXPENDITURES: Expenditures related to research, design and development of products are charged to product development and engineering expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. At March 31, 1998 and 1997, there were no capitalized software development expenditures since the period between technological feasibility and availability have coincided and products under development have not yet achieved technological feasibility. Research and development expenditures are expensed as incurred. ADVERTISING EXPENDITURES: Advertising expenditures of $1,196,903 and $321,229 in 1998 and 1997 respectively, were charged to operations as incurred. COMPUTATION OF NET INCOME PER SHARE The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which specifies the computation presentation and disclosure requirements for earnings per share. SFAS 128 superseded Accounting Principles Board Opinion No. 15 and became effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 required restatement of all prior-period earnings per share data presented after the effective date. The Company's financial statements have been revised to effect the new standard. RECLASSIFICATIONS: Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. The reclassification has no effect on previously reported net loss or shareholders' equity. F-13 2. RECENT PRONOUNCEMENTS: In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This Statement establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. It does not, however, require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company believes that the adoption of SFAS 130 will have an immateral impact on the financial statements. This Statement is effective for the Company's 1999 fiscal year. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Statement establishes standards for how public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This Statement is effective for the Company's 1999 fiscal year. The Company does not believe it currently has any separately reportable segments. 3. ACCOUNTS RECEIVABLE: Accounts receivable consist principally of balances due from customers, net of allowance for doubtful accounts. The customers are billed through customers' Visa, Mastercard, and American Express accounts. Amounts due from Visa, Mastercard, and American Express were $22,099, $10,947 and $8,442 in 1998, and $30,493, $14,231 and $0 in 1997, respectively. 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following: MARCH 31, 1998 1997 -------- -------- Furniture and fixtures $114,328 $ 71,424 Computer and office equipment 506,470 295,238 Equipment under capital lease 81,640 Software 115,719 14,021 Leasehold improvements 9,423 -------- -------- 818,157 390,106 Less accumulated depreciation and amortization (188,461) (68,738) -------- -------- $629,696 $321,368 ======== ======== F-14 5. SALES OF TECHNOLOGY: Effective August 21, 1996, Datalink completed a transaction with a Canadian corporation (the Buyer) selling the Company's technology for cash and a note under the terms of a sales agreement (sales agreement). At closing for settlement Datalink received approximately $1,095,000, and an additional payment of approximately $1,095,000 was received November 1996, and a note for approximately $26,800,000. The note is due December 31, 2006 and bears interest at 8% per annum. The note is collateralized by the technology. Datalink and the Buyer entered into a "Management and Marketing Agreement" dated August 21, 1996 (the Agreement). The Agreement expires August 31, 2001, and may be extended for two additional two year terms. The extension of the term will be automatic and Datalink or the Buyer during any extension can terminate the agreement with 90 days notice to the other party. The significant terms of the agreement are as follow: Datalink will receive an annual fee of 10% of "Direct Cost Marketing, Distributing and Selling" technology related services, as defined in the Agreement, Datalink receives an exclusive worldwide right to use, modify and sub license the source code for the technology, including application software, intellectual property and documentation, Datalink has first right of refusal in the event the Buyer desires to transfer all or part of the application software, The Buyer will receive, commencing January 1, 1997, an annual "owners fee" of $1,095,000, the owners fee to be applied as follows: pay accrued interest and the excess, if any; a) 60% of the remaining fee applied to the note balance, and b) 40% of the remaining fee paid in cash to the Buyer until the note is paid in full, Buyer will receive the "net revenue less owners fee payable," as defined in the Agreement, related to the technology sold to be applied as follow: a) 60% of the net revenue applied to the note balance, and b) 40% of the net revenue paid in cash to the Buyer until the note is paid in full, and After the note is paid, the "net revenue," as defined in the Agreement, related to the technology sold to be applied as follows: 40% of the net revenue paid in cash to the Buyer, and 60% retained by the Company. Effective May 1997, the Company completed a transaction with a Canadian corporation selling certain other of the Company's technology for cash and a note. At closing, Datalink received approximately $2,900,000, and a note for approximately $10,100,000. The note is due December 31, 2006 and bears interest at 6% per annum. The note is collateralized by the technology. This transaction is accounted for in the same manner as the sale of technology agreement detailed above; the note receivable has not been recorded as it is not expected that the fees and revenues allocated to the buyer will be sufficient to service the note receivable principal and interest payments due to Datalink. The cash received by Datalink has been accounted for under the provisions of the "Emerging Issues Task Force, 88-18: Sales of Future Revenues" (EITF 88-18). It is expected that the owners fees and net revenue allocated to the buyer will not be sufficient to service the note receivable principle and interest payments due Datalink and as such the note has not been recorded. F-15 Based on the criteria included within EITF 88-18, the amounts received under the sales agreement have been included within the balance sheet caption "Advance on Technology Sales" and is being amortized using the interest method over the term of the agreement. (Note 11.) Other income for fiscal years 1998 and 1997 includes as an expense within the caption "Technology Owners Fee" of $1,570,000 and $273,750, representing a portion of the owners fee earned through March 31, 1998 and 1997, respectively. The sale agreement requires that the owners fee be applied to the interest owed by the buyer on the note. Interest, if accrued through March 31, 1998 and 1997 would have approximated $4,000,000 and $1,312,000, respectively. Since it is uncertain whether the interest and principal will be collected over the term of the agreement, interest income on the note has been recognized to the extent of the amounts due under the Technology Owners Fee provision of the sales agreement. (Note 11.) 6. CONVERTIBLE DEBENTURES AND WARRANTS: The Company issued a convertible debenture of $130,000 during fiscal year 1997 as a finders fee which was exercisable into shares of Common Stock. The debenture was subsequently converted into 130,000 shares in October 1996. The Company recorded an expense of $1.17 million associated with the issuance. The Company also issued a convertible debenture in the sum of $2 million which was subsequently converted into 100,000 shares. On July 1, 1996, the Company issued the same investor a warrant to purchase 100,000 shares of Common Stock at $25 per share exercisable at any time prior to July 1, 1998. During the year ended March 31, 1998, the warrants were repriced to $3.75 per share. The Common Stock issued under these agreements were issued pursuant to the exemption from registration under the Securities Act of 1933 (the Securities Act) provided under Regulation S; the Company was a "Reporting Issuer" under the provisions of the Securities Act, as amended. 7. CAPITAL LEASES: The Company has entered into a leasing agreement for certain equipment used in the operation of the Company. The lease has been classified as a capital lease, and is for a five year term, with payments due monthly at an interest rate of 10.45% per annum. Payments, including interest in the initial three years of the lease are approximately $2,000 per month. During the last two years of the lease the payments are reduced to approximately $1,100 per month. The principal portion of obligation under the capital lease for the next five years are as follows: Year ended March 31, 1999 $13,699 2000 15,201 2001 16,868 2002 18,718 2003 11,853 ------- Total $76,339 F-16 8. INCOME TAXES: At March 31, 1998, the Company has approximately $370,000 in Canadian net operating loss carryforwards which expire in the years 2000 through 2004. Net operating loss carryforwards were determined using the applicable statutory rates. The net operating loss carryforward balances vary from the applicable percentages of net loss due to expenses applied under generally accepted accounting principles not deductible for tax purposes. Net operating loss carryforwards available for the Company for U.S. tax purposes are as follows: FEDERAL STATE ------------------------- ------------------------- BALANCE EXPIRATION BALANCE EXPIRATION ---------- ---------- ---------- ---------- $ 980,000 2012 $ 500,000 2002 1,650,000 2013 800,000 2003 ---------- ---------- $2,630,000 $1,300,000 ========== ========== Temporary differences and carryforwards which gave rise to significant portions of deferred tax assets and liabilities are as follows: MARCH 31, MARCH 31, 1998 1997 Deferred tax assets: ---------- --------- Net operating loss carryforwards $4,300,000 $520,000 Less: valuation allowance (4,300,000) (520,000) ---------- --------- $ - $ - ========== ========= In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. The Company has established a valuation allowance to the extent of its deferred tax assets since it is more likely than not that the benefit cannot be realized in the future. 9. SHAREHOLDERS' EQUITY: The Company's authorized capital stock consists of Common Stock and Preferred Stock. On November 5, 1997, the Company completed the sale of units of the Company's Series A Convertible Preferred Stock. The units were sold in a private placement pursuant to an agreement with an investment banking firm. A total of 68.5 units were sold at a cost of $150,000 per unit for total gross proceeds of $10,275,000. Each unit consisted of 40,000 shares of Preferred Stock, par value $0.01, and each share of Preferred Stock is now convertible into one share of Common Stock. Also included with each unit was a detachable Common Stock purchase warrant to purchase 20,000 shares of the Company's Common Stock at a purchase price of $5.00 per share. F-17 The Company received approximately $8.0 million in cash, net of expenses, and $1.05 million in a note receivable from an officer of the Company. Expenses and commissions related to the private placement totaled approximately $1.3 million. On January 8, 1998, shareholders holding 10,582,523 shares (pre-split) of the Company's $.001 par value Common Stock (the "Common Stock"), and 141,558 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock"), signed written consents approving a one for ten (1 for 10) reverse split of the Company's outstanding Common Stock and an increase in the number of shares of Common Stock which may be acquired upon the exercise of options under the Company's 1996 Stock Option Plan from 300,000 to 500,000 after the reverse split. On January 8, 1998, there were 20,182,925 shares of Common Stock issued and outstanding, and 2,740,000 shares of Preferred Stock outstanding. On January 15, 1998 the Board of Directors of the Company approved a 1 for 10 reverse stock split. The 1 for 10 reverse stock split was effected on February 9, 1998, and applied to all shareholders of record. Subsequent to the split the number of shares of Common Stock into which the Preferred Stock could be converted was reduced from 27,400,000 to 2,740,000, and the number of shares of Common Stock issued and outstanding was 2,018,293. All financial data and share data in this Form 10-KSB give retroactive effect to this split, unless otherwise indicated. CONVERTIBLE PREFERRED STOCK: Under the Company's Articles of Incorporation, as amended in February 1998, the Company is authorized to issue 500,000 shares of Preferred Stock, of which 274,000 have been designated as Series A Preferred Stock. DIVIDENDS: The holders of shares of Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, ratably with any declaration or payment of any dividend with holders of the Common Stock or other junior securities of this Corporation, when as and if declared by the Board of Directors, based on the number of shares of Common Stock into which each share of its Series A Convertible Preferred Stock is then convertible. As of March 31, 1998, no dividends have been declared. LIQUIDATION: In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of record of the shares of the Series A Preferred Stock shall be entitled to receive, before and in preference to any distribution or payment of assets of the Company or the proceeds thereof may be made or set apart for the holders of Common Stock or any other security junior to the Series A Preferred Stock in respect of distributions upon liquidation out of the assets of the Corporation legally available for distribution to its stockholders, in an amount in cash equal to $37.5 per share. If, upon such liquidation, the assets of the Corporation available for distribution to the holders of the Series A Preferred Stock and any other series of preferred stock then outstanding ranking on parity with the Series A Preferred Stock upon liquidation ("Parity Stock") shall be insufficient to permit payment in full to the holders of the Series A Preferred Stock and Parity Stock, then the entire assets and funds of the Company legally available for distribution to such holders and the holders of the Parity Stock then outstanding shall be distributed ratable among the holders of the Series A Preferred Stock and Parity Stock based upon the F-18 proportion the total amount distributable on each share upon liquidation bears to the aggregate amount available for distribution on all shares of the Series A Preferred Stock and such Parity Stock, if any. CONVERSION: Each share of Preferred Stock, at the option of the holder, is convertible into a number of fully paid and non-assessable shares of Common Stock as determined by dividing the Preferred Stock issue price of $37.5 by the initial conversion price of $3.75. Conversion is automatic immediately commencing 18 months after the final closing of the Private Placement if the closing price of the Company's Common Stock equals or exceeds $10.00 per share for 30 consecutive trading days and a registration statement covering the shares of Common Stock issuable upon conversion of the Preferred Stock has been declared effective by the Securities and Exchange Commission. REDEMPTION: The Series A Preferred Stock is not redeemable. VOTING RIGHTS: The holder of each share of Preferred Stock is entitled to one vote for each share of Common Stock into which each share of Series A Preferred Stock could be converted. DETACHABLE WARRANTS: The Company has granted the Series A Preferred Stock holders detachable warrants to purchase 137,000 shares of Common Stock. The warrants are exercisable for a period of four years commencing one year after the date of initial closing of the offering at a purchase price of $5.00 per share and expire in November 2002. The warrants are subject to redemption by the Company upon 30 days' prior notice at $5.00 per warrant commencing 18 months after the final closing, provided that the Warrants and the underlying common shares have been registered under the Securities Act and the Common Stock has traded at or above $12.5 per share for 30 consecutive trading days. In connection with the private placement, the placement agent received warrants to purchase 824,383 shares of Common Stock with an exercise price of $3.75. The deemed dividends on the preferred stock of $8,083,000 and on warrants of $2,624,000 issued in conjunction with the private placement, reflect the beneficial conversion feature, which is the difference between the proceeds allocated to the preferred stock or warrants respectively, and the fair value of the preferred stock or warrants (assuming immediate conversion) upon issuance. STOCK OPTION PLAN: In June 1996, the Company adopted the 1996 Stock Incentive Plan (the "Plan"). The "Plan" provides for the granting of stock options to acquire Common Stock and/or the granting of stock appreciation rights to obtain, in cash or shares of Common Stock, the benefit of the appreciation of the value of shares of Common Stock after the grant date. The Company is currently authorized to issue up to 500,000 shares of Common Stock under the Plan. The Plan expires ten years after its adoption. Under the Plan, the Board of Directors may grant incentive stock options to purchase shares of the Company's Common Stock only to employees, directors, officers, consultants and advisers of the Company. The Board of Directors may grant options to purchase shares of the Company's Common Stock at prices not less than fair market value at the date of grant for incentive stock options. The Board of Directors also has the authority to set exercise dates (no longer F-19 than ten years from the date of grant), payment terms and other provisions for each grant. In addition, incentive options may be granted to persons owning more than 10% of the voting power of all classes of stock, at a price no lower than 110% of the fair market value at the date of grant, as determined by the Board of Directors. Options granted under the Plan generally vest at a rate of 25% per annum over 4 years from the date of grant. 1996 STOCK PURCHASE PLAN: In September 1996, the Company adopted the 1996 Nonqualified Stock Purchase Plan (the Nonqualified Plan). The Company has reserved 224,622 shares of its $.01 par value Common Stock for issuance to eligible persons under this plan. Stock granted under this plan are subject to a purchase option that expires over a five year period a the original issuance price. As of March 31, 1998, no shares had been granted under this plan. Activity under the 1996 Stock Incentive Plan through March 31, 1998 is as follows: WEIGHTED SHARES NUMBER AGGREGATE AVERAGE AVAILABLE OF PRICE PER EXERCISE EXERCISE FOR GRANT OPTIONS SHARE PRICE PRICE ----------- --------- ----------- ---------- -------- Balance, 3/31/1996 - - $ - $ - $ - Authorized 300,000 Granted (268,080) 268,080 $20.00-$40.00 $5,991,600 $22.40 Canceled 3,000 (3,000) $20.00 (60,000) $20.00 Exercised - (2,720) $20.00 (54,400) $20.00 --------- --------- ---------- ------ Balance, 3/31/1997 34,920 262,360 $20.00-$40.00 $5,877,200 $22.40 --------- --------- ---------- ------ Options repriced 1,419,368 $ 5.41 Authorized 200,000 Granted (144,555) 144,555 $ 2.97-$20.00 612,987 $ 4.30 Canceled 69,596 (69,596) $ 2.00-$20.00 (185,821) $ 2.67 Exercised - - --------- --------- ---------- ------ Balance, 3/31/1998 159,961 337,319 $ 2.97-$20.00 $7,723,734 $ 4.54 The weighted average fair value of those options granted through March 31, 1998 and 1997 was $4.54 and $22.40, respectively. Options to purchase 227,867 and 223,802 shares were exercisable with a weighted average exercise price of $4.70 and $21.30 at March 31, 1998 and 1997 respectively. Effective August 18, 1997, the Board of Directors repriced the employee options to $4.00 per option share. F-20 PRO FORMA STOCK-BASED COMPENSATION: The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock Based Compensation. Accordingly, no compensation expense has been recognized for these plans. Had compensation expense been determined on the fair value at the grant dates for awards under these plans consistent with the method of SFAS 123, the Company's net loss in 1998 and 1997 would have been adjusted to the pro forma amounts indicated below: 1998 1997 Net loss available to ------------- ----------- common shareholders As reported $(14,738,804) $(5,309,411) Pro forma (15,650,080) (5,938,181) Net loss per share As Reported, Basic and Diluted (7.53) (3.01) Pro forma, Basic and Diluted (7.99) (3.40) The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants under the Plan in 1998 and 1997: 1998 1997 ----------- ---------- Expected dividend $ -- $ -- Expected life of option 1-4 years 1-4 years Risk-free interest rate 5.60%-6.62% 6.01%-6.63% Expected volatility 90% 40% The above pro forma disclosures are not likely to be representative of the effects on reported net income for future years. The following table summarizes the stock options outstanding at March 31, 1998: OPTIONS OPTIONS OUTSTANDING CURRENTLY EXERCISABLE - ----------------------------------------------------- ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ----------- ----------- ----------- -------- ----------- -------- MARCH 31, 1998 $ 1.00-$ 3.00 2,000 9.4 $ 2.97 291 $ 2.97 $ 3.00-$ 4.00 103,334 8.5 3.79 29,080 3.86 $ 4.00-$ 5.00 219,886 8.7 4.49 189,981 4.45 $ 5.00-$ 6.00 4,240 9.8 6.00 2,448 6.00 $ 6.00-$ 7.00 2,000 9.6 6.40 208 6.41 $ 7.00-$10.00 1,163 9.1 10.00 1,163 10.00 $10.00-$20,00 4,696 8.1 20.00 4,696 20.00 ------- --- ------ ------- ------ 337,319 8.7 $ 4.22 227,867 $ 4.70 ======= === ====== ======= ====== F-21 10. REVENUE: The Company has sales to customers in both Canada and the U.S. Revenue from Canadian Sales totaled $103,340 and $112,525 and sales from United States customers totaled $859,121 and $74,366 in 1998 and 1997, respectively. 11. OTHER INCOME: Other Income (expense) consists of the following items: YEAR ENDED DESCRIPTION 1998 1997 --------------------- ------------ ---------- Owners fee sale $(1,570,000) $(273,750) of technology Interest on note from 1,570,000 273,750 sale of technology Amortization of 474,882 136,201 technology advance Interest income 367,436 136,070 Miscellaneous (10,889) (144,000) ----------- --------- Total Other income $ 831,429 $ 128,271 (expense) =========== ========= 12. EARNINGS PER SHARE (EPS) DISCLOSURES: NET LOSS PER SHARE: The Company has adopted Financial Accounting Standards Board No. 128 "Earnings Per Share" (EPS) and accordingly all prior periods have been restated. Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. The following is a reconciliation of the numerator (net loss) and denominator (number of shares) used in the basic and diluted EPS calculation: MARCH 31, 1998 1997 ----------- ----------- Basic EPS: Net Loss $ (4,031,804) $(5,309,411) Deemed dividends on preferred stock (8,083,000) - Beneficial conversion feature of warrants in association with preferred stock (2,624,000) - ------------ ----------- Net loss available to common shareholders $(14,738,804) $(5,309,411) ============ =========== Average common shares outstanding 1,958,622 1,763,638 ------------ ----------- Basic EPS $ (7.53) $ (3.01) ============ =========== F-22 Diluted EPS: Net loss $(4,031,804) $(5,309,411) Deemed dividends on preferred stock (8,083,000) - Beneficial conversion feature of warrants in association with preferred stock (2,624,000) - ------------ ----------- Net loss available to common shareholders $(14,738,804) $(5,309,411) ============ =========== Average common shares outstanding 1,958,622 1,763,638 Convertible notes - - Warrants - - Stock options - - Total shares 1,958,622 1,763,638 ------------ ----------- Diluted EPS $ (7.53) $ (3.01) =========== =========== 5,666,107 shares in 1998, 362,360 shares in 1997 were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 13. OPERATING LEASES: The Company leases space for both its San Jose and Vancouver locations through 2003. Rental expense for these leases and for various equipment leases totaled approximately $123,000 in 1998 and $79,000 in 1997. Future minimum lease payments due under these agreements are as follows for the years ending March 31: 1999 $ 254,800 2000 239,331 2001 231,004 2002 237,217 2003 100,829 ---------- $1,063,181 ========== 14. RELATED PARTY TRANSACTIONS: Effective May 1, 1996, DCC, entered into a three year employment agreement with the Company's Chief Executive Officer. F-23 Concurrently with the execution of the employment agreement, the Company's Chief Executive Officer entered into a Stock Purchase Agreement pursuant to which he purchased 200,000 shares of the Common Stock of DCC (which were later exchanged for 200,000 shares of the Company's Common Stock), and as payment terms he executed a non-recourse promissory note in the amount of $1,500,000. The note bears interest at 5% per annum and the principal plus interest are due on or before April 1, 2001. As security for the note, the Chief Executive Officer has granted the Company a security interest in the 2,000,000 shares of Common Stock. On June 26, 1996, the Company entered into a Loan Forgiveness Agreement with the Chief Executive Officer which provided that the $1,500,000 promissory note would be forgiven if he continues to serve as the Company's Chief Executive Officer through May 1, 1999, and there are no uncured defaults by him under this Employment Agreement on May 1, 1999. The note, together with interest accrued thereon has been incorporated in the balance sheet. The note plus interest is being amortized over the period of the contract as employment. Consequently, in the years ended March 31, 1998 and 1997, expense of $585,044 and $479,340 has been recorded as compensation expense. On January 2, 1997, the Company entered into a three year noncancelable lease agreement with an officer of the Company where the Company leases office space owned by the officer at an annual rate of $100,000 or $8,333.37 per month. In conjunction with the private placement dated November 5, 1997 an officer of the Company entered into a stock purchase agreement. Under the terms of the agreement, the officer received 28,000 shares of Preferred Stock with detachable warrants to purchase 140,000 shares of the Company's Common Stock at $5.00 per share, in exchange for a note receivable in the amount of $1,050,000. The note is collateralized by certain assets of the officer and bears interest at a rate of 10.25%. No payments are due until November 5, 2002 at which time the full amount is due. 15. COMMITMENTS AND CONTINGENCIES: The Company has a letter of credit agreement with Union Bank of California as condition of its pager rental agreement. Under the terms of the agreement, the letter of credit is in the amount of $200,000. Borrowings under the letter of credit bear interest at prime plus 2% and required a compensating balance to be on deposit at the bank of $200,000. The letter of credit expires February 1, 1999, and is renewable. There were no amounts outstanding under this arrangement as of March 31, 1998 or March 31, 1997. 16. EMPLOYEE BENEFIT PLAN: During 1998, the Company established a plan (the "Plan") which is qualified under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees may make voluntary contributions to the Plan of up to 20% of their annual compensation, not to exceed the statutory amount, and the Company may make matching contributions. The Company made no contributions in 1998. F-24 17. SUBSEQUENT EVENTS: Subsequent to year end the Company entered into a Line of Credit agreement with a financial services company. The line of credit is for the express purpose of purchasing wireless information devices. The line of credit is in the amount of $1,000,000 and is collateralized by funds on account at the financial services company. Borrowings under the line of credit bear interest at a variable rate equal to 2.4% above the 30-day commercial paper rate. The line of credit expires March 27, 1999, with an automatic one year renewal provision. SCHEDULE 2 Supplementary Income Statement Information: COLUMN A COLUMN B ITEM CHARGED TO COSTS AND EXPENSE - -------------------------------------- ---------------------------- Maintenance and Repairs $ 6,372 Depreciation of Property and Equipment 119,723 Amortization of Notes Receivable 447,176 Advertising Costs 1,196,903 Bad Debt Charge-Offs 32,523 F-25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: June 29, 1998 DATALINK SYSTEMS CORPORATION By:/s/ Anthony N. LaPine Anthony N. LaPine Chief Executive Officer, President and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Anthony N. LaPine Chief Executive Officer, June 29, 1998 Anthony N. LaPine President and Chairman of the Board /s/ Thomas C. Bland Chief Financial Officer June 29, 1998 Thomas C. Bland /s/ Marshall Geller Director June 29, 1998 Marshall Geller /s/ Fred Hoar Director June 29, 1998 Fred Hoar /s/ David Ladd Director June 29, 1998 David Ladd EX-24.1 2 EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Form S-8 of Datalink Systems Corporation of our report dated May 7, 1998, on our audits of the consolidated financial statements of Datalink Systems Corporation as of March 31, 1997 and 1998, and for the two years in the period ended March 31, 1998, which report is included in this Annual Report on Form 10-KSB. /s/ Coopers & Lybrand, L.L.P. COOPERS & LYBRAND, L.L.P. San Jose, California June 30, 1998 EX-27 3
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages F-3 and F-4 of the Company's Form 10-KSB for the fiscal year ended March 31, 1998, and is qualified in its entirety by reference to such financial statements. YEAR MAR-31-1998 MAR-31-1998 7,353,719 0 75,547 (9,806) 0 7,461,997 818,157 (188,461) 8,115,318 1,280,657 0 0 2,740 20,183 4,586,470 4,609,393 962,461 962,461 530,545 5,295,149 (831,429) 0 0 (4,031,804) 0 0 0 0 0 (14,738,804) (7.53) (7.53)
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