SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to___________
Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
(Previous Name of Registrant: DataMark Holding, Inc.)
(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 Heber Avenue, Suite 204
P. O. Box 8000
Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(435) 655-3617
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 7, 1998, 13,099,210 of the Registrant's Common Shares
were outstanding. As of October 7, 1998, the aggregate market value of voting
stock held by non-affiliates of the Registrant was approximately $22,903,028
based on the average of the closing bid and asked prices for the Registrant's
Common Shares as quoted by the NASDAQ National Market.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated herein by reference, as indicated
herein.
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PART I
ITEM 1. BUSINESS
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SUMMARY
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and
referred to herein as "DCTI" or the "Company") develops and markets proprietary
electronic commerce software and technologies and online information services
for a variety of computer platforms and hand-held computing devices connected to
the Internet. The core technology is organized into three product groups which
include: a suite of electronic commerce tools for building Internet storefronts
designed for retailing a wide variety of consumer and business products; a
distributed content publishing software suite that allows businesses to
creatively deliver information services across the Internet as well as wireless
networks; and a transaction software suite that incorporates a complete Internet
payment processing system to streamline credit card transactions over the
Internet. The Company utilizes its software suites to host and deliver
information services and e-commerce tools to major businesses, Internet portals,
and financial institutions on the Internet. The Company also licenses the
software. The Company's sophisticated software and technology is currently used
by major portals such as Excite, Netscape and America Online, as well as by the
Company's own prominent group of Web-sites including www.weatherlabs.com and
www.videosnow.com.
The Company's four operating divisions include netClearing(TM),
WeatherLabs(TM), Videos Now(TM), and Books Now(TM). The netClearing division
utilizes both the e-commerce tools and the transaction software suite to provide
a complete electronic commerce package for conducting business and facilitating
credit card payment processing over the Internet. The WeatherLabs division
supplies proprietary real-time weather information to online business throughout
the world, and hosts its own web site for consumers and business customers.
Videos Now and Books Now utilize the Company's software suites to operate
e-commerce web sites that sell media products such as videos, movies,
LaserDiscs, DVDs, and books to consumers and online businesses.
The Company's content and commerce software is designed to be
co-branded or private labeled by its customers. This approach enables the
Company's customers and partners to brand their own sites and products and build
additional value into their online presence with the use of the Company's
technology. The Company believes that significant revenue opportunities exist
for all its divisions in the rapidly expanding e-commerce sector of the Internet
industry.
The Company believes that its combined strengths in information
technology, software development and electronic commerce for the Internet equate
to a powerful business model that can yield significant per-transaction based
revenue streams at a comparatively low cost to the Company. The Company believes
that this model for growth is sustainable in the rapidly expanding market for
Internet commerce.
INTERNET STRATEGY
General
The Company develops sophisticated e-commerce software and information
services for the Internet. The Company has created unique e-commerce, content
publishing, and payment processing software suites that are marketed and
licensed to online businesses including: Internet portals, web sites and
financial institutions. Its principal divisions are netClearing, WeatherLabs,
Videos Now and Books Now. The Company recently acquired Digital Courier
International, Inc., an Internet software development company, that specializes
in electronic commerce. This acquisition is expected to give the Company a
competitive advantage in the fast-paced Internet commerce industry.
netClearing: E-Commerce Payment Processing
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Independent research organizations report that online commerce is
growing at a rapid pace. Forrester Research projects that some 380,000 merchants
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will be online and selling by the year 2000, while International Data Corp.
forecasts that the total volume of e-commerce will surpass $220 billion by 2001.
Beyond simply opening a new consumer sales channel, the Internet enables the
creation of an automated system for online ordering and distribution that can
boost sales volume while lowering costs, thereby increasing the profit margin of
every transaction.
General
The Company's recently launched netClearing technology is a complete
line of payment processing services which can be tailored to fit the needs of
any merchant, from an e-commerce startup to an online retailing giant to a
financial institution such as a merchant bank. For all customers, netClearing
can provide comprehensive transaction services including reporting transaction
activity; handling chargebacks; conducting ongoing fraud detection; and
performing highly efficient authorization, capture, settlement and
reconciliation. netClearing's gateway payment technology, derived from
point-of-sale leader VeriFone Inc., enables merchants to seamlessly integrate
Internet transactions with legacy financial networks, allowing full leverage of
existing infrastructure.
netClearing provides fast and efficient processing at a low transaction
fee by utilizing state-of-the-art technologies. All netClearing solutions can be
easily implemented at a low setup cost, and are highly scalable for future
expansion and increased performance requirements. The software is developed with
open standards technology for full interoperability with existing merchant
systems and Web sites, and is designed for parallel payment processing, for
efficient and robust performance. Moreover, netClearing is highly secure through
support for both SET and SSL; additional security in the form of digital
certificates is provided through VeriFone Inc.'s partner VeriSign.
netClearing Internet Payment Processing
Fast and Secure Authorization and Capture. With netClearing technology,
a merchant collects credit card transaction data sent to its e-commerce site in
a standard message format and sends it to netClearing's secure server through a
secure Web page or electronic form. netClearing's authorization and capture
process allows for both real-time and delayed capture for transactions requiring
synchronized fulfillment and shipment. netClearing's delayed capture feature
protects the consumer from being charged for an order until the goods are
shipped. Once a merchant fulfills authorized purchases, netClearing forwards
settlement files to the appropriate back-end processor. With no payment server
required, this solution is extremely simple to implement and inexpensive to
maintain. Complete transaction reports are sent to merchants as each transaction
batch is processed, or reports are made available online through netClearing's
merchant administration site.
Fully Outsourced Payment Processing. Designed for both financial
institutions and the online merchant who wants to establish real-time private
label e-commerce functionality with minimal overhead, this option provides
complete payment processing with no need for a payment server on the merchant's
side. The e-commerce site's payment page, hosted on a secure payment server at
netClearing's datacenter, is designed by netClearing to appear to be a part of
the merchant's own site. Payment information is authorized and captured in
real-time to enable fast and efficient live transaction processing; delayed
capture can also be specified by the merchant. Real-time reports generated
according to merchant-defined parameters can be printed directly from the
merchant's browser.
API-Level Payment Processing Integration. Established online merchants
already deploying an e-commerce publishing solution can implement netClearing's
leading-edge payment processing technology within their Web site through tight
API-level (application programming interface-level) integration. The merchant
can retain full control of a payment page hosted on their own secure server,
while establishing close interoperability with existing merchant-side accounting
and order-tracking modules for complete leverage of existing investments.
netClearing supports both SET and SSL to guarantee the security of encrypted
payment information transmitted to netClearing, and accepts transactions from
all commercial payment servers.
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Additional Services To Be Provided
Virtual Merchant Accounts. netClearing anticipates providing "virtual
banking services" that will be fully integrated with netClearing's transaction
processing system. These services will be accessible and customizable online for
truly virtual merchant banking. netClearing's Virtual Merchant Accounts will
interface with a merchant bank to give merchants a turnkey e-commerce platform
from which to conduct business on the Internet.
Insurance against Fraudulent Transactions. NetClearing is also
developing a robust e-commerce insurance package with the goal of guaranteeing
risk-free online payments. Typical credit card issuers insure against fraudulent
transactions, but require consumers to assume a deductible. netClearing's
products are anticipated to cover this deductible in full, making e-commerce
even safer for the customer than brick-and-mortar transactions.
Sophisticated Fraud Detection Software. Both customers and merchants
are protected by netClearing's extensive matrix of fraud detection schemes,
which constantly monitor account activity for suspicious transactions. Merchants
and consumers are instantly alerted to evidence of the misuse of credit card
information online, detected by such metrics as the verification of bill to/ship
to addresses, velocity of purchase, and bad card histories cross-referenced in
industry fraud databases.
Full-Service Transaction Reporting. netClearing will enable businesses
to track sales, credits, transactions, and chargebacks through easily-customized
reports viewed with their Web browsers, available 24 hours a day for the
merchant's convenience. Detailed real-time information helps merchants track
purchasing trends across a variety of hourly, daily, and seasonal timelines for
precise planning. Payment information can be easily imported into existing
accounting systems for streamlined financial control.
Security. netClearing has adopted both SSL and SET 1.0/2.0 protocol
standards for consumer-to-merchant authentication and encryption, ensuring the
highest level of security and transactional integrity for electronic commerce.
At the netClearing payment processing facility, merchants are protected by
unmatched network security guarding Virtual Merchant Account servers, account
information, and transaction reports. Extensive firewall protection and secure
merchant data controls prevent intruders from compromising merchants' online
businesses 24 hours a day, seven days a week.
WeatherLabs
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In May 1998, the Company purchased WeatherLabs, Inc., one of the
leading online providers of weather and weather-related information. WeatherLabs
utilizes the Company's sophisticated distributed content publishing software to
deliver weather-related products and services over the Internet.
General
WeatherLabs has provided its clients commercially-focused,
weather-related products and services that enhance the value of web sites and
online services since 1990. From site planning and marketing development, to
custom application design and deployment, the meteorologists, engineers and
creative designers at WeatherLabs offer comprehensive meteorological data
available on the Internet to any business affected by the weather. Clients
include Excite Inc, @Home, Netscape, Conde Nast, SkyTel, Nokia, Philips
Multimedia, and Preview Travel.
Technology
As a pioneer in object-oriented software development, WeatherLabs
encapsulates meteorological and atmospheric science into portable Java objects
in component form that accurately represent the attributes of meteorological
conditions. With this solid technology foundation and the most advanced tools
from JavaSoft, Sun Microsystems, Visigenic and Netscape Communications, the
WeatherLabs development team can continuously and easily enhance the accuracy of
forecasting and analytic engines on the fly without interrupting the production
process.
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The STORM Software Framework. To ensure that weather data and
meteorological measurements are collected and processed efficiently, WeatherLabs
relies upon STORM, the Company's proprietary Java-based and object-oriented
system architecture. STORM permeates every aspect of WeatherLabs and is
responsible for numerical analysis, meteorological science and forecasting
algorithms--as well as the processing and packaging of the data as varied as ski
reports, airport delay forecasts, and editorial content. As a server side
architecture which places the bulk of weather data and algorithmic processing on
the Company's highly specialized computing facilities, STORM enables easy
integration of the entire WeatherLabs product line through a lightweight client
side connection.
Distribution: Taking a Ride on the WeatherBus. Before critical weather
information reaches clients, data speeds through the CORBA/IIOP-based WeatherBus
pipeline to the WeatherFactory research and development facility. After thorough
information analysis and processing with STORM, the WeatherBus automatically
delivers weather products to WeatherLabs' clients in any electronic format. In
this process, built-in load balancing allows STORM to maximize the delivery
performance of information through the WeatherBus from source to final
destination.
Security and Seamless Integration. WeatherLabs products are seamlessly
integrated into proprietary systems with maximum reliability and security
through the Company's real-time encoding system which employs point-to-point
encryption, digital signatures, and dual firewall gateways.
Continuous Weather Information 24 hours a day, 7 days a week.
WeatherLabs ensures the constant flow of weather information to its clients by
leveraging system redundancy in each of its technology centers. Satellite dishes
in San Francisco, London, St. Kitts and Salt Lake City work around the clock to
provide constant--and identical--data to all three WeatherLabs weather centers
which house redundant servers and multiple T1 connections for uninterrupted
weather reporting 24 hours a day, seven days a week. As STORM assimilates
volumes of weather information around the clock, innovative WeatherLabs products
from historical analytics to detailed forecasts will eventually be available for
any geocode on the planet -- down to any street address in the world.
Videos Now
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The Company's electronic commerce software suites are all applied to
create retail storefronts with sophisticated search, database and transaction
processing capabilities. The Company has incorporated all of its technologies
into a robust and scalable retail engine to be initially launched on America
Online as a new video site, Videos Now. Videos Now will be the "Premier Video
Partner" throughout the AOL online service, Digital City, and AOL.com.
Videos Now is a comprehensive online video retailer that will enable
businesses to create customized and effective virtual video storefronts. The
powerful content and commerce engines from Digital Courier give extensive
flexibility to businesses looking to seamlessly integrate a virtual video store
into their Web sites, cellular phones, kiosks or wireless PDA services.
Videos Now, under development for the past nine months, is anticipated
to go online in October 1998 and begin accepting and processing orders for video
product purchases. Among the features of the Videos Now site are a library of
over 100,000 videos, a broad range of movie categories, DVD and Laserdisc
inventory, streaming video previews, major discounts on selected titles, and
monthly specials. The Company is also enabling its technology to deliver
video-on-demand for its customers.
Videos Now offers highly customized, pre-indexed video libraries for
niche-oriented channels on major portals or niche-oriented businesses and
special interest Web sites, such as health care, home cooking, skiing or
biotechnology. The Videos Now library can be tailored to the specific needs of
the channel, site or business customer. For example, a sports-oriented site may
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wish to offer only sports related videos through its virtual video store,
keeping a focus to its overall site. Videos Now business customers can define
and purchase their own video libraries online, and automatically receive the
updates to their video storefront the same day.
The search capabilities of Videos Now offer robust navigation through
thousands of video titles. Moreover, Videos Now is fully integrated with the
entire range of online products from the Company. This integration with the
Company's content offerings provides relevant video title suggestions when cross
referenced by a weather-related media search or a book search. The use of
netClearing technology provides seamless and efficient payment processing and
credit card authorizations.
By securely storing purchasing information such as billing and shipping
information for each retail customer, Videos Now offers its customers
easy-to-use, one-button, one-touch shopping. Customers can keep track of their
video title purchases and request to be notified when titles of a particular
subject matter or authorship are added to the library. In addition, customers
can be notified when particular titles are marked down by a given price
percentage, keeping them abreast of the best buys on the Internet.
Books Now
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In January 1998, the Company purchased Books Now, Inc., which sells
books over the Internet through its strategic relations with certain magazine
distribution companies. Books Now has entered into agreements with over 200
magazine companies and online entities. Books Now provides book ordering
fulfillment services in correlation to certain magazine book reviews, book
mentions and advertisements. Among the magazines with which Books Now has
contracts are Cosmopolitan, Science News, Southern Living and Field & Stream.
Through its "Virtual Bookstore" program, Books Now develops, builds and
maintains a bookstore branded with the look, feel and navigational tools of the
partnering website. This Virtual Bookstore is linked from the partner's websites
home page and other integral locations. Visitors to the magazine's web site are
thus given the opportunity to purchase books which are thematically related to
the content and subject of the magazine. For example, a visitor to the Science
News website can, through the Books Now "Virtual Bookstore" (branded as the
Science News Bookstore), see specially-indexed science-related books available
for sale. Similarly, "Virtual Bookstores" on other partner websites can be
targeted and highlighted with sport books, design books, health books, etc.
Books Now does not attempt to compete with the major destination
booksellers on the Internet, such as Amazon and Barnes & Noble. Books Now does
not attempt to divert Internet traffic to its destination website. Rather, it
enables existing websites to share in book sales revenue while keeping visitors
within their site and brand. Participating websites - which at this time
primarily consist of magazine websites - are able to brand the Company's
technology and e-commerce capabilities with their own interface and logo in the
form of a virtual bookstore. Revenue from purchases made over the Internet from
such websites are shared between Books Now and the website.
The Company intends to incorporate the sophisticated technology
developed for the Videos Now retail engine into the Books Now virtual
bookstores.
Industry partnerships
Through alliances with leaders in the technology industry, Digital
Courier has become a leading developer of technology-driven products. These
partnerships bolster the extensibility and portability of its products.
Netscape Communications. Digital Courier worked with Netscape's engineering team
on the flagship Enterprise Server 3.0. This product offers groundbreaking
integration of CORBA ORB technology directly into the Enterprise Web Server,
enabling server-side Java applications to be more extensible, easily
distributed, and infinitely portable. Digital Courier was among the first
companies to deploy this technology and worked closely with Netscape's
Engineering and QA groups on the final product. All of Digital Courier's
server-based Web applications use the latest versions of this technology today.
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Sun Microsystems. Digital Courier continues to build on a relationship
encompassing the Sun Solaris Operating System group up to the Starfire
Enterprise 10000 super-scalar server technology. The Sun platform comprises over
75% of Digital Courier's production engine and technology center systems.
JavaSoft. Digital Courier is a premier developer partner with JavaSoft. The
company is currently working with several alpha and beta products from JavaSoft
to ensure their suitability for commercial applications. Software applications
developed by Digital Courier were showcased, demonstrated, and endorsed at
JavaSoft's JavaOne conference in the keynote address delivered by Java's creator
James Gosling.
Visigenic. The leader in CORBA technologies for Java, the Visigenic ORB is a key
component to the Digital Courier technology framework. Because this technology
is directly integrated into Netscape's flagship product, Enterprise Server 3.x,
Digital Courier has worked closely with both firms simultaneously to build tools
for the most sophisticated online applications available today.
Symbol Technologies. Digital Courier is working closely with Symbol
Technologies, a leading hand-held device manufacturer, to develop the next
generation of online applications suitable for hand-held devices equipped with
wireless communication capabilities.
Nokia. Nokia is a leading developer of cellular phone technology including the
new generation of Nokia Communicator products. Digital Courier has developed
custom software applications for delivery of weather and financial information
to these cellular phones.
GeoWorks. GeoWorks develops real-time operating systems for third-generation
cellular phones and personal digital assistants. Digital Courier is developing
information products that can be deployed across any device that support the
GeoWorks operating system.
Apple Computer. Digital Courier continues to expand its developer relationship
with Apple Computer's Enterprise Software Division (formerly NeXT Computer,
Inc.). This group develops industry-leading object-oriented technologies that
integrate directly into Web applications and the Java programming language.
Marketing
Each division of the Company has its own specialized marketing staff to promote
and sell the Company's virtual commerce products to websites, online services
and other Internet businesses. Prominent positioning on major portals to
increase visibility has been a primary marketing goal. For example, the
prominence of the WeatherLabs weather service on major sites such as Excite has
led to numerous "inbound" requests to license the service on other websites. The
marketing staff continues to develop relationships with major Internet companies
and websites, and will attempt to position the Company's virtual commerce
products and processing and clearing technology for greater visibility and
market recognition.
The WeatherLabs and netclearing marketing department works out of the Company's
San Francisco offices, and the Books Now and Videos Now departments work out of
the Company's Salt Lake City offices.
Significant Customers
The Company is not dependent upon a single customer. Videos Now, when
launched in October 1998, is expected to initially derive most of its revenue
from its presence on the America Online network and on AOL.com. The Company's
three-year agreement with America Online gives Videos Now "premier anchor
tenancy" on key channels of the America Online service. Loss of America Online
as a customer would have a material adverse affect on Videos Now and on the
Company. The Company is currently in negotiations with other major portals and
Web sites, and consummation of any such prospective transactions would lessen
the dependence of Videos Now on America Online members and visitors. Although
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the WeatherLabs business model has benefited from its high profile on the Excite
and Netscape search engines, its major sources of revenue are expected to
increasingly come from licensing the technology and services to additional
websites, both large and small, and from advertising revenue sharing
arrangements. Moreover, WeatherLabs has recently entered into agreements with
such major Internet companies as @Home, Preview Travel, and the Travel Channel
on the AOL Network. Books Now derives its sales from its virtual bookstores and
its relationships with over 200 magazines.
The Technology
The Company's computer facility is a state-of-the-art data center which
supports the products and services offered by the Company over the Internet. It
has redundant systems in place for power, network, environmental, and fire
suppression. Located in Salt Lake City, the technology center guarantees
consistently optimal performance through state-of-the-art system scalability and
reliability. Features of the facility include:
A redundant OC-12 655Mbps fiber optic data connection into the technology
center yields high bandwith throughput for e-commerce customers.
Switched 155 Mbps asynchronous transfer mode (ATM) backbones to each of the
primary data server providing the bandwidth to handle thousands of simultaneous
transactions.
Powered by a series of HP 9000 multiprocessor servers and Sun Microsystems
Enterprise servers, the super- scalar processing architecture manages the
Company's service components including simultaneous payment processing,
real-time report generation, merchant accounting, and proprietary content
creation, management, and distribution for its web sites.
An expandable 1-Terabyte fully redundant data storage system ensures high
performance and fault tolerant access to critical transactional data.
To ensure that production systems remain up and running around the clock,
seven days a week, the facility exploits modern fire retardant systems,
quad-power conditioners, industrial battery backup arrays as well as an 8- day
backup diesel generator to guarantee a continuous power supply.
Research and Development
The Company has invested significant resources in research and
development over the last three years. During the fiscal years ended June 30,
1998, 1997 and 1996, the Company has spent $1,432,006, $3,966,185 and
$1,478,890, respectively, on research and development. Although the Company's
Books Now and WeatherLabs divisions have current revenues from a variety of
sources, the Videos Now division is still largely in development. It is
anticipated that this division will begin to generate revenue during the next
fiscal year, and that the Company's expenditures on research and development
will correspondingly decrease.
Seasonality
To date the Company has not experienced any significant seasonal
pattern to its business. It is anticipated, however, that as the Company's
virtual commerce sites begin to generate increased revenue, the second quarter
of the Company's fiscal year (October through December) will be responsible for
a disproportionate share of the Company's revenue. This corresponds to the
increased "holiday" shopping on the Internet.
Development of Company
The Company was incorporated under the laws of the State of Delaware on
May 16, 1985. It was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
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The Company recruited an experienced management and technical team to design and
implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, the Company acquired an Internet access business and entered
into strategic alliances with companies in the electronic mail ("e-mail")
business. The Company formed a division to create a network of interconnected
Web communities to be promoted by local television station affiliates. The
Company divested its direct marketing, internet access, and television website
hosting businesses in fiscal 1998. In March 1998, the Company signed an
agreement to acquire Digital Courier International, Inc., a private Internet
software development company. The acquisition was consummated in September,
1998, and the Company formally changed its name to Digital Courier Technologies,
Inc.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. In addition, the
Company expects the market for Internet-based commerce and advertising, to the
extent it continues to develop, to be intensely competitive. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Although the Company believes that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments.
The Company has a number of competitors that provide software to
merchants and financial institutions for processing payment card transactions
over the Internet. They include VeriFone, Inc., IBM Corporation, and AT&T
Corporation. Several other competitors, including CyberCash, Inc. and
ClearCommerce Corporation, offer software that enables Internet merchants to
obtain credit card authorizations through one of a variety of communications
links with credit card processors. Open Market, Inc., among others, provides
electronic commerce software that includes payment components designed to
facilitate on-line credit card transactions. Several of these competitors are
developing software to process transactions in compliance with the SET standard,
including VeriFone, IBM, and Trintech. All of these companies are providers of
software, rather than complete payment services, but their software does provide
merchants and financial institutions an alternative to the Company's service.
Additional competition could come from Web browser companies and
software and hardware vendors that incorporate Internet payment capabilities
into their products. Further, because of the rapidly evolving nature of the
industry, many of the Company's collaborative partners are current or potential
competitors. In particular, the Company believes that Microsoft intends to
actively compete in all areas of Internet and online commerce.
Many of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources than the
Company. In addition, many of the Company's current or potential competitors,
such as Microsoft, have broad distribution channels that may be used to bundle
competing products directly to end-users or purchasers. If such competitors were
to bundle competing products for their customers, the demand for the Company's
services may be substantially reduced, and the ability of the Company to
successfully effect the distribution of its products and the utilization of its
services would be substantially diminished. There can be no assurance that the
Company will be able to compete effectively with current or future competitors
or that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition or operating
results.
The Company also competes with many other e- providers of online
content. Companies such as Reel.com, Amazon, Barnes & Noble, CD Universe and
others sell books and videos on the Internet, directly competing with the
Company's Books Now and Videos Now divisions. These companies have far greater
financial resources than the Company. The Company also competes with The Weather
Channel, Accu-Weather, and other major providers of weather information on the
Internet.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical and
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marketing resources than the Company. In addition, providers of content and
advertising on the Internet may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft or Netscape.
In the future, the Company expects to face competition in the various
demographic and geographic markets addressed by the Company. This competition
may include companies that are larger and better capitalized than the Company
and that have expertise and established brand recognition in these markets.
There can be no assurance that the Company's competitors will not develop
Internet products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's offerings. Moreover, a
number of the Company's current customers, licensees and partners have also
established relationships with certain of the Company's competitors, and future
advertising customers, licensees and partners may establish similar
relationships.
The Company also competes with online services and other Web site
operators, as well as traditional offline media such as television, radio and
print for a share of consumers' Internet purchases and advertisers' total
advertising budgets. The Company believes that the number of companies selling
Web-based advertising and the available inventory of advertising space have
increased substantially during the past year. Accordingly, the Company may face
increased pricing pressure for the sale of advertisements. There can be no
assurance that the Company will be able to compete successfully against its
current or future competitors or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
PROPRIETARY RIGHTS
The Company regards its patents, copyrights, trademarks, trade dress,
trade secrets and similar intellectual property \ as critical to its success,
and the Company relies upon trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States, and has obtained the
registration of a number of its trademarks. Substantially all national content
appearing in the Company's online properties is licensed from third parties
under short-term agreements.
GOVERNMENT REGULATION
State Sales and Use Tax Laws. While most online companies have adopted
"mail order" policies with respect to the payment of sales and other taxes, many
states are aggressively attempting to capture new tax revenues from online
transactions. The Company believes that several states are moving aggressively
to tax online retailers and service providers even when they have no physical
presence within the state. The Company currently charges sales tax only for
goods sold over the Internet to customers in the states in which the Company has
operations - California and Utah. If other states assert tax claims for products
sold by the Company over the Internet, compliance could be burdensome and costly
and require reporting that could adversely affect the Company's financial
performance.
Federal Money Transmitter Regulation. Recent federal legislation
imposes a record-keeping requirement on all persons performing wire transfers of
funds. Records of all transactions over $3,000 must be kept in a form accessible
to subpoena for five years. Although this regulation does not currently apply to
the Company's netClearing services, it may be applicable to future phases of
netClearing currently under development. The Company's netClearing services are
being designed to be able to comply with such legislation if required to do so.
State Money Transmitter Regulations. Several states currently have
regulations requiring registration and bonding for "money transmitters."
Although the Company does not believe that these regulations are currently
applicable to it, a significant risk exists that regulators will take the
position that such regulations are applicable to the Company's future phases of
netClearing. While the Company is prepared to fully comply with these
regulations to the extent that they are applicable and does not believe that
compliance will impose a material burden on the Company's operations, there is a
risk that expanding developments in this area of regulation may expose the
Company to greater regulatory burdens in the future.
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Regulation E. Regulation E has been promulgated by the Federal Reserve
Board under authority of the Electronic Funds Transfer Act. It applies to
entities that issue "access devices" to "consumer asset accounts." The
regulation requires written disclosures at the time an access device is issued,
written receipts for transactions, periodic statements, and error resolutions
procedures. While there is some uncertainty, the Company believes that some
aspects of Regulation E may apply to certain of its netClearing services
currently in development.
Because Regulation E was issued at a time when no Internet services
like those of the Company existed, its application to the Company's services
involves numerous uncertainties and ambiguities. The Company believes that it is
designing and is operating its services in a manner that fully complies with the
intention of Regulation E. There remains the possibility that the Federal
Reserve Board, and the other agencies that interpret and apply the regulation
may in the future challenge the Company's services on the ground that they do
not comply with Regulation E. The costs of responding to such a challenge could
result in significant drains on the Company's financial and management
resources, which could have a material adverse effect on the Company's business,
financial condition or operating results.
EMPLOYEES As of June 30, 1998, the Company had 31 full-time employees.
The Company's future success is substantially dependent on the performance of
its management, sales force, key technical personnel, and its continuing ability
to attract and retain highly qualified technical, sales and managerial
personnel.
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RISK FACTORS
Risk Factors Regarding the Acquisition
Uncertainty Relating to Integration. The acquisition of Digital Courier
International, Inc. in September 1998 (the "DCII Acquisition") involves the
integration of two companies that have previously operated independently. The
successful combination of the two companies will require significant effort from
each company, including the coordination of their research and development,
utilization and successful commercialization of in-process research and
development, integration of the companies' product offerings, coordination of
their sales and marketing efforts and business development efforts. In order to
reach profitability, DCTI will need to integrate and streamline overlapping
functions successfully. Costs generally associated with this type of integration
that may be incurred by DCTI include the integration of product lines, sales
force cross-training and market positioning of products. While these costs have
not been currently identified, any such costs may have an adverse effect on
operating results in the periods in which they are incurred. Each of DCTI and
Digital Courier International, Inc. has different systems and procedures in many
operational areas that must be rationalized and integrated. There may be
substantial difficulties associated with integrating two separate companies, and
there can be no assurance that such integration will be accomplished smoothly,
expeditiously or successfully. The integration of certain operations following
the DCII Acquisition will require management resources that may distract
attention from normal operations. The business of DCTI may also be disrupted by
employee uncertainty and lack of focus during such integration. Failure to
quickly and effectively accomplish the integration of the operations of DCTI and
Digital Courier International, Inc. could have a material adverse effect on the
consolidated business, financial condition and results of operations of DCTI.
Moreover, uncertainty in the marketplace or customer concern regarding the
impact of the DCII Acquisition and related transactions could have a material
adverse effect on the consolidated business, financial condition and results of
operations of DCTI.
Retention of Employees. The success of the Company will be dependent in
part on the retention and integration of management, technical, marketing, sales
and customer support personnel. There can be no assurance that the Company will
be able to retain such personnel or that the companies will be able to attract,
hire and retain replacements for employees that leave following consummation of
the DCII Acquisition. The failure to attract, hire, retain and integrate such
skilled employees could have a material adverse effect on the business,
operating results and financial condition of the Company.
Potential Dilutive Effect to Stockholders. Although the companies
believe that beneficial synergies will result from the DCII Acquisition, there
can be no assurance that the combining of the two companies' businesses, even if
achieved in an efficient, effective and timely manner, will result in combined
results of operations and financial condition superior to what would have been
achieved by each company independently, or as to the period of time required to
achieve such result. The issuance of DCTI Common Stock in connection with the
DCII Acquisition could reduce the market price of the DCTI Common Stock unless
revenue growth or cost savings and other business synergies sufficient to offset
the effect of such issuance can be achieved.
Liquidity. Management projects that there will not be sufficient cash
flows from operating activities during the next twelve months to provide capital
for the Company to implement its marketing strategy for its divisions. As of
June 30, 1998, the Company had $3,211,724 of cash. The Company is currently
attempting to obtain additional debt or equity funding. If adequate funding is
not available, the Company may be required to revise its plans and reduce future
expenditures. As reflected in the accompanying consolidated financial
statements, the Company has incurred losses from continuing operations of
$6,264,265, $7,158,851 and $3,586,413 and the Company's operating activities
have used $6,752,970, $6,334,660 and $1,385,567 of cash during the years ended
June 30, 1998, 1997 and 1996, respectively. As of June 30, 1998, the Company has
a tangible working capital deficit of $272,968 and is scheduled to make
substantial payments to AOL. None of the Company's continuing operations are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all. There can be no assurance that the additional funding will be available or,
if available, that it will be available on acceptable terms or in required
amounts.
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Management's plans in regard to these matters include pursuing various
potential funding sources. The Company is currently in negotiations with two
firms to obtain additional working capital through a private placement of the
Company's equity securities. The Company is attempting to accelerate payments
that are due to the Company in the future totaling approximately $1,200,000. The
Company has contacted the entities owing these amounts to negotiate the
acceleration of these payments. The Company is negotiating with a lender to
obtain working capital of $1,200,000 against which loan those receivables would
be pledged. Certain directors of the Company have made oral commitments to make
loans to and additional investments in the Company. Management is actively
pursuing these alternatives until such time as market conditions are more
favorable to obtaining additional equity financing. There can be no assurance
that additional funding will be available or, if available, that it will be
available on acceptable terms or in required amounts. Management projects that
there will not be sufficient cash flows from operating activities during the
next twelve months to provide capital for the Company to sustain its operations.
Limited Operating History; Anticipated Losses. The Company did not
commence generating revenues from its current operations until January 1998.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company can be based, and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in the new
and rapidly evolving markets for Internet products and services, including the
Web-based advertising market. Specifically, such risks include, without
limitation, the rejection of the Company's services by Web consumers and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its websites, the development of equal or superior services or
products by competitors, the failure of the market to adopt the Web as an
advertising medium, the failure to successfully sell Web-based advertising
through the Company's recently developed internal sales force, potential
reductions in market prices for Web-based advertising, the inability of the
Company to effectively integrate the technology and operations of any other
acquired businesses or technologies with its operations, and the inability to
identify, attract, retain and motivate qualified personnel. There can be no
assurance that the Company will be successful in addressing such risks. As of
June 30, 1998, the Company had an accumulated deficit of $14,680,073. For the
year ended June 30, 1998 and 1997, the Company incurred a loss of $1,790,934 and
$9,340,816. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible. The Company believes that period
to period comparisons of its operating results are not meaningful and that the
results for any period should not be relied upon as an indication of future
performance. As a result of these factors, there can be no assurance that the
Company will not incur significant losses on a quarterly and annual basis for
the foreseeable future.
Fluctuations In Quarterly Operating Results. As a result of the
Company's limited operating history, the Company does not have historical
financial data for a significant number of periods on which to base planned
operating expenses. Although the Company expects that advertising revenue on its
websites will eventually be greater than revenue from direct mail, there can be
no assurance in this regard. Moreover, the sale of advertisements on the Web is
an emerging market that is difficult to forecast accurately. The Company's
expense levels are based in part on its expectations concerning future revenue
and to a large extent are fixed. Quarterly revenues and operating results will
depend substantially upon the advertising revenues received within the quarter,
which are difficult to forecast accurately. Accordingly, the cancellation or
deferral of even a small number of advertising contracts, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenue in relation to the Company's expectations would have an immediate
adverse effect on the Company's business, operating results and financial
condition. The Company has high fixed costs and expenses relating to the
development of the Websites. To the extent that such expenses are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially and adversely affected.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of usage of the Internet,
demand for Internet advertising, seasonal trends in Internet usage and
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advertising placements, the level of user traffic on the Company's websites, the
advertising budgeting cycles of individual advertisers, the amount and timing of
capital expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new products or services by the Company or its
competitors, pricing changes for Web-based advertising, technical difficulties
with respect to the use of the Company's websites or other media properties
developed by the Company, incurrence of costs relating to acquisitions, general
economic conditions and economic conditions specific to the Internet and online
media. As a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing, service or marketing
decisions or business combinations that could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company also expects to experience seasonality in its business, with user
traffic on the Company's websites being lower during the summer and year-end
vacation and holiday periods, when usage of the Web and the Company's services
typically decline. Additionally, seasonality may affect the amount of customer
advertising dollars placed with the Company in the first and third calendar
quarters as advertisers historically spend less during these quarters.
Due to all of the foregoing factors, in future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected.
Dependence On Continued Growth In Use Of The Internet. The Company's
future success is substantially dependent upon continued growth in the use of
the Internet and the Web in order to support virtual commerce and the sale of
advertising on the Company's websites. Rapid growth in the use of and interest
in the Internet and the Web is a recent phenomenon. There can be no assurance
that communication or commerce over the Internet will become widespread or that
extensive content will continue to be provided over the Internet. The Internet
may not prove to be a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary infrastructure,
such as a reliable network backbone, or timely development and commercialization
of performance improvements, including high speed modems. In addition, to the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed upon it by
such potential growth or that the performance or reliability of the Web will not
be adversely affected by this continued growth. In addition, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols required to handle increased levels of Internet activity, or due
to increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Web. If use of the Internet
does not continue to grow, or if the Internet infrastructure does not
effectively support growth that may occur, the Company's business, operating
results and financial condition would be materially and adversely affected.
Developing Market; Unproven Acceptance Of The Company's Products And
Business Strategy. The markets for the Company's products and media properties
have only recently begun to develop, are rapidly evolving and are characterized
by an increasing number of market entrants who have introduced or developed
information navigation products and services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for virtual commerce
and advertising on the Internet is new and evolving, it is difficult to predict
the future growth rate, if any, and size of this market. There can be no
assurance either that the market for virtual commerce and advertising on the
Internet will develop or that demand content and promotional advertising will
emerge or become sustainable. The Company's ability to successfully sell
advertising on its co-branded websites depends substantially on use of the
Company's websites. If use of the Company's websites fails to continue to grow,
the Company's ability to sell advertising would be materially and adversely
affected. If the market fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if the Company's websites do not achieve
or sustain market acceptance, the Company's business, operating results and
financial condition will be materially and adversely affected.
Risks Associated With Brand Development. The Company believes that
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establishing and maintaining the "netClearing,", "Books Now", "WeatherLabs" and
"Videos Now" brands is a critical aspect of its efforts to attract and expand
its Internet audience and that the importance of brand recognition will increase
due to the growing number of Internet sites and the relatively low barriers to
entry. Promotion and enhancement of these brands will depend largely on the
Company's success in providing high quality products and services, which cannot
be assured. If consumers do not perceive the Company's existing websites to be
of high quality, or if the Company introduces new features and services or
enters into new business ventures that are not favorably received by consumers,
the Company will be unsuccessful in promoting and maintaining its brands, and
will risk diluting its brands and decreasing the attractiveness of its audiences
to advertisers. Furthermore, in order to attract and retain Internet users and
to promote and maintain these brands in response to competitive pressures, the
Company may find it necessary to increase substantially its financial commitment
to creating and maintaining a distinct brand loyalty among its consumers. If the
Company is unable to provide high quality features and services or otherwise
fails to promote and maintain its brands, or if the Company incurs excessive
expenses in an attempt to improve its features and services or promote and
maintain its brands, the Company's business, operating results and financial
condition will be materially and adversely affected.
Reliance On Advertising Revenues And Uncertain Adoption Of The Web As
An Advertising Medium. The Company anticipates deriving a significant part of
its revenues from the sale of advertisements by the Internet portals, websites
and other customers who utilize the Company's content under short-term
contracts, and expects to continue to do so for the foreseeable future. Most
Internet advertising customers have only limited experience with the Web as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Webbased advertising and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media.
The Company's ability to generate significant advertising revenues will depend
upon, among other things, advertisers' acceptance of the Web as an effective and
sustainable advertising medium, the development of a large base of users of the
Company's services possessing demographic characteristics attractive to
advertisers, and the ability of the Company to develop and update effective
advertising delivery and measurement systems. No standards have yet been widely
accepted for the measurement of the effectiveness of Web-based advertising, and
there can be no assurance that such standards will develop sufficiently to
support Web-based advertising as a significant advertising medium. Certain
advertising filter software programs are available that limit or remove
advertising from an Internet user's desktop. Such software, if generally adopted
by users, may have a materially adverse effect upon the viability of advertising
on the Internet. The Company also recently completed the transition from a
third-party advertising sales agent to internal advertising sales personnel,
which involves additional risks and uncertainties, including (among others)
risks associated with the recruitment, retention, management, training and
motivation of sales personnel. As a result of these factors, there can be no
assurance that the Company will sustain or increase current advertising sales
levels. Failure to do so will have a material adverse effect on the Company's
business, operating results and financial position.
In addition, there is intense competition in the sale of advertising on
the Internet, including competition from other Internet navigational tools as
well as other high-traffic sites, which has resulted in a wide range of rates
quoted by different vendors for a variety of advertising services, which makes
it difficult to project future levels of Internet advertising revenues that will
be realized generally or by any specific company. Competition among current and
future suppliers of Internet navigational services or Web sites, as well as
competition with other traditional media for advertising placements, could
result in significant price competition and reductions in advertising revenues.
There also can be no assurance that the Company's advertising customers will
accept the internal and third-party measurements of impressions received by
advertisements on the Company's websites, or that such measurements will not
contain errors.
Substantial Dependence Upon Third Parties. The Company depends
substantially upon third parties for several critical elements of its business
including, among others, telecommunications, technology and infrastructure,
distribution activities and advertising sales. The Company believes that there
are other third party providers who can provide the same services as those
providers currently used by the Company.
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Technology And Infrastructure. The Company depends substantially upon
its own computer equipment and its maintenance and technical support to ensure
accurate and rapid presentation of content and advertising to the Company's
customers. Any failure by the Company to effectively maintain such equipment and
provide such information could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, any
termination of telecom agreements with Sprint, or Sprint's failure to renew the
Company's agreement upon expiration could result in substantial additional costs
to the Company in developing or licensing replacement telecom capacity, and
could result in a loss of levels of use of the Company's navigational services.
Enhancement Of The Company's Products. To remain competitive, the
Company must continue to enhance and improve the responsiveness, functionality,
features and content of the Company's main product offerings. There can be no
assurance that the Company will be able to successfully maintain competitive
user response time or implement new features and functions, which will involve
the development of increasingly complex technologies. Furthermore, enhancements
of or improvements to the Company's products may contain undetected errors that
require significant design modifications, resulting in a loss of customer
confidence and user support and a decrease in the value of the Company's
products and services. Any failure of the Company to effectively improve its
products, or failure to achieve market acceptance, could adversely affect the
Company's business, results of operations and financial condition.
Technological Change. The market for Internet products and services is
characterized by rapid technological developments, evolving industry standards
and customer demands, and frequent new product introductions and enhancements.
These market characteristics are exacerbated by the emerging nature of this
market and the fact that many companies are expected to introduce new Internet
products and services in the near future. The Company's future success will
depend in significant part on its ability to continually improve the
performance, features and reliability of the Company's products and content
offerings in response to both evolving demands of the marketplace and
competitive product offerings, and there can be no assurance that the Company
will be successful in doing so.
Management Of Potential Growth. The process of managing large,
potentially high traffic Web sites such as the Company's products and content
offerings will become an increasingly important and complex task. To the extent
that any extended failure of the Company's technology affects customers or
partners, the Company may be exposed to "make good" obligations with its
customers or partners, which could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve the rapid execution necessary to fully exploit the market
opportunity for the Company's products. Any inability to effectively manage
growth could have a material adverse effect on the Company's business, operating
results and financial condition.
Risk Of Capacity Constraints And Systems Failures. A key element of the
Company's strategy is to generate a high volume of use of its products and
content offerings. Accordingly, the performance of the Company's technology is
critical to the Company's reputation, its ability to attract advertisers to the
Company's products and to achieve market acceptance of these products and media
properties. Any system failure that causes interruption or an increase in
response time of the Company's websites could result in less traffic to the
Company's content destinations and, if sustained or repeated, could reduce the
attractiveness of the Company's content offerings to advertisers. An increase in
the volume of traffic to the Company's websites could strain the capacity of the
software or hardware deployed by the Company, which could lead to slower
response time or system failures, and adversely affect the number of impressions
received by advertising and thus the Company's advertising revenues. In
addition, as the number of affiliated Web pages and users increase, there can be
no assurance that the Company's infrastructure will be able to scale
accordingly. The Company is also dependent upon its own technology and link to
the Internet. Any disruption in Internet access or any failure of the Company's
technology to handle higher volumes of user traffic could have a material
adverse effect on the Company's business, operating results and financial
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condition. Furthermore, the Company is dependent on hardware suppliers for
prompt delivery, installation and service of servers and other equipment used to
deliver the Company's products and services.
The Company's operations are dependent in part upon its ability to
protect its operating systems against physical damage from fire, floods,
earthquakes, power loss, telecommunications failures, break-ins and similar
events. The Company does not presently have redundant, multiple site capacity in
the event of any such occurrence. Despite the implementation of network security
measures by the Company, its servers are vulnerable to computer viruses,
breakins and similar disruptions from unauthorized tampering with the Company's
computer systems. The occurrence of any of these events could result in
interruptions, delays or cessations in service to users of the Company's
websites, which could have a material adverse effect on the Company's business,
operating results and financial condition.
Integration Of Potential Acquisitions. During fiscal 1998, the Company
has acquired Books Now, Inc., WeatherLabs, Inc., and Digital Courier
International, Inc. and has evaluated several other potential acquisitions. As
part of its business strategy the Company expects to enter into further business
combinations and/or make significant investments in, complementary companies,
products or technologies. Any such transactions would be accompanied by the
risks commonly encountered in such transactions. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology or
content and rights into the Company's products and services, the difficulties of
integrating personnel of acquired entities, additional expenses associated with
amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies, the impairment of relationships
with employees and customers as a result of any integration of new management
personnel, and the potential unknown liabilities associated with acquired
businesses. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions.
Trademarks And Proprietary Rights. The Company regards its copyrights,
trademarks, trade dress, trade secrets and similar intellectual property as
critical to its success, and the Company relies upon trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
its employees, customers, partners and others to protect its proprietary rights.
The Company pursues the registration of its trademarks in the United States, and
has applied for the registration of certain of its trademarks. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's copyrights, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
The Company anticipates that it may be subject to legal proceedings and
claims in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by the Company and its licensees. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. The Company is not aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
effect on the Company's financial position or results of operations.
Dependence On Key Personnel. The Company's performance is substantially
dependent on the performance of its senior management and key technical
personnel. In particular, the Company's success depends substantially on the
continued efforts of its senior management team, which currently is composed of
a small number of individuals who only recently joined the Company. The Company
does not carry key person life insurance on any of its senior management
personnel. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, operating
results and financial condition of the Company.
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The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results and financial condition.
Government Regulation And Legal Uncertainties. The Company is not
currently subject to direct regulation by any government agency in the United
States, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. For example, the Company may be subject to
the provisions of the Communications Decency Act (the "CDA"). Although the
constitutionality of the CDA, the manner in which the CDA will be interpreted
and enforced and its effect on the Company's operations cannot be determined, it
is possible that the CDA could expose the Company to substantial liability. The
CDA could also dampen the growth in use of the Web generally and decrease the
acceptance of the Web as a communications and commercial medium, and could,
thereby, have a material adverse effect on the Company's business, results of
operations and financial condition. A number of other countries also have
enacted or may enact laws that regulate Internet content. The adoption of such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products and media properties. Such laws
and regulations also could increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, operating results
and financial condition. Moreover, the applicability to the Internet of the
existing laws governing issues such as property ownership, defamation, obscenity
and personal privacy is uncertain, and the Company may be subject to claims that
its services violate such laws. Any such new legislation or regulation or the
application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's business, operating results and
financial condition.
Liability For Information Services. Because materials may be downloaded
by the online or Internet services operated or facilitated by the Company and
may be subsequently distributed to others, there is a potential that claims will
be made against the Company for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature and content
of such materials. Such claims have been brought, and sometimes successfully
pressed against online services in the past. In addition, the Company could be
exposed to liability with respect to the listings that may be accessible through
the Company's websites, or through content and materials that may be posted by
users in classifieds, bulletin board and chat room services offered by the
Company. It is also possible that if any information provided through the
Company's services, such as stock quotes, analyst estimates or other trading
information, contains errors, third parties could make claims against the
Company for losses incurred in reliance on such information. Also, to the extent
that the Company provides users with information relating to purchases of goods
and services, the Company or its operating subsidiaries could face claims
relating to injuries or other damages arising from such goods and services.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability or legal defense expenses that are not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on the
Company's business, operating results and financial condition.
Concentration Of Stock Ownership. As of October 7, 1998, the present
directors, executive officers, greater than 5% stockholders and their respective
affiliates beneficially owned approximately 37% of the outstanding Common Stock
of the Company. As a result of their ownership, the directors, executive
officers, greater than 5% stockholders and their respective affiliates
collectively are able to control all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company.
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Volatility Of Stock Price. The trading price of the Company's Common
Stock has been and may continue to be subject to wide fluctuations in response
to a number of events and factors, such as quarterly variations in operating
results, announcements of technological innovations or new affiliations and
services by the Company or its competitors, changes in financial estimates and
recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news reports relating to trends in the Company's markets. In
addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the trading
price of the Company's Common Stock, regardless of the Company's operating
performance.
Antitakeover Effect Of Certain Charter Provisions. The Board of
Directors has the authority to issue up to 2,500,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock may be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change of control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock.
DIRECTORS AND EXCUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding (i) the current directors of
the Company, who will serve until the next annual meeting of stockholders or
until their successors are elected or appointed and qualified, and (ii) the
current executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors.
The Company's executive officers and directors are as follows:
Name Age Position
---- --- --------
James A. Egide* 64 Director and Chairman
Raymond J. Pittman 29 Director, Chief Executive Officer
Mitchell L. Edwards 40 Director, Executive Vice President
and Chief Financial Officer
Glen Hartman* 41 Director
Kenneth M. Woolley* 52 Director
*Serves on compensation and audit committees.
James A. Egide: Director and Chairman
Mr. Egide was appointed as a Director of the Company in January 1995
and Chairman in September 1997. Since 1990, Mr. Egide has primarily been
involved in managing his personal investments, including multiple international
and national business enterprises. In 1978 he co-founded Carme, a public
company, and served as CEO and Chairman of the Board until 1989 when it was
sold. From 1976 until 1980, Mr. Egide's primary occupation was President and
Director of Five Star Industries, Inc., a California corporation which was a
general contractor and real estate developer. His principal responsibilities
were land acquisition, lease negotiations and financing.
19
<PAGE>
Raymond J. Pittman: Director and Chief Executive Officer.
Mr. Pittman has been Chief Executive Officer of the Company since March
1998. Mr. Pittman was the founder and Chief Executive Officer of Digital Courier
International, Inc. from 1996 until Digital Courier International was acquired
by the Company in September 1998. Prior to forming Digital Courier
International, Inc., Mr. Pittman was the Chief Executive Officer of Broadway
Technologies Group, a technology development and consulting group. Mr. Pittman
received a Masters degree in Engineering-Economic Systems from Stanford
University and Bachelors degree in Computer Engineering from the Univeristy of
Michigan.
Mitchell L. Edwards: Director, Executive Vice President and Chief Financial
Officer
Mr. Edwards has been Executive Vice President and Chief Financial
Officer of the Company since June 1997. From 1995 until joining the Company, Mr.
Edwards was Managing Director of Law and Business Counsellors, a mergers and
acquisitions and corporate finance consulting firm with offices in California
and Utah, and prior to that was a Partner in the law firm of Brobeck, Phleger &
Harrison in Los Angeles. Mr. Edwards' practice for over 10 years has specialized
in mergers and acquisitions, corporate finance, public offerings, venture
capital and other transactions for emerging and high technology companies
throughout the country. Mr. Edwards received a J.D. from Stanford Law School, a
B.A/M.A. in International Business Law from Oxford University (Marshall
Scholar), and a B.A. in Economics from Brigham Young University (Valedictorian).
He has also worked at the White House and at the United States Supreme Court.
Glen Hartman: Director
Mr. Hartman has been a director of the Company since July 1998. Mr.
Hartman is the founder. principal and a member of the board of directors of
Cosine Communications, Inc. since 1996. Mr. Hartman is also the founding general
partner of Falcon Capital, LLC, a private equity investment company,
specializing in technology companies since 1995. From 1992 to 1995 Mr. Hartman
served as CEO and Chairman of Apex Data, a computer peripherals manufacturing
company. Mr. Hartman holds a B.A. in Economics from UCLA..
Kenneth M. Woolley: Director
Mr. Woolley has been a founder and director of several companies. Mr.
Woolley served on the Board of Directors of Megahertz Holding Corporation, the
leading manufacturer of fax/modems for laptop and notebook computers until
February 1995. Prior to the merger of Megahertz and VyStar Group, Inc. in June
1993, Mr. Woolley had served as President of the parent company. Since 1979, Mr.
Woolley has been a principal in Extra Space Management, Inc. and Extra Space
Storage, privately held companies engaged in the ownership and management of
mini-storage facilities. Since 1989, Mr. Woolley has been a partner in D.K.S.
Associates, and since 1990 a director and executive officer of Realty
Management, Inc., privately held companies engaged in the ownership and
management of apartments, primarily in Las Vegas, Nevada. Mr. Woolley is a
director of Cirque Corporation. Mr. Woolley also serves as an associate
professor of business management at Brigham Young University. Mr. Woolley holds
a B.A. in Physics from Brigham Young University, an M.B.A. and Ph.D. in Business
Administration from the Stanford University Graduate School of Business. Mr.
Woolley is available to the Company on a part-time, as needed basis.
20
<PAGE>
Significant Employees
Michael D. Bard: Controller
Mr. Bard joined the Company in September 1996. Mr. Bard was the
Controller for ARD, Inc., a professional services corporation located in
Burlington, Vermont from 1991 to 1996. Prior to joining ARD, Inc., Mr. Bard was
Senior Vice President, Controller for CACI, Inc. International, an information
technology company located in Fairfax, Virginia from 1976 to 1991. Mr. Bard is a
certified public accountant and holds a bachelors degree in accounting.
Brendan Larson: Senior Vice President Business Applications
Mr. Larson joined the Company in 1996. Mr. Larson is the founder of
WeatherLabs, Inc. and served as an officer of WeatherLabs from it founding in
1991 to the present. In 1996 Mr. Larson was employed as a consultant by Broadway
Technologies Group, a software development company. Mr. Larson has an extensive
background in the combined fields of meteorology, broadcast journalism and
computer science. Mr. Larson holds a B.S. degree from Northern Illinois
University.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met except as follows: Mr. Edwards and Mr. Bard were
late in filing Form 4's which were due 10 days following the end of the month in
which certain stock options were granted.
ITEM 2. PROPERTIES
- ------- ----------
The Company is leasing from third parties modern office space in Park
City and Salt Lake City, Utah. These offices include a computer data center and
general offices. In August 1996, the Company moved its offices to 12,000 square
feet of modern office space in Salt Lake City, Utah. In May 1997, the Company
acquired 11,000 square feet of additional modern office space in a neighboring
building in Salt Lake City. All facilities are leased from third parties. The
new offices are being leased under three to five year arrangements. Some leases
contain options to renew. The computer equipment and software development
facilities remain in the previous location. The Company also leases office space
and space for a data center in San Francisco. These facilities are believed
adequate for the Company's current needs. The current total monthly rental for
all facilities is $67,014. Some of the leases are subject to annual increases
for inflation adjustments.
The Company presently has approximately 11,000 square feet of office
space in Salt Lake City which it is attempting to sublease. There was a charge
to earnings during the year ended June 30, 1998 of approximately $544,000 for
the costs of subleasing idle facilities and obligations for which the Compnay
will receive no future benefit..
21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not a party to any legal proceedings which, in its
opinion, after consultation with legal counsel, could have a material adverse
effect on the Company. However, the Company is involved in ordinary routine
litigation incidental to it's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------
Price Range of Common Stock
- ---------------------------
On February 5, 1997, the Company's Common Stock began trading on The
Nasdaq National Market System. Commencing in January 1995 and until the stock
was listed on The Nasdaq National Market, the Company's Common Stock was quoted
on the OTC Bulletin Board. During 1993 and 1994, there was no public market for
the securities of the Company's predecessor, and the Company is not aware of any
quotations for its securities during this period. In prior years, securities of
the Company's predecessor, Exchequer, were traded in the over-the-counter
market.
The Company's common stock trades on The Nasdaq Stock Exchange under
the symbol "DCTI". The following table reflects the high and low bid sales price
reported by The Nasdaq National Market or by the OTC Bulletin Board, as
appropriate, for the periods indicated. The quotes represent interdealer
quotations, do not include mark-up, mark-down or commissions and may not reflect
actual transactions.
High Low
---- ---
Fiscal Year Ending June 30, 1998
--------------------------------
April 1 to June 30, 1998 $9.97 $3.50
January 1 to March 31, 1998 $2.13 $5.00
October 1 to December 31, 1997 $2.44 $5.00
July 1 to September 30, 1997 $2.75 $5.88
Fiscal Year Ended June 30, 1997
-------------------------------
April 1 to June 30, 1997 $7.38 $2.75
January 1 to March 31, 1997 $11.00 $6.75
October 1 to December 31, 1996 $14.38 $7.00
July 1 to September 30, 1996 $16.00 $10.63
On October 7, 1998, the Common Stock was quoted on The Nasdaq National
Market at a closing price of $2.625.
Approximate Number of Equity Security Holders
- ---------------------------------------------
As of October 7, 1998, there were approximately 669 holders of record
of the Company's Common Stock. Because many of such shares are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders..
22
<PAGE>
Dividend Policy
The Company has not paid any cash dividends since its inception. The
Company currently intends to retain future earnings in the operation and
expansion of its business and does not expect to pay any cash dividends in the
foreseeable future.
Changes in Securities
Since June 30, 1997, the Company sold the following securities which
were exempt from registration under the Securities Act of 1933 (the "Act"):
In November 1997, the Company issued 20,000 shares of its common stock
to Reed Hansen in lieu of compensation.
In January 1998, the Company issued 100,000 shares of its common stock
to the former shareholders of Books Now, Inc. in connection with the acquisition
of Books Now, Inc.
In March 1998, the Company issued 136,364 shares of its common stock to
Sven Bensen, 40,909 shares to Arthur E. Benjamin and 24,545 shares to Thomas
Dearden under its Amended and Restated Stock Incentive Plan (the "Plan"). These
shares were issued under the provisions of the Plan, which permit the cashless
exercise of options. The Plan has been registered with the SEC on Form S-8.
In April 1998, the Company issued 13,151 shares of its common stock to
Richard Bentz and 4,939 shares to Edwin Patterson under its Plan. These shares
were issued under the provisions of the Plan which permit the cashless exercise
of options.
In May 1998, the Company issued 10,000 shares of its common stock to
Mark Johnson, a former employee, for cash consideration of $1.00 per share under
its Plan.
In May 1998, the Company issued 253,260 shares of its common stock to
the former shareholders of WeatherLabs, Inc. in connection with the acquisition
of WeatherLabs, Inc.
In June 1998, the Company issued 955,414 shares of its common stock and
warrants to purchase 318,471 additional shares of its common stock at a price of
$6.28 per share to America Online, Inc. ("AOL") in accordance with the
Interactive Marketing Agreement that the Company had signed with AOL.
All shares except those issued to the former shareholders of Books
Now, Inc. and WeatherLabs, Inc. and to AOL were issued on the exercise of
options which had been previously granted to the purchaser, and were issued
pursuant to the Company's effective registration statement on Form S-8. The
issuance of shares to the shareholders of Books Now Inc. and WeatherLabs, Inc.
and to AOL were offerings not involving a public offering and were exempt from
registration pursuant to Section 4(2) of the Act.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following unaudited selected financial data should be read in
conjunction with the Company's consolidated financial statements appearing
elsewhere herein.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 803,011 $ 8,812 $ -- $ $ --
Cost of sales 745,871 492 -- -- --
------------- ------------- ------------- ------------- -------------
Gross margin 57,140 8,320 -- -- --
------------- ------------- ------------- ------------- -------------
Operating expenses:
General and administrative 4,092,737 1,400,916 685,528 56,199 --
Depreciation and amortization 1,536,388 398,066 86,828 25,413 --
Research and development 1,432,006 3,966,185 1,478,890 535,502 --
Selling 1,290,012 1,897,665 -- -- --
AOL agreement costs 675,000
Compensation expense related to issuance
of options by principal stockholder -- -- 1,484,375 -- --
------------- ------------- ------------- ------------- -------------
9,026,143 7,662,832 3,735,621 617,114 --
------------- ------------- ------------- ------------- -------------
Other income (expense), net 20,738 495,661 57,209 (973) --
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations before
income taxes and discontinued operations (8,948,265) (7,158,851) (3,678,412) (618,087) --
Income tax benefit 2,684,000 -- 91,999 132,681 --
------------- ------------- ------------- ------------- -------------
Loss from continuing operations (6,264,265) (7,158,851) $(3,586,413) $(485,406) $ --
------------- ------------- ------------- ------------- -------------
Discontinued operations:
Income from discontinued direct
mail advertising operations,
net of income taxes 111,377 300,438 153,332 221,136 62,998
Gain on sale of direct mail advertising
operations, net of income taxes 4,394,717 -- -- -- --
Loss from discontinued internet
service provider subsidiary,
net of income taxe (265,674) (2,482,403) -- -- --
Gain on sale of Internet service provider
subsidiary, net of income taxes 232,911 -- -- -- --
------------- ------------- ------------- ------------- -------------
Income (loss) from discontinued operations 4,473,331 (2,181,965) 153,332 221,136 62,998
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (1,790,934) $ (9,340,816) $ (3,433,081) $ (264,270) $ 62,998
============= ============= ============= ============= =============
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.74) (0.86) (0.61) (0.$0) --
Diluted (0.74) (0.86) (0.61) (0.10) --
Net income (loss):
Basic (0.21) (1.12) (0.58) (0.06) 0.01
Diluted (0.21) (1.12) (0.58) (0.06) 0.01
Weighted average common shares outstanding:
Basic 8,422,345 8,309,467 5,917,491 4,713,028 4,282,299
Diluted 8,422,345 8,309,467 5,917,491 4,713,028 4,432,881
As of June 30,
--------------
1998 1997 1996 1995 1994
Balance Sheet Data:
Working capital $ 2,964,313 $ 3,624,308 $ 12,774,113 $ 794,156 $ 350,428
Total assets 23,222,948 11,320,660 16,222,902 1,073,225 476,210
Long-term debt, net of current portion,
capital lease obligation 1,384,132 -- -- -- --
Stockholders' equity 18,197,898 9,826,083 15,541,624 1,073,225 476,210
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- -----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
The Company began operations in 1987 to provide highly targeted
business to consumer advertising through direct mail. Since the Company's
founding, the direct mail marketing business had provided substantially all of
the Company's revenues. The direct mail marketing business was sold in March
1998 and its results of operations are classified as discontinued operations in
the accompanying consolidated financial statements.
In fiscal 1994, the Company began developing its own proprietary
websites. Since fiscal 1994, the Company has devoted significant resources
towards the development and launch of these websites.
In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an
Internet service provider headquartered in Salt Lake City, Utah. In March 1998,
Sisna was resold to its original owner for 35,000 shares of the Company's common
stock. Sisna's results of operations are included in the accompanying
consolidated statements of operations from the date of acquisition through the
date of sale, as discontinued operations.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. ("Books Now"), a book reseller, in exchange for a maximum of
362,500 shares of the Company's common stock. One hundred thousand shares were
issued at closing and 262,500 shares are subject to a three-year earn-out
contingency based upon achieving certain financial performance objectives. The
acquisition was accounted for as a purchase. Books Now's results of operations
are included in the accompanying consolidated statements of operations since the
date of acquisition. In May, 1998, the Company acquired all of the outstanding
stock of WeatherLabs, Inc., a provider of weather and weather-related
information and products on the Internet, in exchange for up to 777,220 shares
of the Company's common stock. 253,260 shares were issued at closing, and an
additional 523,960 shares may be issued upon the attainment by WeatherLabs of
certain financial performance targets. The acquisition was accounted for as
purchase. The results of operations of WeatherLabs are included in the
accompanying financial statements from the date of acquisition.
The Company entered into a Stock Exchange Agreement with Digital
Courier International, Inc., a Nevada corporation ("Digital Courier"), dated as
of March 17, 1998 (the "Exchange Agreement"). The Exchange Agreement was
approved by the shareholders of the Company in a Special Meeting held on
September 16, 1998 during which the shareholders approved a name change from
DataMark Holding, Inc. to Digital Courier Technologies, Inc. Pursuant to the
Exchange Agreement, the Company has agreed to issue 4,659,080 shares of its
common stock to the shareholders of Digital Courier International, Inc.. This
acquisition will be accounted for as a purchase and the Company anticipates that
approximately $11.7 million of the total purchase price of approximately $13
million will be allocated to in process research and development and will be
expensed in the first quarter fo fiscal 1999. This allocation will be finanlized
upon completion of a third-party valuation. Digital Courier International, Inc.
is a Java based Internet and wireless communications software development
company originally incorporated as Digital Courier Technologies, Inc. on July
23, 1996. For the year ended December 31, 1997, Digital Courier International,
Inc. had no revenues. Digital Courier International, Inc.'s results of
operations are not included in the accompanying financial statements.
Results of Operations
Year ended June 30, 1998 compared with year ended June 30, 1997
Net Sales
Net sales for the year ended June 30, 1998 were $803,011 as compared to
$8,812 for the year ended June 30, 1997. The Books Now operations which were
25
<PAGE>
acquired in January 1998 accounted for $392,719 of the fiscal 1998 net sales and
a one time sale of a turn-key Internet computer system accounted for the
remainder of the fiscal 1998 net sales.
Cost of Sales
Cost of sales for the year ended June 30, 1998 were $745,871 or 92.9%
of net sales, $408,667 of the cost of sales were for the one time sale of a
turn-key Internet computer system.. For the year ended June 30, 1997 costs of
sales were $492.
Operating Expenses
General and administrative expense increased 192.1% to $4,092,737
during the year ended June 30, 1998 from $1,400,916 during the year ended June
30, 1997. The increase in general and administrative expense was due to the
addition of administrative and support staff, as well as increased related
facilities costs, associated with WorldNow Online. In addition, the Company
accrued $544,014 for the cost of subleasing idle facilities and the future costs
of idle facilities during the year ended June 30, 1998. General and
administrative expense for the year ended June 30, 1998 also included a charge
of $362,125 for compensation costs related to the issuance and exercise of stock
options.
Depreciation and amortization expense increased 286% to $1,536,388
during the year ended June 30, 1998 from $398,066 during the year ended June 30,
1997. The increase was due to having the Company's state of the art computer
facility in service during the entire year ended June 30, 1998 as compared to
only two months during the year ended June 30, 1997.
Research and development expense decreased 63.9% to $1,432,006 during
the year ended June 30, 1998 from $3,966,185 during the year ended June 30,
1997. Research and development expense decreased due to decreased levels of
activity required for the development of WorldNow Online.
Selling expense decreased 32% to $1,290,012 during the year ended June
30, 1998 from $1,897,665 during the year ended June 30, 1997. The decrease in
selling expense was due to reductions in the sales and marketing staff of
WorldNow Online.
During the year ended June 30, 1998, the Company incurred costs
associated with an interactive marketing agreement with America Online, Inc.
("AOL") of $675,000. On June 1, 1998, the Company entered into an Interactive
Marketing Agreement with America Online, Inc. ("AOL") for an initial term of 39
months (the "Agreement"), which can be extended for successive one-year terms by
AOL thereafter. Under the Agreement, the Company will pay AOL $12,000,000 in
cash and issue a seven-year warrant to purchase 318,471 shares of the Company's
common stock at $12.57 per share (the "Performance Warrant") in exchange for AOL
providing the Company with certain permanent anchor tenant placements for its
Videos Now site on the AOL Network and promotion of the Videos Now site. The
Company is scheduled to make cash payments to AOL of $1,200,000 upon execution
of the agreement in June 1998, $4,000,000 prior to January 1, 1999, $4,000,000
prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. The initia
$1,200,000 payment was not actually made until July 6, 1998. The Performance
Warrant vests over the term of the agreement as certain promotion criteria are
achieved by AOL. The agreement includes an option whereby AOL elected to provide
additional permanent anchor tenant placements for Videos Now on AOL.com (a
separate and distinct website) in exchange for 955,414 shares of the Company's
common stock and a seven-year, fully vested warrant to purchase 318,471 shares
of the Company's common stock at a price of $6.28 per share (the "Option
Warrant").
The original $12 million of cash payments and the value of the Performance
Warrant, to be determined as the warrant vests, will be accounted for as
26
<PAGE>
follows: (i) the estimated fair value of the permanent anchor tenant placements
on the AOL Network of $1,750,000 per year, or approximately $5,250,000 in total,
will be charged to expense ratably over the period from the launch of the
Company's interactive site, which is expected to be October 15, 1998, through
the original term of the agreement; and (ii) the remaining amount will be
treated as advertising costs and will be expensed as paid or as the Performance
Warrant vests. The advertising will be expensed as paid in accordance with SOP
93-7, because the Company has no experience on which to evaluate the
effectiveness of the direct response advertising. The value of the common shares
issued of $8,330,016 and the value of the Option Warrant of $2,519,106 represent
the value of the permanent anchor tenant placements on AOL.com and will be
charged to expense ratably over the period from the launch of the Company's
interactive site on AOL.com through the original term of the agreement. As of
June 30, 1998, the initial $1,200,000 payment obligation was allocated $525,000
to AOL anchor tenant placement costs and $675,000 to expense as advertising
costs. The value of the common stock issued and the Option Warrant was recorded
as AOL anchor tenant placement costs in the accompanying consolidated financial
statements.
Discontinued Operations
During March 1998, the Company sold its direct mail marketing and
Internet service operations, therefore, their results of operations are
presented as discontinued operations. During the year ended June 30, 1998,
pretax income from the direct mail marketing operations was $178,204 as compared
to $480,701 for the year ended June 30, 1997. During the year ended June 30,
1998, the Internet service operations incurred a pretax loss of $425,078 as
compared to a pretax loss of $2,662,666 during the year ended June 30, 1997. The
Company realized a pretax gain of $7,031,548 from the sale of its direct mail
marketing operations and a $372,657 gain from the sale of its Internet service
operations during the year ended June 30, 1998.
Year ended June 30, 1997 compared with year ended June 30, 1996
Net Sales
Net sales for the year ended June 30, 1997 were $8,812. There were no
net sales from continuing operations during the year ended June 30, 1996.
Cost of Sales
Cost of sales for the computer online operations for the year ended
June 30, 1997 were $492. There were no sales or related cost of sales for the
year ended June 30, 1996.
Operating Expenses
General and administrative expense increased 104.4% to $1,400,916
during the year ended June 30, 1997 from $685,528 during the year ended June 30,
1996. The increase in general and administrative expense was due to the addition
of administrative and support staff, as well as increased related facilities
costs, associated with WorldNow Online.
Depreciation and amortization expense increased 358.5% to $398,066
during the year ended June 30, 1997 from $86,828 during the year ended June 30,
1996. The increase was due to acquiring the Company's state of the art computer
facility during the year ended June 30, 1997 and placing it into service during
the fourth quarter of the year ended June 30, 1997.
Research and development expense increased 168.2% to $3,966,185 during
the year ended June 30, 1997 from $1,478,890 during the year ended June 30,
1996. Research and development expense increased due to accelerated levels of
activity required for the development of WorldNow Online.
Selling expense for the year ended June 30, 1997 was $1,897,665. The
27
<PAGE>
Company did not incur any selling expense during the year ended June 30, 1996
related to continuing operations, because the WorldNow Online main web site was
in its early development stages and was not at the point where net sales could
be attained.
Discontinued Operations
During March 1998, the Company sold its direct mail marketing and
Internet service operations, therefore, their results of operations are
presented as discontinued operations. During the year ended June 30, 1997,
pretax income from the direct mail marketing operations was $480,701 as compared
to $245,331 for the year ended June 30, 1996. During the year ended June 30,
1997, the Internet service operations incurred a pretax loss of $2,662,666.
There were no Internet service operations during the year ended June 30, 1996.
28
<PAGE>
Quarterly Results
The following tables set forth certain quarterly financial information
of the Company for each quarter of fiscal 1998 and fiscal 1997. This information
has been derived from the quarterly financial statements of the Company which
are unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited financial statements included herein and include all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the financial results for such periods. This information should
be read in conjunction with the financial statements and the notes thereto and
the other financial information appearing elsewhere herein.
<TABLE>
<CAPTION>
For the three months ended
Sep. 30, 1997 Dec. 31, 1997 Mar. 31, 1998 Jun 30, 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 17,545 $ 1,942 $ 385,671 $ 397,853
Cost of sales 5,459 59,598 258,144 422,670
------------- ------------- ------------- ------------
Gross margin 12,086 (57,656) 127,527 (24,817)
------------- ------------- ------------- ------------
Operating expenses:
General and administrative 548,659 425,483 738,944 2,379,651
Depreciation and amoritization 385,904 398,817 383,329 368,338
Research and development 473,350 373,717 454,218 130,721
Selling 642,006 336,355 188,861 122,790
AOL agreement costs -- -- -- 675,000
------------- ------------- ------------- ------------
2,049,919 1,534,372 1,765,352 3,676,500
------------- ------------- ------------- ------------
Other income (expense), net 61,063 (27,589) (26,397) 13,661
------------- ------------- ------------- ------------
Loss from continuing operations before income
taxes and discontinued operations (1,976,770) (1,619,617) (1,664,222) (3,687,656)
Benefit (provision) for income taxes -- (49,829) 2,733,829 --
------------- ------------- ------------- ------------
Income (loss) from continuing operations (1,976,770) (1,669,446) 1,069,607 (3,687,656)
------------- ------------- ------------- ------------
Discontinued operations:
Income (loss) from continuing operations
advertising operations, net of income taxes 110,558 51,368 (50,548) --
Loss from operations of discontinued internet
service subsidiary, net of income taxes (121,431) (123,546) (20,698) --
Gain on sale of direct mail advertising operations,
net of income taxes -- -4,394,717 --
Gain on sale of internet service provider
subsidiary, net of income taxes -- -- 232,911 --
------------- ------------- ------------- ------------
Income (loss) from discontinued operations (10,873) (72,178) 4,556,382 --
------------- ------------- ------------- ------------
Net income (loss) $(1,987,643) $(1,741,624) $ 5,625,989 $(3,687,656)
------------- ------------- ------------- ------------
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.23) $ (0.19) $ 0.12 $ (0.48)
Diluted (0.23) (0.19) 0.12 (0.48)
Net income (loss):
Basic (0.23) (0.20) 0.64 (0.48)
Diluted (0.23) (0.20) 0.64 (0.48)
Weighted average common shares outstanding
Basic 8,560,932 8,605,767 8,763,505 7,723,563
Diluted 8,560,932 8,605,767 8,832,086 7,723,563
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
For the three months ended
--------------------------
Sep. 30, 1996 Dec. 31, 1996 Mar 31, 1997 Jun. 30, 1997
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales -- -- -- 8,812
Cost of sales -- -- -- 492
------------- ------------- ------------ -------------
Gross margin -- -- -- 8,320
------------- ------------- ------------ -------------
Operating expenses:
Research and development 307,754 660,362 970,194 2,027,875
General and administrative 109,027 272,640 388,405 630,844
Selling 657,871 273,582 341,400 624,812
Depreciation and amortization 65,709 73,769 80,269 178,319
------------- ------------- ------------ -------------
1,140,361 1,280,353 1,780,268 3,461,850
------------- ------------- ------------ -------------
Other income (expense), net 160,691 128,840 120,259 85,871
Loss from continuing operations before
income taxes and discontinued operations (979,670) (1,151,513) (1,660,009) (3,367,659)
Income tax benefit 51,813 33,850 -- --
------------- ------------- ------------ -------------
Loss from continuing operations (927,857) (1,117,663) (1,660,009) (3,367,659)
------------- ------------- ------------ -------------
Discontinued operations:
Income from discontinued direct mail
advertising operations, net of income taxes 86,356 56,415 120,901 36,766
Loss from discontinued internet service provider
subsidiary, net of income taxes -- (1,823,006) (745,060)
------------- ------------- ------------ -------------
Income (loss) from discontinued operations 86,356 56,415 (1,702,105) (708,294)
------------- ------------- ------------ -------------
Net loss $ (841,501) $(1,061,248) $(3,362,114) $(4,075,953)
============= ============= ============ =============
Net loss per common share:
Income (loss) from continuing operations:
Basic $ (0.11) $ (0.14) $ (0.20) $ (0.41)
Diluted (0.11) (0.14) (0.20) (0.41)
Net income (loss):
Basic (0.10) (0.13) (0.40) (0.49)
Diluted (0.10) (0.13) (0.40) (0.49)
Weighted average common shares outstanding:
Basic 8,110,407 8,126,649 8,479,376 8,309,467
Diluted 8,110,407 8,126,649 8,479,376 8,309,467
</TABLE>
(1) The sum of net income (loss) per share amounts for the four quarters may
not equal annual amounts due to rounding.
Liquidity and Capital Resources
Prior to calendar year 1996, the Company satisfied its cash
requirements through cash flows from operating activities and borrowings from
financial institutions and related parties. However, in order to fund the
expenses of developing and launching WorldNow Online, in March 1996, the Company
began a private placement to major institutions and other accredited investors
(the "March 96 Placement"). The Company completed the March 96 Placement for net
proceeds of $16,408,605 during fiscal year 1997, including the exercise of
warrants.
In October 1997, the Company entered into a three-year sale and
leaseback agreement which provided the Company with $2,750,000 in additional
working capital. The Company was required to place $250,000 in escrow upon
signing this agreement.
In March 1998, the Company sold the net assets of DataMark Systems,
Inc., its direct mail marketing subsidiary. To date, the Company has received
$6,857,300 from the sale of these net assets and is scheduled to receive an
additional $700,000 in June 1999.
30
<PAGE>
In April 1998, the Company purchased 1,800,000 shares of its common
stock held by a former officer of the Company in exchange for $1,500,000 in
cash.
On June 1, 1998, the Company entered into a thirty-nine month
Interactive Marketing Agreement with America Online, Inc. ("AOL"), wherein the
Company has agreed to pay AOL $12,000,000. The Company made a cash payment to
AOL of $1,200,000 in July 1998, and is scheduled to make payments to AOL of
$4,000,000 prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and
$2,800,000 prior to January 1, 2000.
AOL has exercised its option under the contract and has received
955,414 shares of the Company's common stock and warrants for 318,471 shares of
common stock.
Operating activities used $6,752,970 during the year ended June 30,
1998 compared to $6,334,660 during the year ended June 30, 1997. The increase in
cash used by operating activities during the year ended June 30, 1998 as
compared to 1997 was primarily attributable to the accrual of $675,000 for the
AOL agreement.
Cash used in investing activities was $1,944,751 and $3,697,694 during
the years ended June 30, 1998 and 1997, respectively. During the year ended
June 30, 1998, the Company's investing activities included cash advances for
operating activities to Digital Courier International, Inc., the acquisition of
equipment for $794,344, a net investment in CommTouch, Ltd. valued at $375,000
and the receipt of proceeds from the sale of equipment for $20,938. During the
year ended June 30, 1997, the Company investing activities included the
acquisition of equipment for $3,188,360 and investment in net long-term assets
of discontinued operations of $509,334.
Cash provided by financing activities was $6,971,041 during the year
ended June 30, 1998 as compared to $1,811,354 during the year ended June 30,
1997. The increase in cash provided was attributable to the net receipt of
$6,857,300 from the sale of the direct mail marketing net assets in March 1998,
$2,650,000 from the sale and leaseback agreement entered into in October 1997,
$32,417 from the proceeds received upon the exercise of stock options and
$86,000 from loan proceeds. This increase in cash provided during the year ended
June 30, 1998 was offset in part by the payment of $1,500,000 for the retirement
of common stock owned by former officers of the Company. During the year ended
June 30, 1997, the Company received $1,811,354 from the issuance of common
stock.
Management projects that there will not be sufficient cash flows from
operating activities during the next twelve months to provide capital for the
Company to sutain its operations. As of June 30, 1998, the Company had
$3,211,724 of cash. As described above. The Company made a cash payment to AOL
of $1,200,000 in July, 1998. The Company is currently attempting to obtain
additional debt or equity funding. If adequate funding is not available, the
Company may be required to revise its plans and reduce future expenditures. As
reflected in the accompanyin consolidated financial statements, the Company has
incurred losses from continuing operations of $6,264,265, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,752,970,
$6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and
1996, respectively. As of June 30, 1998, the Company has a tangible working
capital deficit of $272,968 and is scheduled to make substantial payments as
described above to AOL. None of the Company's continuing operations are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all.
Management's plans in regard to these matters include pursuing various
potential funding sources. The Company is currently in negotiations with two
firms to obtain additional working capital through a private placement of the
Company's equity securities. The Company is attempting to accelerate payments
that are due to the Company in the future totaling approximately $1,200,000. The
Company has contacted the entities owing these amounts to negotiate the
acceleration of these payments. The Company is negotiating with a lender to
obtain working capital of $1,200,000 against which loan those receivables would
be pledged. Certain directors of the Company have made oral commitments to make
loans to and additional investments in the Company. Management is actively
pursuing these alternatives until such time as market conditions are more
31
<PAGE>
favorable to obtaining additional equity financing. There can be no assurance
that additional funding will be available or, if available, that it will be
available on acceptable terms or in required amounts. Management projects that
there will not be sufficient cash flows from operating activities during the
next twelve months to provide capital for the Company to sustain its operations.
Year 2000 Issue
Beginning in October 1997, the Company initiated the review and
assessment of all its computerized hardware and internal-use software systems in
order to ensure that such systems will function properly in the year 2000 and
beyond. During the last two years, the Company's computerized information
systems have been substantially replaced and are believed to be Year 2000
compliant. It is possible, however, that software programs acquired from third
parties and incorporated into other applications utilized by the Company may not
be fully Year 2000 compliant, however, in the most likely worst case scenario
these programs would have minimal financial impact on the Company. The Company
intends to continue testing, replacing, or enhancing its internal applications
through the end of 1999 to ensure that risks related to such software are
minimized. Management does not believe that costs associated with Year 2000
compliance efforts will have a material impact on the Company's financial result
or operations.
Forward-Looking Information
Statements regarding the Company's expectations as to future revenue
from its business strategy, and certain other statements presented herein,
constitute forward-looking information within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to (i) the
Company has only generated minimal revenue from its Internet businesses, and has
not generated and may not generate the level of purchases, users or advertisers
anticipated, and (ii) the costs to market the Company's Internet services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements and reports of independent public
accountants are filed as part of this report on pages F-1 through F-26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- -----------------------------------------------------------------
FINANCIAL STATEMENT DISCLOSURE.
-------------------------------
Effective June 28, 1996, the Registrant dismissed Hansen, Barnett &
Maxwell ("Hansen") as its certifying accountant. Hansen's reports on the
Registrant's financial statements for the years ended June 30, 1995 and 1994 did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
as to uncertainty, audit scope, or accounting principles. The Registrant's board
of directors unanimously approved dismissal of Hansen.
On June 28, 1996, the Registrant engaged Arthur Andersen LLP
("Andersen") to perform its audits and provide accounting services thereafter.
The Registrant did not consult with Andersen prior to such date regarding any
reportable matter.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Located in Part I as permitted by Instruction 3 to Item 401(b)
of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Incorporated by reference to the Registrant's Proxy Statement
for its 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth information regarding Common Stock of
the Company beneficially owned as of October 7, 1998 by: (i) each person known
by the Company to beneficially own 5% or more of the outstanding Common Stock,
(ii) each director and director nominee, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all officers and directors as a group.
As of October 7, 1998, there were 13,099,210 shares of Common Stock outstanding
and no Preferred Stock outstanding.
Amount of Percentage
Names and Addresses of Common of Voting
Principal Stockholders Shares* Securities
---------------------- ------- ----------
Lorne House Trust 995,296 7.6%
Castletown, Isle of Man
America Online, Inc. 955,414 7.3%
22000 AOL Way
Dulles, Virginia 20166
Officers and Directors
----------------------
James A. Egide 1,663,898(1) 12.7%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Raymond J. Pittman 1,930,127 14.7%
187 Fremont Street
San Francisco, California 94105
Kenneth M. Woolley 387,000(2) 2.9%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Mitchell L. Edwards 420,307(3) 3.1%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Glen Hartman 66,667 0.5%
136 Heber Avenue, Suite 204
Park City, Utah 84060
All Directors and Executive Officers 4,467,999 32.7%
33
<PAGE>
(5 persons)
* Assumes exercise of all exercisable options held by listed security holders
which can be acquired within 60 days from October 7, 1998.
(1) Includes 25,000 shares which Mr. Egide may acquire on exercise of options.
(2) Includes 225,000 shares which Mr. Woolley may acquire on exercise of
options.
(3) Includes 280,000 shares which Mr. Edwards may acquire on exercise of
options. Does not include 85,000 shares which may be acquired on exercise of
options which are not currently exercisable.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
During the year ended June 30, 1994, the Company made cash loans to two
officers totaling $46,000, which were settled during the year ended June 30,
1995, except for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1994, the Company had borrowed money from certain
officers. Additional borrowings of $50,000 and $129,500 were made during the
years ended June 30, 1996 and 1995, respectively. Principal payments on these
notes were $1,666, $199,500, and $2,152 during the years ended June 30, 1997,
1996 and 1995, respectively. The amounts due on these loans at June 30, 1998,
1997 and 1996 were $0, $0 and $1,666, respectively.
During the year ended June 30, 1996, the Company borrowed $500,000 from
a bank to fund computer equipment purchases. Certain officers and stockholders
guaranteed the loan. In exchange for the guarantee, such persons received a
one-year option to purchase 25,000 shares of common stock at $5.00 per share.
During the year ended June 30, 1997, the Company negotiated services
and equipment purchase agreements with CasinoWorld Holdings, Ltd., Cybergames,
Inc., Online Investments, Inc. and Barrons Online, Inc., companies in which Mr.
Egide, one of the Company's directors and stockholders has an ownership
interest. Under the agreements, the Company provided software development
services, and configured hardware and other computer equipment.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) INDEX TO FINANCIAL STATEMENTS
Title of Documents Page No.
- ------------------ --------
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
- ---------------------------------------------------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-4
34
<PAGE>
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-10
(b) Reports on Form 8-K
-------------------
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of its fiscal year ended June 30, 1998.
(c) Exhibits
--------
The following documents are included as exhibits to this report.
<TABLE>
<CAPTION>
Exhibits Exhibit Description Page or Location
- -------- ------------------- ----------------
<S> <C> <C>
3.1 Amended and restated certificate of incorporation attached herewith
3.2 By-laws attached herewith
10.1 Lease Agreement +
10.2 Amended and restated DataMark Holding, Inc Incentive #
Plan
10.3 Interactive Marketing Agreement with America Online, Inc. attached herewith
10.4 Content license and distribution agreement with At Home attached herewith
Corporation
10.5 Stock Exchange Agreement with Digital Courier *
International, Inc.
10.6 Asset Purchase Agreement with Focus Direct, Inc. *
21.1 Subsidiaries of the Registrant attached herewith
22.0 Consent of Independent Public Accountants attached herewith
27.0 Financial Data Schedule attached herewith
</TABLE>
Incorporated by reference to the Company's Proxy statement filed on
September 1, 1998 for Special Stockholders meeting to be held on
September 16, 1998.
# Incorporated by reference to the Company's Form S-8 filed on April 28,
1998.
+ Incorporated by reference to the Company's Annual Report for the year
ended June 30, 1995.
35
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
(formerly DataMark Holding, Inc.)
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997 AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 30, 1998
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Courier Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Digital Courier
Technologies, Inc. (formerly DataMark Holding, Inc.) and subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Courier
Technologies, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from continuing operations of $6,264,265, $7,158,851 and $3,586,413 during the
years ended June 30, 1998, 1997 and 1996, respectively. The Company has a
tangible working capital deficit of $272,968 as of June 30, 1998. None of the
Company's continuing operations are generating positive cash flows. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 23, 1998
F-1
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 3,211,724 $ 4,938,404
Trade accounts receivable 16,459 --
Inventory 21,046 --
Current portion of AOL anchor tenant placement costs 3,237,281 --
Other current assets 118,721 74,742
Net current assets of discontinued operations -- 105,739
-------------------------------
Total current assets 6,605,231 5,118,885
-------------------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,225,817 5,210,607
Furniture, fixtures and leasehold improvements 777,419 724,717
Vehicles -- 29,059
-------------------------------
7,003,236 5,964,383
Less accumulated depreciation and amortization (2,109,736) (510,307)
-------------------------------
Net property and equipment 4,893,500 5,454,076
-------------------------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of current portion 8,136,841 --
-------------------------------
GOODWILL, net of accumulated amortization of $67,997 1,318,661 --
-------------------------------
RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL, INC 810,215 --
-------------------------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS
-- 709,063
-------------------------------
OTHER ASSETS 1,458,500 38,636
-------------------------------
$ 23,222,948 $ 11,320,660
-------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF JUNE 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
CURRENT LIABILITIES: --------------------------------
<S> <C> <C>
Current portion of capital lease obligations $ 1,006,906 $ --
Note payable 100,000 --
Accounts payable 1,458,598 1,086,474
Accrued rental payments for vacated facilities 544,014 --
Other accrued liabilities 531,400 408,103
--------------------------------
Total current liabilities 3,640,918 1,494,577
--------------------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 1,384,132 --
--------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 7 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value;
2,500,000 shares authorized, no shares issued
Common stock, $.0001 par value; -- --
20,000,000 shares authorized, 8,268,489 and
8,560,932 shares outstanding, respectively
827 856
Additional paid-in capital 30,506,614 22,714,366
Warrants outstanding 2,519,106 --
Receivable to be settled through the repurchase
of common shares by the Company
(148,576) --
Accumulated deficit (14,680,073) (12,889,139)
--------------------------------
Total stockholders' equity 18,197,898 9,826,083
--------------------------------
$ 23,222,948 $ 11,320,660
--------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
NET SALES $ 803,011 $ 8,812 $ --
COST OF SALES 745,871 492 --
------------------------------------------
Gross margin 57,140 8,320 --
------------------------------------------
OPERATING EXPENSES:
General and administrative 4,092,737 1,400,916 685,528
Depreciation and amortization 1,536,388 398,066 86,828
Research and development 1,432,006 3,966,185 1,478,890
Selling 1,290,012 1,897,665 --
AOL agreement costs 675,000 -- --
Compensation expense related to issuance
of options by principal stockholder -- -- 1,484,375
------------------------------------------
Total operating expenses 9,026,143 7,662,832 3,735,621
------------------------------------------
OPERATING LOSS (8,969,003) (7,654,512) (3,735,621)
------------------------------------------
OTHER INCOME (EXPENSE):
Interest and other income 178,354 496,365 95,408
Interest expense (157,616) (704) (38,199)
------------------------------------------
Net other income 20,738 495,661 57,209
------------------------------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(8,948,265) (7,158,851) (3,678,412)
INCOME TAX BENEFIT 2,684,000 -- 91,999
------------------------------------------
LOSS FROM CONTINUING OPERATIONS (6,264,265) (7,158,851) (3,586,413)
------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
DISCONTINUED OPERATIONS: --------------------------------------------
<S> <C> <C> <C>
Income from operations of discontinued
direct mail advertising operations,
net of income tax provision of $66,827,
$180,263 and $91,999, respectively $ 111,377 $ 300,438 $ 153,332
Gain on sale of direct mail advertising operations,
net of income tax provision of $2,636,831 4,394,717 -- --
Loss from operations of discontinued Internet
service provider subsidiary, net of income tax benefit
of $159,404 and $180,263, respectively (265,674) (2,482,403) --
Gain on sale of Internet service provider subsidiary,
net of income tax provision of $139,746 232,911 -- --
--------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,473,331 (2,181,965) 153,332
--------------------------------------------
NET LOSS $(1,790,934) $(9,340,816) $(3,433,081)
============================================
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.74) $ (0.86) $ (0.61)
============================================
Income (loss) from discontinued operations:
Basic and diluted $ 0.53 $ (0.26) $ 0.03
============================================
Net Loss:
Basic and diluted $ (0.21) $ (1.12) $ (0.58)
============================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 8,422,345 8,309,467 5,917,491
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Warrants
Shares Amount Capital Outstanding
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1995 5,539,953 $ 554 $ 1,187,913 $ --
Issuance of common stock for cash,
net of offering costs of $1,524,538 1,992,179 199 13,914,650 --
Stock subscriptions, net of
commissions of $166,238 214,500 21 1,496,116 --
Exercise of stock warrants 321,775 32 2,493,724 --
Issuance of options by principal stockholder -- -- 1,484,375 --
Exercise of stock options 17,000 2 8,498 --
Net loss -- -- -- --
--------------------------------------------------------------------------------
BALANCE, June 30, 1996 8,085,407 808 20,585,276 --
Exercise of stock options 102,400 10 78,405 --
Collection of stock subscriptions receivable -- -- -- --
Exercise of stock warrants 36,125 4 279,965 --
Issuance of common stock to
purchase computer software 12,000 1 95,999 --
Issuance of common stock to acquire Sisna 325,000 33 1,674,721 --
Net loss -- -- -- --
--------------------------------------------------------------------------------
BALANCE, June 30, 1997 8,560,932 856 22,714,366 --
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Stock
Receivable To Be Subscriptions Accumulated
Settled In Stock Receivable Deficit
--------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, June 30, 1995 $ -- $ -- $ (115,242)
Issuance of common stock for cash,
net of offering costs of $1,524,538 -- -- --
Stock subscriptions, net of
commissions of $166,238 -- (1,496,137) --
Exercise of stock warrants -- -- --
Issuance of options by principal stockholder -- -- --
Exercise of stock options -- -- --
Net loss -- -- (3,433,081)
--------------------------------------------------------------------------------
BALANCE, June 30, 1996 -- (1,496,137) (3,548,323)
Exercise of stock options -- -- --
Collection of stock subscriptions receivable -- 1,496,137 --
Exercise of stock warrants -- -- --
Issuance of common stock to
purchase computer software -- -- --
Issuance of common stock to acquire Sisna -- -- --
Net loss -- -- (9,340,816)
--------------------------------------------------------------------------------
BALANCE, June 30, 1997 -- -- (12,889,139)
--------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Warrants
Shares Amount Capital Outstanding
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1997 8,560,932 $ 856 $ 22,714,366 $
Exercise of stock options 424,815 42 539,093 --
Acquisition of shares in cashless
exercise of stock options (132,822) (13) (488,329)
Issuance of common stock for compensation 20,000 2 61,248 --
Compensation expense recorded in connection
with grant of stock options -- -- 343,750 --
Issuance of common stock to acquire
Books Now, Inc. 100,000 10 234,365
Issuance of common stock to acquire
WeatherLabs, Inc. 253,260 26 709,103 --
Issuance of common stock and warrants
in connection with AOL agreement 955,414 96 8,329,920
Purchase of common stock from officers for cash (1,866,110) (187) (1,699,813) --
Reacquisition and retirement of common
stock in connection with sale of Sisna (35,000) (4) (141,090) --
Reacquisition of common stock issued to
purchase computer software (12,000) (1) (95,999) --
Receivable to be settled through the
repurchase of common shares by the Company -- -- -- --
Net loss -- -- -- --
--------------------------------------------------------------------------------
BALANCE, June 30, 1998 8,268,489 827 $ 30,506,614 $ $ 2,519,106
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Stock
Receivable To Be Subscriptions Accumulated
Settled In Stock Receivable Deficit
--------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, June 30, 1997 $ -- $ -- $(12,889,139)
Exercise of stock options -- -- --
Acquisition of shares in cashless
exercise of stock options -- -- --
Issuance of common stock for compensation -- -- --
Compensation expense recorded in connection
with grant of stock options -- -- --
Issuance of common stock to acquire
Books Now, Inc.
Issuance of common stock to acquire
WeatherLabs, Inc. -- -- --
Issuance of common stock and warrants
in connection with AOL agreement 2,519,106 -- --
Purchase of common stock from officers for cash -- -- --
Reacquisition and retirement of common
stock in connection with sale of Sisna -- -- --
Reacquisition of common stock issued to
purchase computer software -- -- --
Receivable to be settled through the
repurchase of common shares by the Company (148,576) -- --
Net loss -- -- (1,790,934)
--------------------------------------------------------------------------------
BALANCE, June 30, 1998 $ (148,576) $ -- $(14,680,073)
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------------
<S> <C> <C> <C>
Net loss $(1,790,934) $(9,340,816) $(3,433,081)
Adjustments to reconcile net loss to net cash used in operating activities:
Gains on sales of direct mail and Internet service operations (7,404,205) -- --
Depreciation and amortization 1,536,388 398,066 86,828
Compensation expense related to issuance of stock options 343,750 -- 1,484,375
Issuance of common stock as compensation 61,250 -- --
Compensation expense related to cashless exercise of stock options
18,375 -- --
Loss on disposition of equipment 11,196 -- --
Expense purchased research and development -- 1,674,721 --
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable 101,653 8,206 (8,206)
Inventory 836 -- --
AOL anchor tenant placement costs (525,000) -- --
Other current assets 154,263 (74,742) 2,042
Net current assets of discontinued operations -- 182,041 (178,964)
Other assets (13,360) (38,636) 84,570
Accounts payable 446,168 588,899 443,813
Accrued liabilities 306,650 267,601 133,056
------------------------------------------
Net cash used in operating activities (6,752,970) (6,334,660) (1,385,567)
CASH FLOWS FROM INVESTING ACTIVITIES: ------------------------------------------
Purchase of property and equipment (794,344) (3,188,360) (2,589,212)
Proceeds from sale of equipment 20,938 -- --
Increase in receivable from Digital Courier International, Inc. (810,215) -- --
Increase in net long-term assets of discontinued operations -- (509,334) (70,628)
Cash of discontinued operations 13,870 -- --
Increase in other assets (375,000) -- --
------------------------------------------
Net cash used in investing activities (1,944,751) (3,697,694) (2,659,840)
------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of direct mail advertising operations $ 6,857,300 $ -- $ --
Net proceeds from sale and lease back of equipment 2,650,000 -- --
Net proceeds from issuance of common stock and other contributed capital 32,417 358,418 16,417,105
Collection of receivables from sale of common stock -- 1,496,137 719,000
Proceeds from borrowings 86,000 -- 29,701
Purchase of common stock from officers (1,700,000) -- --
Principal payments on capital lease obligation (690,183) -- --
Principal payments on borrowings (264,493) (43,201) --
--------------------------------------------
Net cash provided by financing activities 6,971,041 1,811,354 17,165,806
--------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,726,680) (8,221,000) 13,120,399
CASH AT BEGINNING OF YEAR 4,938,404 13,159,404 39,005
--------------------------------------------
CASH AT END OF YEAR $ 3,211,724 $ 4,938,404 $ 13,159,404
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 157,616 $ 9,495 $ 56,942
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Organization and Principles of Consolidation
DataMark Systems, Inc. ("Systems") was incorporated under the laws of the State
of Nevada on April 29, 1987. DataMark Printing, Inc. ("Printing") was
incorporated under the laws of the State of Utah on March 23, 1992. WorldNow
Online Network, Inc. ("WorldNow"), formerly DataMark Media, Inc., was
incorporated as a wholly owned subsidiary of Systems on October 3, 1994. Systems
negotiated a plan of reorganization and subscription agreement with the
shareholders of Printing (who were also greater than 80 percent shareholders of
Systems) whereby those shareholders transferred all of the outstanding shares of
common stock of Printing to Systems as an additional contribution to capital in
December 1994. No additional shares of common stock of Systems were issued in
the transaction.
Exchequer I, Inc. ("Exchequer"), a publicly held Delaware corporation, was
incorporated May 16, 1985. On January 11, 1995, Systems consummated a merger
agreement with Exchequer whereby Systems became a wholly owned subsidiary of
Exchequer, which changed its name to DataMark Holding, Inc. ("Holding" or the
"Company"). The shareholders of Systems received 2121.013 shares of Holding's
common stock for each share of Systems' common stock outstanding at the date of
the merger. Accordingly, the 2,132 shares of Systems' common stock were
converted into 4,522,000 shares of Holding's common stock. The accompanying
financial statements have been restated to reflect the stock conversion for all
periods presented. The merger was accounted for as a reverse acquisition with
Systems being considered the acquiring company for accounting purposes. Prior to
the merger, Holding had no assets, $26,215 of liabilities and 471,952 shares of
common stock issued and outstanding. The reverse acquisition was accounted for
by recording the liabilities of Holding at the date of merger at their
historical cost, which approximated fair value.
Effective March 17, 1998, Holding entered into a Stock Exchange Agreement (the
"Exchange Agreement") with Digital Courier International, Inc., a Nevada
corporation ("DCII"). Pursuant to the Exchange Agreement, Holding agreed to
issue 4,659,080 shares of its common stock to the shareholders of DCII. The
acquisition and the changing of Holding's name to Digital Courier Technologies,
Inc. ("DCTI") were approved by the shareholders of Holding on September 16,
1998. The acquisition of DCII will be accounted for as a purchase and the
Company anticipates that approximately $11.7 million of the total purchase price
of approximately $13.0 million will be allocated to in process research and
development and will be expensed in the first quarter of fiscal year 1999. This
allocation will be finalized upon completion of a third-party valuation. After
entering into the Exchange Agreement, the Company made advances to DCII to fund
its operations. The amount loaned to DCII totaled $810,215 as of June 30, 1998
and is reflected as a noncurrent receivable in the accompanying June 30, 1998
consolidated balance sheet.
DCII is a Java-based Internet and wireless communications software development
company originally incorporated on July 23, 1996. For the year ended December
31, 1997, DCII had no revenues.
On January 8, 1997, the Company acquired all of the outstanding shares of common
stock of Sisna, Inc. ("Sisna"). In January 1998, the Company acquired all of the
outstanding shares of common stock of Books Now, Inc. ("Books Now") and in May
1998 acquired all of the outstanding common stock of WeatherLabs Technologies,
Inc. ("WeatherLabs"). The acquisitions of Sisna, Books Now and WeatherLabs have
been accounted for as purchases with the results of operations of the acquired
entities being included in th accompanying consolidated financial statements
from the dates of the acquisitions. Additionally, in March 1998, the Company
sold its direct mail advertising operations to Focus Direct, Inc. ("Focus
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
Direct") and sold the shares of common stock of Sisna acquired in January 1997
back to Sisna's former major shareholder (see Note 3 for pro forma information).
The accompanying consolidated financial statements have been retroactively
restated to present the direct mail advertising operations and Sisna's Internet
service operations as discontinued operations.
On July 15, 1998, the Company signed an agreement to sell certain assets related
to the Company's Internet-related business branded under the "WorldNow" and
"WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The
assets relate primarily to the national Internet-based network of local
television stations (see Note 12).
DCTI, WeatherLabs, Books Now, WorldNow, Printing and Sisna are collectively
referred to herein as the "Company". All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations and Related Risks
The Company's historical operations have primarily consisted of providing highly
targeted business to consumer advertising for its clients. During fiscal years
1998, 1997 and 1996, the medium for such targeted advertising was direct mail
and was being expanded to include an online network (see discussion below). The
direct mail advertising operations were sold in March 1998.
In January 1997, the Company acquired Sisna, which operates as an Internet
service provider allowing its customers access to the Internet. Through a
network of franchisees, Sisna offers Internet access in 12 states. Sisna was
sold back to Sisna's former major shareholder in March 1998.
In fiscal 1994, the Company began developing an advertiser funded national
Internet service ("WorldNow Online") which was launched in the last quarter of
fiscal year 1997. The Company's strategy for WorldNow Online included the
creation of a national Internet-based network of local television stations.
WorldNow would provide free web hosting, web maintenance and other Internet
features, including national content and advertising, to the television
stations. In return, the stations would provide local content, ranging from
news, weather and sports, to entertainment, recreational and cultural events, as
well as free television advertising and promotions in order to drive local users
of the Internet to the WorldNow site. Both WorldNow and the stations' revenues
would be derived from local and national advertising as well as related commerce
conducted via the Internet. WorldNow went online in June 1997, and began
generating minimal advertising revenues in August 1997. In July 1998, the
Company agreed t sell certain assets related to the national Internet-based
network of local television stations (see Note 12).
As discussed above, the Company has recently acquired Books Now, WeatherLabs and
DCII. The Company's strategy is to be an Internet services company and engage in
e-commerce and provide Internet content development, packaging and distribution
for Internet portals and websites. In addition to e-commerce and web hosting
from its data center, the Company is creating virtual content and commerce
products that can be branded and used by existing Internet portals, websites and
Internet communities. Its main product offerings are Videos Now(TM),
WeatherLabs(TM)and Books Now(TM).
The Company has a limited operating history upon which an evaluation of the
Company can be based, and its prospects are subject to the risks, expenses and
uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services. Specifically, such risks
include, without limitation, the dependence on continued growth in use of the
Internet, the ability of the Company to effectively integrate the technology and
operations of acquired businesses or technologies with its operations, the
ability to maintain and expand the channels of distribution, the ability to
maintain continuing expertise in proprietary and third-party technologies, the
timing of introductions of new services, the pricing policies of the Company's
competitors and suppliers and the ability to identify, attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks or that the Company will achieve or sustain
profitability. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible.
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
As reflected in the accompanying consolidated financial statements, the Company
has incurred losses from continuing operations of $6,264,265, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,752,970,
$6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and
1996, respectively. As of June 30, 1998, the Company has a tangible working
capital deficit of $272,968. None of the Company's continuing operations are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Management's plans in regard to these matters include pursuing various potential
funding sources. The Company is currently in negotiations with two firms to
obtain additional working capital through a private placement of the Company's
equity securities. The Company is attempting to accelerate payments that are due
to the Company in the future totaling approximately $1,200,000. The Company has
contacted the entities owing these amounts to negotiate the acceleration of
these payments. The Company is negotiating with a lender to obtain working
capital of $1,200,000 against which loan those receivables would be pledged.
Certain directors of the Company have made oral commitments to make loans to and
additional investments in the Company. Management is actively pursuing these
alternatives until such time as market conditions are more favorable to
obtaining additional equity financing. There can be no assurance that additional
funding will be available or, if available, that it will be available on
acceptable terms or in required amounts.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory
Inventory is valued at the lower of cost or market, with cost being determined
using the first-in, first-out method. As of June 30, 1998, inventory consists
primarily of purchased books to be sold and distributed by Books Now.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when
incurred. Depreciation and amortization of property and equipment are computed
using primarily an accelerated method over the estimated useful lives of the
related assets, which are as follows:
Vehicles 5 years
Printing equipment 5 years
Computer and office equipment 5 - 7 years
Furniture, fixtures and leasehold
improvements 5 - 10 years
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net loss.
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
Other Assets
As of June 30, 1998 and 1997, other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Noncurrent receivable from Focus Direct (see Note 3) $ 700,000 $ -
Investment in CommTouch preferred stock (see below) 375,000 -
Security deposit under capital lease arrangement (see Note 7)
250,000 -
Deposits and other 133,500 38,636
-----------------------------------
$ 1,458,500 $ 38,636
================== ================
</TABLE>
During fiscal year 1998, the Company entered into a Series C Preferred Share
Purchase Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli
company, whereby the Company agreed to invest $750,000 in CommTouch's Series C
Preferred Stock. One half of the investment was made on July 2, 1997 and the
other half was made on September 17, 1997. The Company also has an option to
make an additional $1,000,000 investment in CommTouch's Series C Preferred
Stock. CommTouch is engaged in the development, manufacture and marketing of
PC-based Internetworking software. As of June 30, 1998, management of the
Company determined that the investment in CommTouch was partially impaired and
recorded a reserve of $375,000 against the investment.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated balance sheets
for cash, accounts receivable, and accounts payable approximate fair values
because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's note payable and capital
lease obligations also approximate fair value based on current rates for similar
debt. The $700,000 noncurrent receivable related to the sale of the direct mail
advertising business is noninterest bearing and is not due until June 30, 1999.
The estimated fair value of the receivable as of June 30, 1998 is approximately
$640,500.
Revenue Recognition
Revenue is recognized upon shipment of product and as services are provided or
pro rata over the service period. The Company defers revenue paid in advance
relating to future services and products not yet shipped.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. These deferred tax assets
or liabilities are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the fiscal year. Diluted net loss per common share ("Diluted EPS")
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net loss per common share.
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
Options to purchase 1,445,000, 1,424,815 and 1,072,215 shares of common stock at
weighted average exercise price of $3.82, $5.36, and $4.63 per share as of June
30, 1998, 1997, and 1996, respectively and warrants to purchase 656,942, 20,000
and 56,125 shares of common stock at weighted average exercise prices of $9.37,
$7,75 and $7.75 per share, respectively, were not included in the computation of
diluted EPS. The inclusion of the options and warrants would have been
antidilutive, thereby decreasing net loss per common shares. As of June 30,
1998, the Company has agreed to issue up to an additional 1,048,940 shares of
common stock in connection with the acquisitions of Books Now and WeatherLabs
(see Note 3). The issuance of the shares is contingent on the achievement of
certain performance criteria and/or the future stock price of the Company's
common stock. These contingent shares have also been excluded from the
computation of diluted EPS.
Supplemental Cash Flow Information
Noncash investing and financing activities consist of the following:
During the year ended June 30, 1998, the Company issued 955,414 shares of common
stock and warrants to purchase 318,471 shares of common stock to America OnLine,
Inc. ("AOL") in connection with an Interactive Marketing Agreement. The common
shares issued were recorded at their fair value of $8,330,016 and the warrants
were recorded at their fair value of $2,519,106 with the offset being recorded
as AOL anchor tenant placement costs (see Note 4). In addition, the Company
acquired the common stock of Book Now and WeatherLabs in exchange for 100,000
and 253,260 shares of common stock, respectively (see Note 3).
During the year ended June 30, 1997, the Company acquired $96,000 of computer
software in exchange for 12,000 shares of common stock. During the year ended
June 30, 1998, the software was returned by the Company and the Company received
back the 12,000 shares of common stock. During fiscal year 1997, the Company
acquired the common stock of Sisna in exchange for 325,000 shares of the
Company's common stock. During fiscal year 1998, the Company sold the common
stock of Sisna back to the former major shareholder of Sisna for the return of
35,000 shares of the Company's common stock.
During the year ended June 30, 1996, the Company received subscription
agreements for the purchase of 214,500 shares of common stock at $7.75 per share
amounting to $1,496,137, net of commissions of $166,238. Payment was received
subsequent to June 30, 1996 (see Note 8).
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components and SFAS No. 131 establishes new
standards for public companies to report information about their operating
segments, products and services, geographi areas and major customers. Both
statements are effective for financial statements issued for periods beginning
after December 15, 1997, accordingly, the Company will adopt SFAS No. 130 and
SFAS No. 131 in its fiscal year 1999 consolidated financial statements.
Management believes the adoption of SFAS Nos. 130 and 131 will not have a
material impact on the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at fair value and that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999; accordingly, the Company will adopt
SFAS No. 133 in its fiscal year 2000 consolidated financial statements.
Management believes the adoption of SFAS No. 133 will not have a material impact
on the consolidated financial statements.
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
Reclassifications
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal year 1998 presentation.
(3) ACQUISITIONS AND DISPOSITIONS
Books Now
In January 1998, the Company acquired all of the outstanding stock of Books Now,
a seller of books through advertisements in magazines and over the Internet. The
shareholders of Books Now received 100,000 shares of the Company's common stock
upon signing the agreement and can receive 87,500 additional shares per year for
the next three years based on performance goals established in the agreement.
The annual number of shares could increase up to a maximum of 175,000 shares if
the Company's average stock price, as defined, does not exceed $8.50 per share
at the end of the three-year period. The Company granted certain piggyback
registration rights and a one time demand registration right with regard to the
shares received under the agreement. The Company also entered into a three-year
employment agreement with the president of Books Now that provides for base
annual compensation of $81,000 and a bonus on pretax income ranging from 5% to
8% based on the level of earnings.
The acquisition has been accounted for as a purchase and the operations of Books
Now are included in the accompanying consolidated financial statements since the
date of acquisition. The tangible assets acquired included $261 of cash, $21,882
of inventory and $50,000 of equipment. Liabilities assumed included $112,335 of
notes payable, $24,404 of capital lease obligations and $239,668 of accounts
payable and accrued liabilities. The excess of the purchase price over the
estimated fair value of the acquired assets of $538,639 has been recorded as
goodwill and is being amortized over a period of five years.
WeatherLabs
On March 17, 1998, the Company entered into a Stock Exchange Agreement to
acquire all of the outstanding stock of WeatherLabs, one of the leading
providers of weather and weather-related information on the Internet. The
acquisition was closed in May 1998. At closing the shareholders of WeatherLabs
were issued 253,260 shares of the Company's common stock. These shareholders are
entitled to receive a total of 523,940 additional shares over the next three
years based on the stock price of the Company's common stock, as defined, at the
end of the Company's next three fiscal years.
The acquisition has been accounted for as a purchase and the operations of
WeatherLabs are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $3,716 of
cash, $19,694 of accounts receivable, $115,745 of equipment and $13,300 of
deposits. Liabilities assumed included $100,000 of notes payable, $56,902 of
capital lease obligations and $134,444 of accounts payable and accrued
liabilities. The excess of the purchase price over the estimated fair value of
the acquired assets of $848,019 has been recorded as goodwill and is being
amortized over a period of five years.
Unaudited Pro Forma Data for Acquisitions of Continuing Operations
The unaudited pro forma results of operations of the Company for the years ended
June 30, 1998 and 1997 (assuming the acquisitions of Books Now and WeatherLabs
had occurred as of July 1, 1996) are as follows:
1998 1997
--------------------------------
Revenues $ 1,171,200 $ 368,802
Loss from continuing operations (6,993,401) (7,574,632)
Loss from continuing operations per share (0.80) (0.87)
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
Sisna, Inc.
On January 8, 1997, the Company completed the acquisition of Sisna pursuant to
an Amended and Restated Agreement and Plan of Reorganization (the "Agreement").
Pursuant to the Agreement, Holding issued 325,000 shares of its common stock in
exchange for all of the issued and outstanding shares of Sisna. The acquisition
was accounted for as a purchase. The excess of the purchase price over the
estimated fair value of the acquired assets less liabilities assumed was
$1,674,721, which was allocated to purchased research and development and
expensed at the date of the acquisition. Sisna has not been profitable since its
inception. The tangible assets acquired consisted of $32,212 of trade accounts
receivable, $124,151 of inventory and $500,000 of computer and office equipment.
The liabilities assumed consisted of $10,550 of bank overdrafts, $278,227 of
accounts payable, $233,142 of notes payable and $134,444 of other accrued
liabilities.
In connection with the acquisition, the Company entered into three-year
employment agreements with four of Sisna's key employees and shareholders. The
employment agreements provided for automatic renewals for one or more successive
one-year terms (unless notice of non-renewal was given by either party), could
be terminated by the Company for cause (as defined), or could be terminated by
the Company without cause. If terminated without cause, the employees were
entitled to their regular base salary up to the end of the then current term and
any bonus owed pursuant to the employment agreements. The four employment
agreements provided for aggregate base annual compensation of $280,000. The
employment agreements also provided for aggregate bonuses of $500,000, which
were paid as of the date of the acquisition. These bonuses were earned and
expensed as the employees completed certain computer installations. The
employment agreements also included noncompetition provisions for periods
extending three years after the termination of employment with the Company.
In March 1998, the Company sold the operations of Sisna back to Sisna's major
shareholder, who was a director of the Company, in exchange for 35,000 shares of
the Company's common stock. The purchaser of Sisna received tangible assets of
approximately $55,000 of accounts receivable, $35,000 of prepaid expenses,
$48,000 of computer and office equipment, and $10,000 of other assets and
assumed liabilities of approximately $33,000 of accounts payable, $102,000 of
notes payable, and $244,000 of other accrued liabilities resulting in a pretax
gain on the sale of $372,657.
The operations of Sisna have been reflected in the accompanying consolidated
financial statements from the acquisition date in January 1997 through the sale
date in March 1998 as discontinued operations. The Sisna revenues were $555,686
and $341,842, respectively, and the losses from operations were $(425,078) and
$(2,662,666) during fiscal years 1998 and 1997, respectively.
Sale of Direct Mail Advertising Operations
In March 1998, the Company sold its direct mail advertising operations to Focus
Direct, a Texas corporation. Pursuant to the asset purchase agreement, Focus
Direct purchased all assets, properties, rights, claims and goodwill, of every
kind, character and description, tangible and intangible, real and personal
wherever located of the Company used in the Company's direct mail operations.
Focus Direct also agreed to assume certain liabilities of the Company related to
the direct mail advertising operations. Focus Direct is not affiliated with the
Company.
Pursuant to the agreement, Focus Direct agreed to pay the Company $7,700,000 for
the above described assets. Focus Direct paid the Company $6,900,000 at closing
and will pay the additional $800,000 by June 30, 1999. The total purchase price
was adjusted for the difference between the assets acquired and liabilities
assumed at November 30, 1997 and those as of the date of closing. This sale
resulted in a pretax gain of $7,031,548. The purchaser acquired tangible assets
consisting of approximately $495,000 of accounts receivable, $180,000 of
inventory, $575,000 of furniture and equipment, and $10,000 of other assets, and
assumed liabilities of approximately $590,000 of accounts payable and $320,000
of other accrued liabilities.
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
The direct mail advertising operations have been reflected as discontinued
operations in the accompanying consolidated financial statements. The direct
mail advertising revenues for the years ended June 30, 1998, 1997 and 1996
amounted to $7,493,061, $6,448,156 and $4,256,887, respectively.
(4) Interactive Marketing Agreement with America Online, Inc.
On June 1, 1998, the Company entered into an Interactive Marketing Agreement
with America Online, Inc. ("AOL") for an initial term of 39 months (the
"Agreement"), which can be extended for successive one-year terms by AOL
thereafter. Under the Agreement, the Company will pay AOL $12,000,000 in cash
and issue a seven-year warrant to purchase 318,471 shares of the Company's
common stock at $12.57 per share (the "Performance Warrant") in exchange for AOL
providing the Company with certain permanent anchor tenant placements for its
Videos Now site on the AOL Network and promotion of the Videos Now site. The
Company is scheduled to make cash payments to AOL of $1,200,000 upon execution
of the agreement in June 1998, $4,000,000 prior to January 1, 1999, $4,000,000
prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. The initial
$1,200,000 payment was not actually made until July 6, 1998. The Performance
Warrant vests over the term of the agreement as certain promotion criteria are
achieved by AOL
The agreement includes an option whereby AOL elected to provide additional
permanent anchor tenant placements for Videos Now on AOL.com (a separate and
distinct website) in exchange for 955,414 shares of the Company's common stock
and a seven-year, fully vested warrant to purchase 318,471 shares of the
Company's common stock at a price of $6.28 per share (the "Option Warrant").
The original $12 million of cash payments and the value of the Performance
Warrant, to be determined as the warrant vests, will be accounted for as
follows: (i) the estimated fair value of the permanent anchor tenant placements
on the AOL Network of $1,750,000 per year, or approximately $5,250,000 in total,
will be charged to expense ratably over the period from the launch of the
Company's interactive site, which is expected to be October 15, 1998, through
the original term of the agreement; and (ii) the remaining amount will be
treated as advertising costs and will be expensed as paid or as the Performance
Warrant vests. The advertising will be expensed as paid in accordance with SOP
93-7, because the Company has no experience on which to evaluate the
effectiveness of the direct response advertising. The value of the common shares
issued of $8,330,016 and the value of the Option Warrant of $2,519,106 represent
the value of the permanent anchor tenant placements on AOL.com and will be
charged to expense ratably over the period from the launch of the Company's
interactive site on AOL.com through the original term of the agreement. As of
June 30, 1998, the initial $1,200,000 payment obligation was allocated $525,000
to AOL anchor tenant placement costs and $675,000 to expense as advertising
costs. The value of the common stock issued and the Option Warrant was recorded
as AOL anchor tenant placement costs in the accompanying consolidated financial
statements.
(5) NOTE PAYABLE
As of June 30, 1998, the Company has a note payable to an unrelated individual
in the amount of $100,000. The note was assumed in the acquisition of
WeatherLabs. The note is unsecured, bears interest at eight percent and is due
on demand.
(6) INCOME TAXES
The components of the net deferred income tax assets as of June 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 3,611,000 $ 3,464,800
Accrued liabilities 271,400 83,400
Receivable reserves and other 162,000 22,000
----------------------------------------------
Total deferred income tax assets 4,044,400 3,570,200
Valuation allowance (4,044,400) (3,570,200)
----------------------------------------------
Net deferred income tax asset $ - $ -
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
As of June 30, 1998, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $10,030,000. For federal
income tax purposes, utilization of these carryforwards is limited if the
Company has had more than a 50 percent change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a change occurs in
the future. The tax net operating losses will expire beginning in 2009.
No benefit for income taxes was recorded during the year ended June 30, 1997.
The income tax benefits recorded for the years ended June 30, 1998 and 1996 of
$2,684,000 and $91,999, respectively, were limited to the income tax provision
recorded on income from discontinued operations. As discussed in Note 1, certain
risks exist with respect to the Company's future profitability, and accordingly,
a valuation allowance was recorded against the entire net deferred income tax
asset.
(7) COMMITMENTS AND CONTINGENCIES
Leases
In October 1997, the Company entered into a sale and three-year capital
leaseback agreement related to $3,000,000 of the Company's computer equipment.
The agreement provided that $250,000 of the proceeds be placed in escrow upon
signing the agreement. The equipment was sold at book value resulting in no
deferred gain or loss on the transaction. The Company assumed certain minor
capital lease obligations related to equipment as a result of the acquisitions
of Books Now and WeatherLabs. The Company leases certain facilities and
equipment used in its operations under operating lease arrangements. Commitments
for minimum rentals under noncancelable leases as of June 30, 1998 are as
follows, net of sublease rentals:
<TABLE>
<CAPTION>
Minimum Operating Leases
------------------------------------------------
Capital Minimum Deduct Net
Lease Lease Sublease Rental
Year ending June 30, Payments Rentals Rentals Commitments
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $ 1,155,481 537,293 $ 188,617 $ 348,676
2000 1,150,872 475,109 267,166 207,943
2001 301,321 293,791 198,044 95,747
2002 13,763 120,478 99,122 21,356
2003 5,220 - - -
-------------------------------------------------------------------
Total minimum lease payments 2,626,657 1,426,671 $ 752,949 $ 673,722
=================================================
Less amount representing interest (235,619)
Present value of net minimum lease
payments, including current
maturities of $1,006,906 $ 2,391,038
=================
</TABLE>
The Company incurred rent expense of $552,264, $472,572 and $118,923 in
connection with its operating leases for the years ended June 30, 1998, 1997 and
1996, respectively. Due to the sale of the Company's direct mail advertising
operations and the Sisna Internet service operations during fiscal 1998, the
Company vacated certain leased facilities. The Company accrued a liability for
an estimated $544,014 of future rental payments for vacated facilities that will
not be covered by subleases.
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
Purchase Commitment
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services. This agreement was terminated and superceded by an agreement effective
July 15, 1997. The Company has committed to minimum annual usage of at least
$500,000 over a three-year period.
Legal Matters
As discussed in Note 3, during fiscal year 1998 DCTI acquired the common stock
of Books Now in exchange for 100,000 shares of DCTI's common stock with
additional shares to be earned based on Books Now achieving certain performance
goals during the three years following the acquisition date. In June 1998, the
Company received a letter from the prior owner of Books Now, who is also the
current president of Books Now, alleging that his duties had been changed
without his consent and Books Now had been prevented by DCTI from reaching its
financial goals for the first year. The former owner contends that DCTI breached
its agreements with him, breached the implied covenant of good faith and fair
dealing in connection with the agreements and defrauded him in connection with
DCTI's purchase of Books Now's common stock.
DCTI and the former owner are engaged in settlement discussions in an effort to
resolve this matter without litigation. While management believes, after
consultation with legal counsel, that the ultimate outcome of this matter will
not have a significant effect on the Company's consolidated financial position,
liquidity or results of operations, it is possible that a change in the
Company's estimate of its probable liability, if any, could occur.
The Company is the subject of certain other legal matters which it considers
incidental to its business activities. It is the opinion of management, after
consultation with legal counsel, that the ultimate disposition of these legal
matters will not have a material impact on the consolidated financial position,
liquidity or results of operations of the Company.
(8) CAPITAL TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $.0001 par
value preferred stock. As of June 30, 1998, no preferred stock has been issued.
The Company's Board of Directors is authorized, without shareholder approval, to
fix the rights, preferences, privileges and restrictions of one or more series
of the authorized shares of preferred stock.
Common Stock Issuances and Other Transactions
During the year ended June 30, 1996, the Company raised equity capital through
private placements of its restricted common stock at $7.75 per share. The
Company engaged finders to introduce potential investors to the Company. The
finders received a ten percent commission and warrants to purchase 250,000
shares of the Company's common stock at a price of $7.75 per share. During
fiscal year 1997 these warrants were cancelled and replaced with 125,000 options
to purchase common stock at $9.00 per share. The Company sold 1,992,179 shares
of common stock for $13,914,849 in proceeds, net of offering costs of
$1,524,538, and received subscriptions for an additional 214,500 shares of
common stock. The proceeds from the subscriptions of $1,496,137, net of offering
costs of $166,238, were received in fiscal year 1997. The Company issued
warrants to purchase up to 377,900 shares of the Company's common stock at $7.75
per share to certain of the investors. During the years ended June 30, 1997 and
1996, 36,125 and 321,775 of these warrants to purchase shares of the Company's
common stock were exercised, respectively.
The Company agreed with certain of the investors to use its best efforts to
register the issued shares and warrants under the Securities Act of 1933. The
Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission during fiscal year 1996 and it became effective in fiscal
year 1997.
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
As discussed in Note 3, during the year ended June 30, 1997, the Company issued
325,000 shares of its common stock to purchase Sisna. During the year ended June
30, 1998, the Company sold the operations of Sisna back to Sisna's former major
shareholder for 35,000 shares of the Company's common stock. In fiscal year
1997, the Company acquired certain computer software in exchange for 12,000
shares of common stock. In fiscal year 1998, the Company returned the computer
software for the return of the 12,000 shares of common stock.
During the year ended June 30, 1998, the Company issued 100,000 and 253,260
shares of its common stock to purchase Books Now and WeatherLabs, respectively
(see Note 3). The Company issued 955,414 shares of common stock and warrants to
purchase common stock to AOL in connection with the Interactive Marketing
Agreement described in Note 4.
On April 28, 1998, the Company entered into an Amended Stock Repurchase
Agreement (the "Repurchase Agreement") with Mr. Chad L. Evans, the former CEO
and Chairman of the Board of the Company. Pursuant to the Repurchase Agreement,
the Company agreed to repurchase 1,800,000 shares of the Company's common stock
held by Mr. Evans for $1,500,000. Additionally, the Company entered into a
Confidentiality and Noncompetition Agreement with Mr. Evans, pursuant to which
Mr. Evans, for consideration consisting of $25,000, has agreed, among other
things, not to compete with the Company, solicit employees from the Company, or
use proprietary information of the Company for a period of three years. In
addition, the Company acquired 66,110 shares of common for $199,813 from the
president of the direct mail advertising operations that were sold during the
year.
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
(9) STOCK OPTIONS
The Company has established the Omnibus Stock Option Plan (the "Option Plan")
for employees and consultants. The Company's Board of Directors has from time to
time authorized the grant of stock options outside of the Option Plan to
directors, officers and key employees as compensation and in connection with
obtaining financing and guarantees of loans. The following table summarizes the
option activity for the years ended June 30, 1998, 1997 and 1996.
Options Outstanding
Number of Option Price
Shares Per Share
------------------------------------
Balance at June 30, 1995 150,592 $ 0.25
Granted 470,000 5.00-9.00
Balance at June 30, 1996 620,592 0.25-9.00
Granted 65,000 3.25
Expired or cancelled (100,000) 5.00
Balance at June 30, 1997 585,592 0.25-9.00
Granted 365,000 2.75-5.00
Expired or cancelled (305,000) 3.25-7.75
Exercised (150,592) 0.25
Balance at June 30, 1998 495,000 $2.75-9.00
=====================================
All of the above options have been granted with exercise prices equal to or
greater than the intrinsic fair value of the Company's common stock on the dates
of grant. During the year ended June 30, 1998, the Company decreased the option
price to $2.75 per share for 315,000 of the options that had been previously
granted at prices ranging from $3.25 to $7.75 per share and extended the
exercise periods for certain of the options. As of June 30, 1998, 430,000 of the
above options are exercisable and the above options expire, if not exercised,
from December 31, 1998 through June 30, 2002.
The Option Plan provides for the issuance of a maximum of 2,500,000 shares of
common stock. The Option Plan is administered by the Board of Directors who
designate option grants as either incentive stock options or non-statutory stock
options. Incentive stock options are granted at not less than 100 percent of the
market value of the underlying common stock on the date of grant. Non-statutory
stock options are granted at prices determined by the Board of Directors. Both
types of options are exercisabl for the period as defined by the Board of
Directors on the date granted; however, no incentive stock option is exercisable
after ten years from the date of grant. The following table summarizes the stock
option activity for the years ended June 30, 1998, 1997 and 1996 under the
Option Plan.
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
Options Outstanding
Number of Option Price
Shares Per Share
-----------------------------------------
Balance at June 30, 1995 634,946 $ 0.50-1.00
Granted 175,000 7.75
Expired or canceled (341,323) 0.50-1.00
Exercised (17,000) 0.50
Balance at June 30, 1996 451,623 0.50-7.75
Granted 510,000 3.25-9.00
Expired or canceled (20,000) 0.50-5.00
Exercised (102,400) 0.50-1.00
Balance at June 30, 1997 839,223 0.50-9.00
Granted 635,000 2.75-7.75
Expired or canceled (250,000) 0.50-7.25
Exercised (274,223) 0.50-3.38
Balance at June 30, 1998 950,000 $ 2.75-9.00
=========================================
In June 1996, in connection with an employment agreement with an officer of
WorldNow, a principal stockholder granted an option to the officer to purchase
237,500 shares of restricted common stock from the principal stockholder at
$1.50 per share. As discussed in Note 8, during the year ended June 30, 1996 the
Company sold shares of restricted common stock in a private placement at $7.75
per share; accordingly, the Company recognized $1,484,375 of compensation
expense related to this transaction during the year ended June 30, 1996.
Stock-Based Compensation
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans as they relate to employees and directors. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma information
regarding net income (loss) as if the Company had accounted for its stock
options granted to employees and directors subsequent to June 30, 1995 under the
fair value method of SFAS No. 123. The fair value of these stock options was
estimated at the grant date using the Black-Scholes option pricing model with
the following assumptions: average risk-free interest rates of 5.50, 6.47 and
5.86 percent in fiscal years 1998, 1997 and 1996, respectively, a dividend yield
of 0 percent, volatility factors of the expected common stock price of 88.91,
77.80 and 77.80 percent, respectively, and weighted average expected lives
ranging from one to nine years for the stock options. For purposes of the pro
forma disclosures the estimated fair value of the stock options is amortized
over the vesting periods of the respective stock options. Following are the pro
forma disclosures and the related impact on net loss for the years ended June
30, 1998, 1997 and 1996:
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
1998 1997 1996
---------------------------------------------------
Net loss:
As reported $ (1,790,934) $ (9,340,816) $ (3,433,081)
Pro forma (4,895,300) (10,378,303) (3,926,658)
Net loss per share
(basic and diluted):
As reported (0.21) (1.12) (0.58)
Pro forma (0.58) (1.25) (0.66)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to June 30, 1995, and due to the nature and timing of option
grants, the resulting pro forma compensation cost may not be indicative of
future years.
(10) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of its
employees. All employees are eligible to participate and may elect to contribute
to the plan annually. The Company has no obligation to contribute and did not
contribute additional matching amounts to the Plan during any year presented.
(11) RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1994, the Company made cash loans to two officers
totaling $46,000, which were settled during the year ended June 30, 1995, except
for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1995, the Company had borrowed money from certain officers.
Additional borrowings of $50,000 were made during the year ended June 30, 1996.
Principal payments on these notes were $1,666, and $199,500 during the years
ended June 30, 1997 and 1996, respectively. The amounts due on these loans at
June 30, 1997 and 1996 were $0 and $1,666, respectively.
During the year ended June 30, 1996, the Company borrowed $500,000 from a bank
to fund computer equipment purchases. Certain officers and shareholders
guaranteed the loan. In exchange for the guarantee, such persons received a
one-year option to purchase 25,000 shares of common stock at $5.00 per share
(see Note 9).
During the year ended June 30, 1997, the Company negotiated services and
equipment purchase agreements with CasinoWorld Holdings, Ltd. and Barrons
Online, Inc., companies in which one of the Company's directors and shareholders
has an ownership interest. Under the agreements, the Company provided software
development services, configured hardware and other computer equipment and
related facilities amounting to $410,292. As of June 30, 1998, the Company had a
receivable from these companies in the amount of $148,576. The Company had
agreed to repurchase shares of its common stock as settlement for the
receivable. Accordingly, the receivable is reflected as contra equity in the
accompanying June 30, 1998 consolidated balance sheet.
(12) SUBSEQUENT EVENT
Agreement to Sell Certain Assets Related to WorldNow
On July 15, 1998, the Company signed an agreement to sell certain assets related
to the Company's Internet-related business branded under the "WorldNow" and
WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The
assets related primarily to the national Internet-based network of local
television stations. Pursuant to the asset purchase agreement, Gannaway agreed
to pay $487,172 (less certain amounts as defined) in installments over a
one-year period from the date of closing and agreed to pay earn-out payments of
up to $500,000. The earn-out payments are based upon ten percent of monthly
revenues actually received by the buyer in excess of $100,000 and are to be paid
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
quarterly. The purchaser acquired tangible assets of approximately $100,000 and
assumed no liabilities. The operations of WorldNow have been reflected in the
accompanying consolidated financial statements in loss from continuing
operations.
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 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.
DIGITAL COURIER TECHNOLOGIES, INC.
Dated: October 12, 1998 By /s/ James A. Egide
-----------------------------------------
James A. Egide, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James A. Egide Director and Chairman October 12, 1998
- ---------------------------- of the Board
James A. Egide
/s/ Raymond J. Pittman Director and Chief October 12, 1998
- ---------------------------- Operating Officer
Raymond J. Pittman
/s/ Mitchell L. Edwards Director, Executive Vice President, October 12, 1998
- ---------------------------- and Chief Financial Officer
Mitchell L. Edwards
Director October , 1998
- ----------------------------
Glen Hartman
Director October , 1998
- ----------------------------
Kenneth Woolley
/s/ Michael D. Bard Controller October 12, 1998
- ----------------------------
Michael D. Bard
</TABLE>
See accompanying notes to consolidated financial statements.
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE
OF
INCORPORATION
OF
DATAMARK HOLDING, INC.
(Originally incorporated as Exchequer, Inc.
To be known hereafter as Digital Courier Technologies, Inc.)
The following Amended and Restated Certificate of Incorporation of DataMark
Holding, Inc. amends and restates the provisions of and supersedes the
Certificate of Incorporation filed with the Secretary of State of the State of
Delaware on May 16, 1985 in its entirety and any and all certificates of
amendment filed with the Secretary of State of the State of Delaware prior to
September 16, 1998.
ARTICLE I
NAME
----
The name of the corporation hereby created shall be Digital Courier
Technologies, Inc.
ARTICLE II
DURATION
--------
The Corporation shall continue in existence perpetually unless sooner
dissolved according to law.
ARTICLE III
PURPOSES
--------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
CAPITALIZATION
--------------
The total number of shares of stock of all classes which the
Corporation shall have authority to issue is Twenty Two Million Five Hundred
Thousand (22,500,000), of which Twenty Million (20,000,000) shares shall have
the par value of One Hundredth of One Cent ($.0001) each and shall be shares of
common stock (the "Common Stock"), and Two Million Five Hundred Thousand
(2,500,000) shares shall have the par value of One Hundredth of One Cent
($.0001) each and shall be shares of preferred stock (the "Preferred Stock").
ARTICLE V
CLASSES OF STOCK
----------------
A statement of the designations and the powers, preferences, and
rights, and the qualifications, limitations, or restrictions thereof, of the
shares of stock of each class which the Corporation shall be authorized to
issue, is as follows:
(a) Preferred Stock. Shares of preferred stock may be issued from time
<PAGE>
to time in one or more series as may from time to time be determined by the
Board of Directors. Each series shall be distinctly designated. All shares of
any one series of the preferred stock shall be alike in every particular, except
that there may be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The powers, preferences, participating, optional
and other rights of each such series qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any time
outstanding. Subject to the provisions of subparagraph (i) of Paragraph (c) of
this Article V, the Board of Directors of this Corporation is hereby expressly
granted authority to fix by resolution or resolutions adopted prior to the
issuance of any shares of each particular series of preferred stock, the
designation, powers, preferences and relative, participating, optional and other
rights and the qualifications, limitations and restrictions thereof, if any, of
such series, including, without limiting the generality of the foregoing the
following:
(i) The distinctive designation of , and the number of shares of
preferred stock which shall constitute, the series, which number may be
increased (except as otherwise fixed by the Board of Directors) or decreased
(but not below the number of shares thereof outstanding) from time to time by
action of the Board of Directors;
(ii) The rate and times at which, and the terms and conditions
upon which, dividends, if any, on shares of the series shall be paid, the extent
of preferences or relation, if any, of such dividends to the dividends payable
on any other class or classes of stock of this Corporation, or on any series of
preferred stock, and whether such dividends shall be cumulative or
noncumulative;
(iii)The right, if any, of the holders of shares of the series to
convert the same into, or exchange the same for any other series, or any other
class or classes of stock of this Corporation, and the terms and conditions of
such conversion or exchange;
(iv) Whether shares of the series shall be subject to redemption,
and the redemption price or prices, including, without limitation, a redemption
price or prices payable in shares of the Common Stock, cash or other property
and the time or times at which, and the terms and conditions upon which, shares
of the series may be redeemed;
(v) The rights, if any, of the holders of shares of the series
upon voluntary or involuntary liquidation merger, consolidation, distribution or
sale of assets, dissolution or winding up of this Corporation;
(vi) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for shares of the series; and
(vii)The voting powers, if any, of the holders of shares of the
series which may, without limiting the generality of the foregoing, include (A)
the right to more or less than one vote per share on any or all matters voted
upon by the shareholders and (B) the right to vote as a series by itself or
together without preferred stock as a class, upon such matters, under such
circumstances and upon such conditions as the Board of Directors may fix,
including, without limitation, the right, voting as a series by itself or
together with other series of preferred or together with all series of preferred
stock as a class, to elect one or more directors of this Corporation in the
event there shall have been a default in the payment of dividends on any one or
more series of preferred stock or under such other circumstances and upon such
conditions as the Board may determine.
(b) Common Stock. The Common Stock shall be non-assessable and shall
not have cumulative voting rights or pre-emptive rights. In addition, the Common
Stock shall have the following powers, preferences, rights, qualifications,
limitations and restrictions. -------------
(i) After the requirements with respect to preferential dividends
of preferred stock (fixed in accordance with the provisions of Paragraph (a) of
this Article V), if any, shall have been met and after this Corporation shall
comply with all the requirements, if any, with respect to the setting aside of
funds as sinking funds or redemption or purchase accounts (fixed in accordance
with provisions of Paragraph (a) of this Article V) and subject further to any
other conditions which may be fixed in accordance with the provisions of
paragraph (a) of this Article V, but not otherwise, the holders of Common Stock
shall be entitled to receive such dividends, if any, as may be declared from
time to time by the Board of Directors.
(ii) After distribution in full of the preferential amount (fixed
in accordance with the provisions of Paragraph (a) of this Article V), if any,
to be distributed to the holders of preferred stock in the event of a voluntary
or involuntary liquidation, distribution or sale of assets, dissolution or
winding up of this Corporation, the holders of the Common Stock shall be
<PAGE>
entitled to receive all of the remaining assets of this Corporation, tangible
and intangible, of whatever kind available for distribution to stockholders,
ratably in proportion to the number of shares of the Common Stock held by each;
(iii) Shares of the Common Stock may be issued from time to time
as the Board of Directors shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors;
(iv) No holder of any of the shares of any class or series of
stock or of options, warrants or other rights to purchase shares of any class or
series of stock or of other securities of the Corporation shall have any
pre-emptive right to purchase or subscribe for any unissued stock of any class
or series of any additional shares of any class or series to be issued by reason
of any increase of the authorized capital stock of the Corporation of any class
or series, or bonds, certificate of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any class or
series, or carrying any rights to purchase stock of any class or series, but any
such unissued stock, additional authorized issue of shares of any class or
series of stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such person, firms, corporation or
associations, whether such holders or others, and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its sole
discretion.
(c) Other Provisions. The relative powers, preferences and rights of
each series of preferred stock in relation to the powers, preferences and rights
of each other series of preferred stock shall, in each case, be as fixed from
time to time by the Board of Directors in the resolution or resolutions adopted
pursuant to authority granted in Paragraph (a) of this Article V, and the
consent by class or series vote or otherwise, of the holders of the preferred
stock of such of the series of preferred stock as are from time to time
outstanding shall not be required for the issuance by the Board of Directors of
any other series of preferred stock whether the powers, preferences and rights
of such other series shall be fixed by the Board of Directors as senior to, or
on a parity with the powers, preferences and rights of such outstanding series,
or any of them: provided, however, that the Board of Directors may provide in
such resolution or resolutions adopted with respect to any series of preferred
stock that the consent of the holders of a majority (or such greater proportion
as shall be therein fixed) of the outstanding shares of such series voting
thereon shall be required for the issuance of any or all other series of
preferred stock.
(ii) Subject to the provisions of subparagraph (i) of this
Paragraph, shares of any series of preferred stock may be issued from time to
time as the Board of Directors shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(iii) Shares of the Common Stock may be issued from time to time
as the Board of Directors shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(iv) No holder of any of the shares of any class or series of
stock or of options, warrants or other rights to purchase shares of any class or
series of stock or of other securities of the Corporation shall have any
pre-emptive right to purchase or subscribe for any unissued stock of any class
or series or any additional shares of any class or series to be issued by reason
of any increase of the authorized capital stock of the Corporation of any class
or series, or bonds, certificate of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any class or
series, or carrying any rights to purchase stock of any class or series, but any
such unissued stock, additional authorized issue of shares of any class or
series of stock or securities convertible into or exchangeable for stock, or
carrying any right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations or
associations, whether such holders or others, and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its sole
discretion.
ARTICLE VI
BYLAWS
------
In furtherance and not in limitation of the powers conferred by the
<PAGE>
statute, the Board of Directors is expressly authorized to make, alter or repeal
the Bylaws of the Corporation.
ARTICLE VII
MEETINGS AND RECORDS
--------------------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. Elections of directors
need not be by written ballot unless the Bylaws of the Corporation so provide.
ARTICLE VIII
REGISTERED OFFICE AND AGENT
---------------------------
The name of the Corporation's registered agent and address of its
registered office in the State of Delaware are:
The Corporation Trust Company
County of New Castle
1209 Orange Street
Wilmington, Delaware 19801
ARTICLE IX
REMOVAL OF DIRECTORS
--------------------
Any director of the Corporation may be removed for cause at any annual
or special meeting of the shareholders by the same vote as that required to
elect a director provided, that such director prior to his removal shall receive
a copy of the charges against him, delivered to him personally or by mail at his
address appearing on the records of the Corporation, at least thirty (30) days
prior to the meeting at which such removal is to be considered, and such
director has an opportunity to be heard on such charges at the meeting of
shareholders of the Corporation at which the question of his removal is to be
considered.
ARTICLE X
INDEMNIFICATION OF OFFICERS AND DIRECTORS
-----------------------------------------
The Corporation shall indemnify any and all persons who may serve or
who have served at any time as director or officers, or who, at the request of
the Board of Directors of the Corporation, may serve, or at any time have served
as directors or officers of another corporation in which the Corporation at such
time owned or may own shares of stock, or which it was or may be a creditor, or
may own shares of stock, or which it was or may be a creditor, and the
respective heirs, administrators, successors, and assigns, against any and all
expenses, including amounts paid upon judgment, counsel fees, and amounts paid
in settlement (before or after suit is commenced), actually or necessarily by
such persons in connection with the defense or settlement of any claim, action,
suit, or proceeding in which they, or any of them, are made parties, or a party,
or which may be assessed against them or any of them, by reason of being or
having been directors or officers of the Corporation, or such other corporation,
except in relation to matters as to which any such director or officer of the
Corporation, or such other corporations, or former director or officer shall be
adjudged in any action, suit or proceeding to be liable for his own negligence
of misconduct in performance of his duties. Such indemnification shall be in
addition to any other rights to which those indemnified may be entitled under
any Law, by-law, agreement, vote of stockholders or otherwise.
ARTICLE XI
AMENDMENT
---------
<PAGE>
Except as set forth herein and in the General Corporation Law of the
State of Delaware, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders are granted subject to this reservation.
ARTICLE XII
OFFICERS' AND DIRECTORS' CONTRACTS
----------------------------------
No contract or other transactions between this Corporation and any
other firm or corporation shall be affected by the fact that a director or
officer of this Corporation has an interest in, or is a director or officer of
such firm or other corporation. Any officer or director, individually or with
others, may be a party to , or may have an interest in, any transaction of this
Corporation or any transaction in which this Corporation is a party or has an
interest. Each person who is now or may become an officer or director of this
Corporation is hereby relieved from liability that he might otherwise obtain in
the event such officer or director contracts with this Corporation for the
benefit of himself or any other firm or corporation in which he may have an
interest, provided such officer or director acts in good faith.
This Amended and Restated Certificate of Incorporation of the
Corporation was duly adopted in accordance with the provisions of Sections 242
and 245 to the General Corporation law of the State of Delaware.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO BE SIGNED BY MITCHELL EDWARDS, ITS'
SECRETARY, THIS DAY OF SEPTEMBER, 1998.
-------------------------
DataMark Holdings, Inc.
-------------------------
By: Mitchell Edwards
Its: Secretary
Exhibit 3.2
BY-LAWS
OF
DIGITAL COURIER TECHNOLOGIES, INC.
A Delaware corporation
<PAGE>
Article I
Identification
Section 1.1. Name. The name of the Corporation is Digital Courier
Technologies, Inc.
Section 1.2. Registered Office and Registered Agent. The address of the
registered office of the corporation shall be 1209 Orange Street, Wilmington,
Delaware 19801 and the name of the registered agent at such address is The
Corporation Trust Company.
Section 1.3. Principal Business Office. The principal office and place
of business of the Corporation shall be located at 136 Heber Avenue, Park City,
Utah 84068-1990, or at such other location, either within or without the State
of Delaware, as the Board of Directors may from time to time designate. The
Corporation may have such other offices, either within or without the State of
Delaware, as the Board of Directors may designate or as the business of the
Corporation may from time to time require.
Article II
Stockholders, Stock
Section 2.1. Annual Meetings. An annual meeting of stockholders shall
be held for the election of directors at such date, time and place, either
within or without the State of Delaware, as may be designated by resolution of
the Board of Directors from time to time. Any other proper business may be
transacted at the annual meeting.
Section 2.2. Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Board of Directors, or by a
committee of the Board of Directors which has been duly designated by the Board
of Directors and whose powers and authority include the power to call such
meetings, but such special meetings may not be called by any other person or
persons.
Section 2.3. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such a meeting. If mailed, such
notice shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation.
Section 2.4. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than sixty days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.5. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the Certificate of Incorporation or these by-laws,
the holders of one-third of the outstanding shares of stock entitled to vote at
the meeting, present in person or by proxy, shall constitute a quorum. In the
<PAGE>
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided in Section 2.4 of these
by-laws until a quorum shall attend.
Section 2.6. Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in his absence by the Vice
Chairman of the Board, if any, or in his absence by the President, or in his
absence by a Vice President, or in the absence of the foregoing persons, by a
chairman designated by the Board of Directors, or in the absence of such
designation, by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.7. Voting; Proxies. Each stockholder entitled to vote at any
meeting of stockholders shall be entitled to one vote for each share of stock
held by him which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for him by proxy, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall b irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by law or by the Certificate of Incorporation or these
by-laws, be decided by the vote of the holders of a majority of the outstanding
shares of stock entitled to vote thereon present in person or by proxy at the
meeting.
Section 2.8. Fixing Date for Determination of Stockholders of Record.
(a) In order that the Corporation may determined the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not precede the date such record date is fixed and shall not be more
than sixty nor less than ten days before the date of such meeting, nor more than
sixty days prior to any other action. If no record date is fixed, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given. The record date for any other purpose other than
stockholder action by written consent shall be at the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten (10) days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in the State of Delaware,
<PAGE>
its principal place of business, or any officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by applicable law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the date on which the Board of
Directors adopts the resolution taking such prior action.
Section 2.9. List of Stockholders Entitled to Vote. The Secretary shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present. The stock ledger
shall be the only evidence as to who are the stockholders entitled to examin the
stock ledger, the list of stockholders or the books of the Corporation, or to
vote in person or by proxy at any meeting of stockholders.
Section 2.10. Action by Consent of Stockholders. Unless otherwise
restricted by the Certificate of Incorporation, any action required or permitted
to be taken at any annual or special meeting of the stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 2.11. Certificates. Every holder of stock shall be entitled to
have a certificate signed by or in the name of the Corporation by the Chairman
or Vice Chairman of the Board of Directors, if any, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by him in the Corporation. Any of or all the signatures on the certificate
may be a facsimile. In case any officer, transfer agent, or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent, or registrar at the date of issue.
Section 2.12. Lost, Stolen or Destroyed Stock Certificates; Issuance of
New Certificates. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or his legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
<PAGE>
ARTICLE III
Board of Directors
Section 3.1. Number; Qualifications. The Board of Directors shall
consist of at least three or more members, the actual number thereof to be
determined from time to time by resolution of the Board of Directors. Directors
need not be stockholders.
Section 3.2. Election; Resignation; Removal; Vacancies. At each annual
meeting of stockholders, the stockholders shall elect the Directors of the
corporation, or, in the case of Directors elected for a specified term, the
stockholders shall replace those Directors whose terms then expire. Any Director
may resign at any time upon written notice to the Corporation. Any vacancy
occurring in the Board of Directors may be filled by the affirmative vote of a
majority of the Board, although such majority is less than a quorum, or by a
plurality of the votes cast at a meeting of stockholders, and each Director so
elected shall hold office until the expiration of the term of office of the
Director whom he has replaced.
Section 3.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board of Directors may from time to time determine, and if
so determined notices thereof need not be given.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the President, any Vice President, the Secretary, or
by any member of the Board of Directors. Reasonable notice thereof shall be
given by the person or persons calling the meeting, not later than the second
day before the date of the special meeting.
Section 3.5. Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and the participation in a meeting is pursuant to
this by-law shall constitute presence in person at such meeting.
Section 3.6. Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the whole Board shall constitute a quorum for
the transaction of business. Except in cases in which the Certificate of
Incorporation or these by-laws otherwise provide, the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 3.7. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
their absence by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 3.8. Informal Action by Directors. Unless otherwise restricted
by the Certificate of Incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board or
such committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or committee.
<PAGE>
ARTICLE IV
Committees
Section 4.1. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of the committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of any
such absent or disqualified member. Any such committee, to the extent provided
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporatio to
be affixed to all papers which may require it; bur no such committee shall have
power or authority in reference to amending the Certificate of Incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
of Directors as provided in Section 151(a) of the General Corporation Law, fix
any of the preferences or rights of such shares, except voting rights of the
shares), adopting an agreement of merge or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of dissolution, or amending these
by-laws; and, unless the resolution expressly so provides, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock.
Section 4.2. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these by-laws.
ARTICLE V
Officers
Section 5.1. Executive Officers; Election; Qualifications; Term of
Office; Resignation; Removal; Vacancies. The Board of Directors shall choose a
Chief Executive Officer, a President and Secretary, and it may, if it so
determines, choose a Chairman of the Board and a Vice Chairman of the Board from
among its members. The Board of Directors may also choose one or more Vice
Presidents, one or more Assistant Secretaries, a Treasurer and one or more
Assistant Treasurers. Each such officer shall hold office until the first
meeting of the Board of Directors after the annual meeting of stockholders next
succeeding this election, and until his successor is elected and qualified or
until his earlier resignation or removal. Any officer may resign at any time
upon written notice to the Corporation. The Board of Directors may remove any
officer with or without cause at any time, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation. Any number of offices may be held by the same person. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise may be filled for the unexpired portion of the term by the Board of
Directors at any regular or special meeting.
Section 5.2. Powers and Duties of Executive Officers. The officers of
the Corporation shall have such powers and duties in the management of the
Corporation as may be prescribed by the Board of Directors and, to the extent
not so provided, as generally pertain to their respective offices, subject to
the control of the Board of Directors. The Board of Directors may require any
<PAGE>
officer, agent or employee to give security for the faithful performance of his
duties.
Section 5.3 Policies and Procedures. The Board of Directors may, by
resolution, establish policies and procedures regarding the operation and
management of the Corporation by the Officers and Directors, including, but not
limited to, actions requiring the prior consent of the Board of Directors of a
Committee of the Board of Directors.
ARTICLE VI
Miscellaneous
Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
Section 6.2. Seal. The corporate seal shall have the name of the
Corporation inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors
and Committees. Any written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
Section 6.4. Indemnification of Directors, Officers and Employees. The
Corporation shall indemnify to the full extent permitted by law any person made
or threatened to be made a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that he, his
testator or intestate is or was a director, officer or employee of the
Corporation or any predecessor of the Corporation or serves or served any other
enterprise as a director. Officer or employee at the request of the Corporation
or any predecessor of the Corporation.
.
Section 6.5. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors of officers are directors of
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board or committee thereof which authorizes
the contract or transaction, or solely because his or their votes are counted
for such purpose, if: (1) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith authorizes
the contract or transaction by the affirmative votes of majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (3) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
<PAGE>
Section 6.6. Form of Records. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of any information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
Section 6.7. Amendment of By-laws. These by-laws may be altered or
repealed, and new by-laws made, by the Board of Directors, but the stockholders
may make additional by-laws and may alter and repeal any by-laws whether adopted
by them or otherwise.
CERTIFICATE OF SECRETARY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned does hereby certify that he is the Secretary of the
Corporation; that the foregoing by-laws of said Corporation were duly and
regularly adopted as such by the Board of Directors effective _____________,
199_; and that the foregoing by-laws are now in full force and effect.
-------------------------------
Secretary
Exhibit 10.3
Confidential
INTERACTIVE MARKETING AGREEMENT
-------------------------------
This Interactive Marketing Agreement (the "Agreement") dated as of
June 1, 1998 (the "Effective Date"), is between America Online, Inc. ("AOL"), a
Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166, and
DataMark Holding Inc., a Delaware corporation, d/b/a Digital Courier
Technologies, Inc., ("MP"), with offices at 448 E. Winchester Street, Suite 400,
Salt Lake City, Utah 84107. AOL and MP may be referred to individually as a
"Party* and collectively as the "Parties."
INTRODUCTION
------------
AOL and MP each desires to enter into an interactive marketing
relationship whereby AOL will promote and distribute an interactive site
referred to (and further defined) herein as the Affiliated MP Site. This
relationship is further described below and is subject to the terms and
conditions set forth in this Agreement. Defined terms used but not defined in
the body of the Agreement will be as defined on Exhibit B attached hereto.
TERMS
-----
1 . PROMOTION, DISTRIBUTION AND MARKETING.
--------------------------------------
1.1. AOL Promotion of Affiliated MP Site. AOL will provide MP with
the promotions (or any comparable promotions as provided below)
for the Affiliated MP Site described on Exhibit A (the
"Promotions"). Subject to MP's reasonable approval, AOL will
have the right to fulfill its promotional commitments with
respect to any of the foregoing by providing MP with comparable
promotional placements in appropriate alternative areas of the
AOL Network. In addition, if AOL is unable to deliver any
particular Promotion, subject to MP's reasonable approval, AOL
will provide MP, as its sole remedy, with a comparable
promotional placement. AOL reserves the right to redesign or
modify the organization, structure, "look and feel," navigation
and other elements of the AOL Network at any time. In the event
such modifications materially and adversely affect any specific
Promotion, subject to MP's reasonable approval, AOL will provide
MP, as its sole remedy, with a comparable promotional placement.
1.2. Impressions. During the Term, AOL shall deliver Five Hundred
Million (500,000,000) Impressions to MP through the Promotions
(the "Impressions Commitment"). With respect to the Impressions
Commitment, any shortfall in Impressions at the end of a year
will not be deemed a breach of the Agreement by AOL; instead
such shortfall will be added to the Impressions target for the
subsequent year. In the event there is (or will be in AOL's
reasonable judgment) a shortfall in Impressions as of the end of
the Initial Term (a "Final Shortfall"), AOL will provide MP, as
its sole remedy, with advertising placements on the AOL Network
which have a total value, based on AOL's then-current
advertising rate card, equal to the value of the Final Shortfall
(determined by multiplying the percentage of Impressions that
were not delivered by the total, guaranteed payment provided for
below). In the event AOL provides an excess of Impressions in
any year, the Impressions target for the subsequent year will be
reduced by the amount of such windfall.
1.3 AOL.com Promotions.
-------------------
(i) AOL Option. On or prior to June 30, 1998 (the "Closing
Date"), AOL shall have the option (the "AOL Option"),
exercisable in AOL's sole discretion, to provide MP with
the additional package of promotions and placements on
AOL.com as provided on Exhibit A-1 attached hereto (the
"AOL.com Promotions"), by providing MP with written
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notice, which notice shall be attached hereto as an
appendix and will be incorporated as part of this
Agreement. Should AOL exercise the AOL Option, MP shall
accept the AOL.com Promotions and shall immediately begin
payment of the amounts required pursuant to Section 4.2
hereof. In such event, the AOL.com Promotions will be
applied towards fulfilling the Impressions Commitment and
such AOL.com Promotions will be deemed to be a part of
the Promotions as defined in Section 1.1 hereof.
(ii) AOL.com Promotions. Provided that AOL has exercised the
AOL Option, at any time during the Term, AOL shall have
the right to cease the AOL.com Promotions by providing MP
with at least thirty (30) days notice of its intent to do
so. In the event that AOL exercises the foregoing right,
AOL shall forfeit all rights in and to any unvested
Performance Warrant Shares granted to AOL pursuant to
Section 5 hereof. Notwithstanding the foregoing, in no
event will AOL provide less than the Impressions
Commitment through the Promotions.
(iii) AOL.com Premier Position. In the event that AOL decides
to offer a premier video partner position to any third
party on AOL.com which is similar to the Premier Video
Partner position provided to MP in Section 3 hereof, AOL
shall enter into good faith negotiations with MP for a
period of time not to exceed fifteen (15) days with
respect to offering a premier video position to MP on
AOL.com.
1.4. Content of Promotions. Promotions for MP will link only to the
Affiliated MP Site and will promote only the Premier Product.
The specific MP Content to be contained within the Promotions
(including, without limitation, advertising banners and
contextual promotions) (the Promo Content") will be determined
by MP, subject to AOL's technical limitations, the terms of this
Agreement and AOL's then-applicable policies relating to
advertising and promotions. MP will submit in advance to AOL for
its review a quarterly online marketing plan with respect to the
Affiliated MP Site. The Parties will meet in person or by
telephone at least monthly to review operations and performance
hereunder, including a review of the Promo Content to ensure
that it is designed to maximize performance. MP will
consistently update the Promo Content no less than twice per
week. Except to the extent expressly described herein, the
specific form, placement, duration and nature of the Promotions
will be as determined by AOL in its reasonable editorial
discretion (consistent with the editorial composition of the
applicable screens).
1.5. MP Promotion of Affiliated MP Site and AOL. As set forth in
fuller detail in Exhibit C, MP will promote AOL as its preferred
Interactive Service and will promote the availability of the
Affiliated MP Site through the AOL Network. MP will not
implement or authorize any promotion similar in any material
respect (including, without limitation, in scope, purpose,
amount, prominence or regularity) to the promotion required or
provided pursuant to Exhibit C for any other Interactive
Service.
2. AFFILIATED MP SITE.
-------------------
2.1. Customized Site. The Affiliated MP Site shall be a customized,
optimized and "mirrored" version of MP's main web site
containing the specific Content described in Section 2.2 below.
2.2. Content. MP will make available through the Affiliated MP Site
the comprehensive offering of Products and other related Content
described on Exhibit D. Except as mutually agreed in writing by
the Parties, the Affiliated MP Site will contain only Content
that is directly related to the MP Products listed on Exhibit D
and will not contain any third-party products, services,
programming or other Content. All sales of Products through the
Affiliated MP Site will be conducted through a direct sales
format; MP will not promote, sell, offer or otherwise distribute
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any products through any format other than a direct sales format
(e.g., through auctions or clubs) without the prior written
consent of AOL. MP will review, delete, edit, create, update and
otherwise manage all Content available on or through the
Affiliated MP Site in accordance with the terms of this
Agreement. MP will ensure that the Affiliated MP Site does not
in any respect promote, advertise, market or distribute the
products, services or content of any other Interactive Service
or any entity reasonably construed to be in competition with
AOL.
2.3. Production Work. Except as agreed to in writing by the Parties
pursuant to the "Production Work" section of the Standard Online
Commerce Terms & Conditions attached hereto as Exhibit F, MP
will be responsible for all production work associated with the
Affiliated MP Site, including all related costs and expenses.
2.4. Hosting: Communications. MP will be responsible for all
communications, hosting and connectivity costs and expenses
associated with the Affiliated MP Site. In addition, MP will
provide all computer hardware (e.g., servers, network devices,
routers, switches, telephones and other similar equipment) and
all computer software (e.g., web servers, operating systems,
applications, databases and other similar resources) necessary
for MP to access the AOL Network. Additionally MP will bear
responsibility for the implementation, management and costs
associated with the Affiliated MP Site. MP will utilize a
dedicated high speed connection to maintain quick and reliable
transport of information to and from the MP data center and
AOL's designated data center.
2.5. Technology. MP will take all reasonable steps necessary to
conform its promotion and sale of Products through the
Affiliated MP Site to the then-existing technologies identified
by AOL which are optimized for the AOL Service. Additionally, MP
shall have the right to make available to AOL users (i)
"streaming audio or video" or any comparable audio or video
delivery technology and (ii) "wav" files, mpeg files or other
downloadable, nonstreamed audio or video files through any
linked pages of the Affiliate MP Site; provided that, MP shall
not make available any full length Video Products or any
substantial portion thereof through the products described in
either clause (i) or (ii) above, and (b) if MP's provision of
the foregoing products result in an increase in AOL's network
costs, AOL shall have the right to restrict MP's offering of
the foregoing and the Parties shall renegotiate the economic
terms of this Agreement. AOL will be entitled to require
reasonable changes to the Content (including, without
limitation, the features or functionality) within any linked
pages of the Affiliated MP Site to the extent such Content will,
in AOL's good faith judgment, adversely affect any operational
aspect of the AOL Network. AOL reserves the right to review and
test the Affiliated MP Site from time to time to determine
whether the site is compatible with AOL's then-available client
and host software and the AOL Network.
2.6. Product Offering. MP will ensure that the Affiliated MP Site
includes all of the Products and other Content (including,
without limitation, any features, offers, contests,
functionality or technology) that are then made available by or
on behalf of MP through any Additional MP Channel; provided,
however, that (a) such inclusion will not be required where it
is commercially or technically impractical to either Party
(i.e., inclusion would cause either Party to incur substantial
incremental costs); and (b) the specific changes in scope,
nature and/or offerings required by such inclusion will be
subject to AOL's review and approval and the terms of this
Agreement.
2.7. Pricing and Terms. MP will ensure that: (a) the prices (and any
other required consideration) for Products in the Affiliated MP
Site do not exceed the prices for the Products or substantially
similar Products offered by or on behalf of MP through any
Additional MP Channel; (b) the terms and conditions related to
Products in the Affiliated MP Site are no less favorable in any
respect than the terms and conditions for the Products or
substantially similar Products offered by or on behalf of MP
through any Additional MP Channel; and (c) both the prices and
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the terms and conditions related to Products in the Affiliated
MP Site are reasonably and generally competitive in all material
respects with the prices and terms and conditions for the
Products or substantially similar Products offered by third
parties which offer Video Products through any Interactive Site.
2.8. Special Offers. MP will (a) promote through the Affiliated MP
Site any special or promotional off ers made available by or on
behalf of MP through any Additional MP Channel and (b) promote
through the Affiliated MP Site on a regular and consistent basis
special offers exclusively available to AOL Members and /or AOL
Users ((a) and (b) collectively, the "Special Offers"). MP will
provide AOL with reasonable prior notice of Special Offers so
that AOL can market the availability of such Special Offers in
the manner AOL deems appropriate in its editorial discretion,
subject to the terms and conditions hereof.
2.9. Operatinq Standards. MP will ensure that the Affiliated MP Site
complies at all times with the standards set forth in Exhibit E
attached hereto. To the extent site standards are not
established in Exhibit E with respect to any aspect or portion
of the Affiliated MP Site (or the Products or other Content
contained therein), MP will provide such aspect or portion at a
level of accuracy, quality, completeness, and timeliness which
meets or exceeds prevailing standards in the video sale and
rental industry. In the event MP fails to comply with any
material terms of this Agreement or any Exhibits attached
hereto, AOL will have the right (in addition to any other
remedies available to AOL hereunder) to decrease the promotion
it provides to MP hereunder (and to decrease or cease any other
contractual obligation hereunder) until such time as MP corrects
its non-compliance (and in such event, AOL will be relieved of
the proportionate amount of any promotional commitment made to
MP by AOL hereunder corresponding to such decrease in promotion)
and (b) any revenue threshold(s) set forth in Section 4.2 will
each be adjusted proportionately to correspond to such decrease
in promotion and other obligations during the period of
non-compliance.
2.10. Advertising Sales. MP shall have the right to sell promotions,
advertisements, links pointers or similar services or rights
through the Affiliated MP Site ("Advertisements"). The specific
advertising inventory within the Affiliated MP Site will be as
reasonably determined by MP. Notwithstanding the foregoing, in
the event that MP desires to retain a third party to sell
advertising in the Affiliated MP Site on behalf of MP, MP shall
first offer to AOL the right to sell such Advertisements on
behalf of MP. MP and AOL shall share the revenues derived from
the sale of Advertisements in the Affiliated MP Site pursuant to
Section 4.4 hereof. All Advertisements in the Affiliated MP Site
shall be subject to AOL's then-applicable advertising policies,
exclusivities and prior approval.
2.11. Traffic Flow. MP will take reasonable efforts to ensure that AOL
traffic is either kept within the Affiliated MP Site or
channeled back into the AOL Network (with the exception of
advertising links sold and implemented pursuant to the
Agreement). The Parties will work together on implementing
mutually acceptable links from the Affiliated MP Site back to
the AOL Service.
3. PREMIER STATUS.
---------------
3.1. Premier Product Provided MP is in compliance with all material
terms of this Agreement, during the Initial Term, MP will be one
of only two third-party resellers of Premier Products (each a
"Premier Video Partner") expressly promoted by AOL on the
Premier Screens of the AOL Service as provided on Exhibit A
attached hereto.
3.2. Exceptions. Notwithstanding anything to the contrary contained
in this Section 3 (and without limiting any actions which may be
taken by AOL without violation of MP's rights hereunder), no
provision of this Agreement will limit AOL's ability (on or off
the AOL Network) to: (i) undertake activities or perform duties
pursuant to existing arrangements with third parties (or
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pursuant to any agreements to which AOL becomes a party
subsequent to the Effective Date as a result of a Change of
Control, assignment, merger, acquisition or other similar
transaction); (ii) promote or provide "run of service"
advertisement placements; (iii) promote or provide advertisement
placements to any third party in any shopping area or channel;
(iv) promote or provide advertisement placements to any video
club, motion picture, television or film studio or any entity
which creates films, television programs, or motion picture
theatrical productions; (v) promote or provide advertisement
placements to any reseller of Video Products, provided that,
except for the other Premier Video Partner, such promotions or
advertisements cannot promote any online transactions in
connection with Video Products or link to a web site which
offers online transactions in connection with Video Products;
(vi) enter into an arrangement with any third party for the
primary purpose of acquiring AOL Members whereby such party is
allowed to promote or market products or services to AOL Members
that are acquired as a result of such agreement; (vii)create
contextual links or editorial commentary relating to any third
party marketer of the Premier Product; or (viii) promote,
advertise or distribute the products of any third party which is
an aggregator of products (i.e., it is primarily engaged in
activities other than marketing Video Products) each an
"Aggregator"); provided that such promotions do not expressly
promote an Aggregator's Premier Product within the Premier
Screens.
3.3. Product Offer Right. In the event that MP does not offer certain
Video Products through the Affiliated MP Site, and if AOL, in
its reasonable judgment, determines that the offering of such
Video Products is important to a good AOL User experience, MP
shall have thirty (30) days after notice from AOL to provide
such Video Products in the MP Affiliated Site, and if within
such thirty (30) day period MP is unable to provide such Video
Products, AOL shall have the right to engage other third parties
to provide such Video Products.
4. PAYMENTS.
---------
4.1. Guaranteed AOL Service Payments. MP will pay AOL a
non-refundable guaranteed payment of Twelve Million Dollars (US
$12,000,000) as follows:
(i) One Million Two Hundred Thousand Dollars (US $1,200,000)
upon execution of this Agreement;
(ii) Four Million Dollars (US $4,000,000) on or prior to
January 1, 1999;
(iii) Four Million Dollars (US $4,000,000) on or prior to July
1, 1999; and
(iv) Two Million Eight Hundred Thousand Dollars (US $2, 800,000)
on or prior to January 1, 2000.
(v) Notwithstanding the foregoing, all payments required
pursuant to this Section 4.1 shall immediately become due and
payable within five (5) days of the occurrence of an
underwritten secondary public offering of shares of MP resulting
in net proceeds to MP of at least Twenty Million Dollars (US
$20,000,000).
4.2 Guaranteed AOL.com Payments. In the event that AOL exercises the
AOL Option pursuant to Section 1.3 hereof, on the Closing Date,
MP shall deliver to AOL either (i) an aggregate of nine hundred
fifty five thousand four hundred fourteen (955,414) shares of
common stock of MP (the "Common Stock") or (ii) in the event
that the ten day trailing average closing price per price of the
Common Stock reported on the NASDAQ Stock Market ("the Market
Price") as of the Closing Date, is less than the Market Price as
of the execution date hereof, such number of shares of Common
Stock as determined by dividing (i) the Market Price as of the
Closing Date into (ii) Six Million Dollars (US $6,000,000).
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4.3. Sharing of Transaction Revenues. MP shall pay to AOL an amount
equal to four tenths of one percent (.4%) of Transaction
Revenues until such time as the Revenue Threshold has been met.
From and after the Revenue Threshold has been met, MP shall pay
to AOL an amount equal to three percent (3%) of all Transaction
Revenues generated hereunder. MP will pay all of the foregoing
amounts on a quarterly basis within thirty (30) days following
the end of the quarter in which the applicable Transaction
Revenues were generated.
4.4. Sharing of Advertising Revenues. MP shall pay to AOL an amount
equal to fifty percent (50%) of all Advertising Revenues
generated hereunder. Each Party will pay the other Party all
Advertising Revenues received and owed to such other Party as
described herein on a quarterly basis within thirty (30) days
following the end of the quarter in which such amounts were
generated by such Party.
4.5. Alternative Revenue Streams. In the event MP or any of its
affiliates (a) receives or desires to receive, directly or
indirectly, any Additional Revenues in connection with the
Affiliated MP Site (an "Alternative Revenue Stream"), MP will
promptly inform AOL in writing, and the Parties will negotiate
in good faith regarding whether MP will be allowed to market
Products producing such Alternative Revenue Stream through the
Affiliated MP Site, and if so, the equitable portion of revenues
from such Alternative Revenue Stream (if applicable) that will
be shared with AOL (in no event less than the percentage of
Transaction Revenues to be paid to AOL pursuant to this Section
4).
4.6. Late Payments: Wired Payments. All amounts owed hereunder not
paid when due and payable will bear interest from the date such
amounts are due and payable at the prime rate in effect at such
time as listed in the Wall Street Journal. All payments required
hereunder will be paid in immediately available, non-refundable
U.S. funds wired to the "America Online" account, Account Number
323070752 at The Chase Manhattan Bank, 1 Chase Manhattan Plaza,
New York, NY 10081 (ABA: 021000021).
4.7. Auditing Rights. MP will maintain complete, clear and accurate
records of all expenses, revenues and fees in connection with
the performance of this Agreement. For the sole purpose of
ensuring compliance with this Agreement, AOL will have the
right, at its expense, to direct an independent certified public
accounting firm to conduct a reasonable and necessary inspection
of portions of the books and records of MP which are relevant to
MP's performance pursuant to this Agreement. Any such audit may
be conducted after twenty (20) business days prior written
notice.
4.8. Taxes. MP will collect and pay and indemnify and hold AOL
harmless from, any sales, use, excise, import or export value
added or similar tax or duty not based on AOL's net income,
including any penalties and interest, as well as any costs
associated with the collection or withholding thereof, including
attorneys'fees.
4.9. Reports.
--------
4.9.1. Sales Reports. MP will provide AOL in an automated manner
with a monthly report in an AOL-designated format,
detailing the following activity in such period (and any
other information mutually agreed upon by the Parties or
reasonably required for measuring revenue activity by MP
through the Affiliated MP Site): summary sales
information by day (date, number of Products, number of
orders, total Transaction Revenues); and (ii) detailed
sales information (order date/time stamp (if technically
feasible), purchaser name and screenname, SKU or Product
description) (the information in clauses (i) and (ii),
"Sales Reports"). AOL will be entitled to use the Sales
Reports in its business operations, subject to the terms
of this Agreement. More generally, each payment to be
made by MP pursuant to this Section 4 will be accompanied
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by a report containing information which supports the
payment, including information identifying (i) gross
Transaction Revenues and all items deducted or excluded
from gross Transaction Revenues to produce Transaction
Revenues, including, without limitation, chargebacks and
credits for returned or canceled goods or services (and,
where possible, an explanation of the type of reason
therefor, e.g., bad credit card information, poor
customer service, etc.) and (ii) any applicable
Advertising Revenues.
4.9.2. Fraudulent Transactions To the extent permitted by
applicable laws, MP will provide AOL with an prompt
report of any fraudulent order, including the date,
screenname or email address and amount associated with
such order, promptly following MP obtaining knowledge
that the order is, in fact, fraudulent.
5. WARRANTS.
---------
5.1 Grant of Warrants.
(i) First Warrant. MP hereby grants to AOL a warrant
representing the right for a seven (7) year period to
purchase an aggregate of three hundred eighteen thousand
four hundred seventy one (318,471) shares of Common Stock
(the "Performance Warrant Shares") at an exercise price
equal to Twelve Dollars and Fifty Seven Cents ($12.57).
(ii) Second Warrant. In the event that MP exercises the AOL
Option pursuant to Section 1.3 hereof, on the Closing
Date, MP will grant to AOL a warrant representing the
right for a seven (7) year period to purchase (i) an
aggregate of three hundred eighteen thousand four hundred
seventy one (318,471) fully vested shares of Common Stock
(the "Time Warrant Shares") at an exercise price equal to
Six Dollars and Twenty Eight Cents ($6.28) or (ii) in the
event that the Market Price as of the Closing Date is
less than the Market Price as of the execution date
hereof, such number of fully vested shares of Common
Stock as determined by dividing (i) the Market Price as
of the Closing Date into (ii)Two Million Dollars (US
$2,000,000), at an exercise price equal to the Market
Price as of the Closing Date.
5.2 Vesting of Performance Warrant Shares. The Performance Warrant
Shares granted hereunder shall vest in accordance with the
following schedule:
(i) during the second (2nd), third (3rd), fourth (4th ) and
fifth (5th ) quarters of the Term, provided that AOL
shall have delivered at least twenty five million
(25,000,000) Impressions to MP during each of the
foregoing quarters, at the end of each such quarter, AOL
shall vest in twenty six thousand, five hundred thirty
nine (26,539) of the Performance Warrant Shares; and
(ii) during the sixth (6th) through thirteenth (13th)
quarters of the Term, provided that AOL shall have
delivered at least fifty million (50,000,000) Impressions
to MP during each of the foregoing quarters, at the end
of each such quarter, AOL shall vest in twenty six
thousand, five hundred thirty nine (26,539) of the
Performance Warrant Shares.
(iii) Notwithstanding the foregoing, all Performance Warrant
Shares shall immediately vest (a) in the event that AOL
and MP shall enter into a binding agreement with respect
to the promotion by AOL of other content or commerce
offerings of MP, or (b) upon a Change of Control of MP.
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5.3 Terms and Conditions/ Anti-Dilution Rights. MP hereby agrees to
use best efforts to amend its current registered "shelf"
offering to ensure that any shares of Common Stock granted to
AOL hereunder, or any warrants convertible into or exchangeable
for Common Stock, shall be granted to AOL from shares of Common
Stock that are registered and fully transferable under MP's
current "shelf" offering. On the execution date hereof, AOL
shall have weighted average anti-dilution protection rights in
the event that MP issues any shares of Common Stock or any
security convertible into or exchangeable for Common Stock to
any person or entity and the consideration per share is less
than the exercise price of the Time Warrant Shares (as
applicable) or the Performance Warrant Shares. All rights
granted in this Section 5.3 are supplementary and additional to
any other rights provided herein, including, without limitation,
the rights granted in Section 5.1 hereof.
5.4 Approval: Final Agreement.
--------------------------
(a) The provisions of this Section 5 contain all of the
principal and essential terms and conditions of the Warrant
granted to AOL hereunder, and without limiting the foregoing,
within thirty (30) days of the execution hereof (the "Cutoff
Date"), MP shall issue the Warrant granted hereunder and will
enter into a Common Stock Subscription Warrant Agreement
substantially in the form of Exhibit H attached hereto which
will document the Warrants granted to AOL hereunder.
(b) MP hereby acknowledges and agrees that, in the event of a
breach of the provisions of this Section 5.4, AOL would be
irreparably harmed and it would be impossible for AOL to
determine the amount of damages that would result from such
breach, and that accordingly, any remedy at law for any such
breach or threatened breach thereof, would be inadequate.
Accordingly, MP agrees that if the Cutoff Date shall have
occurred and MP shall not have executed a Common Stock
Subscription Warrant, the provisions of this Section 5.4 may be
specifically enforced through equitable and injunctive relief in
addition to any other applicable rights or remedies AOL may
have, from any court of competent jurisdiction. MP hereby waives
the claim or defense that a remedy at law would be adequate in
respect to this provision, and agrees to have this Section 5.4
specifically enforced against MP without the necessity of
posting bond or other security, and consents to the entry of
injunctive relief enjoining or restraining any breach or
threatened breach of this Section 5.4.
6. TERM; RENEWAL; TERMINATION.
---------------------------
6.1. Term. Unless earlier terminated as set forth herein, the initial
term of this Agreement will be thirty nine (39) months from the
Effective Date (the "Initial Term").
6.2. Renewal. Upon conclusion of the Initial Term of this Agreement,
AOL will have the right to renew the Agreement for successive
one-year renewal terms (each a "Renewal Term" and together with
the Initial Term, the "Term") by providing MP with notice of
AOL's intention to renew the Agreement for a subsequent Renewal
Term no later than thirty (30) days prior to the commencement of
such Renewal Term. During any such Renewal Term: (i) MP will not
be required to pay any guaranteed, fixed payment or perform the
cross promotional obligations specified in Section 1; and (ii)
AOL will not be required to provide MP with the premier
promotions as provided in Section 3 and Exhibit A hereof;
provided that (iii) for so long as AOL may elect to maintain the
premier promotions contained herein during a Renewal Term, MP
will continue to perform its cross-promotional obligations.
6.3. Termination for Breach. Except as expressly provided elsewhere
in this Agreement, either Party may terminate this Agreement at
any time in the event of a material breach of the Agreement by
the other Party which remains uncured after thirty (30) days
written notice thereof to the other Party (or such shorter
period as may be specified elsewhere in this Agreement);
provided that AOL will not be required to provide notice to MP
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in connection with MP's failure to make any payment to AOL
required hereunder, and the cure period with respect to any
scheduled payment will be five(5) days from the date for such
payment provided for herein. Notwithstanding the foregoing, in
the event of a material breach of a provision that expressly
requires action to be completed within an express period shorter
than 30 days (e.g., the service level response times set forth
in Section 5 of Exhibit E), either Party may terminate this
Agreement if the breach remains uncured after written notice
thereof to the other Party.
6.4. Termination for Bankruptcy/Insolvency. Either Party may
terminate this Agreement immediately following written notice to
the other Party if the other Party (i) ceases to do business in
the normal course, (ii) becomes or is declared insolvent or
bankrupt, (iii) is the subject of any proceeding related to its
liquidation or insolvency (whether voluntary or involuntary)
which is not dismissed within ninety (90) calendar days or (iv)
makes an assignment for the benefit of creditors.
6.5. Termination on Change of Control In the event of (i) a Change of
Control of MP resulting in control of MP by an Interactive
Service or (ii) a Change of Control of AOL, AOL may terminate
this Agreement by providing thirty (30) days prior written
notice of such intent to terminate.
6.6. Termination for Failure to Create an Affiliated MP Site.
Notwithstanding anything to contrary contained herein, if MP
shall not have created an Affiliated MP Site which complies with
the provisions hereof (including, without limitation, Sections
2.2, 2.5, 2.6, 2.9, 2.11, and the provisions of Exhibit I
attached hereto) prior to August 31, 1998, AOL shall have the
right to immediately terminate this Agreement.
6.7. Early Termination Right. Notwithstanding anything to the
contrary contained herein, at any time prior to the Closing
Date, MP shall have the right to terminate this Agreement (the
"Termination Right") by providing AOL with no less than two (2)
days written notice thereof, provided that (i) upon exercise of
such Termination Right, MP shall pay to AOL a sum of One Million
Dollars (US $1,000,000) in lieu of the payments required
pursuant to Section 4.1 hereof, and (ii) at such time as AOL
shall exercise the AOL Option pursuant to Section 1.3 hereof, MP
shall no longer have the right to exercise the Termination
Right, and such right shall be void and of no further legal
effect.
7. MANAGEMENT COMMITTEE/ARBITRATION.
---------------------------------
7.1. The Parties will act in good faith and use commercially
reasonable efforts to promptly resolve any claim, dispute,
claim, controversy or disagreement (each a "Dispute") between
the Parties or any of their respective subsidiaries, affiliates,
successors and assigns under or related to this Agreement or any
document executed pursuant to this Agreement or any of the
transactions contemplated hereby. If the Parties cannot resolve
the Dispute within such time frame, the Dispute will be
submitted to the Management Committee for resolution. For ten
(10) days following submission of the Dispute to the Management
Committee, the Management Committee will have the exclusive
right to resolve such Dispute; provided further that the
Management Committee will have the final and exclusive right to
resolve Disputes arising from any provision of the Agreement
which expressly or implicitly provides for the Parties to reach
mutual agreement as to certain terms. If the Management
Committee is unable to amicably resolve the Dispute during the
ten-day period, then the Management Committee will consider in
good faith the possibility of retaining a third party mediator
to facilitate resolution of the Dispute. In the event the
Management Committee elects not to retain a mediator, the
dispute will be subject to the resolution mechanisms described
below. "Management Committee" will mean a committee made up of a
senior executive from each of the Parties for the purpose of
resolving Disputes under this Section 7 and generally overseeing
the relationship between the Parties contemplated by this
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Agreement. Neither Party will seek, nor will be entitled to
seek, binding outside resolution of the Dispute unless and until
the Parties have been unable to amicably resolve the Dispute as
set forth in this Section 7 and then, only in compliance with
the procedures set forth in this Section 7.
7.2. Except for Disputes relating to issues of (i) proprietary
rights, including but not limited to intellectual property and
confidentiality, and (ii) any provision of the Agreement which
expressly or implicitly provides for the Parties to reach mutual
agreement as to certain terms (which will be resolved by the
Parties solely and exclusively through amicable resolution as
set forth in Section 7.1), any Dispute not resolved by amicable
resolution as set forth in Section 7.1 will be governed
exclusively and finally by arbitration. Such arbitration will be
conducted by the American Arbitration Association ("AAA") in
Washington, D.C. and will be initiated and conducted in
accordance with the Commercial Arbitration Rules ("Commercial
Rules") of the AAA, including the AAA Supplementary Procedures
for Large Complex Commercial Disputes ("Complex Procedures"), as
such rules will be in effect on the date of delivery of a demand
for arbitration ("Demand"), except to the extent that such rules
are inconsistent with the provisions set forth herein.
Notwithstanding the foregoing, the Parties may agree in good
faith that the Complex Procedures will not apply in order to
promote the efficient arbitration of Disputes where the nature
of the Dispute, including without limitation the amount in
controversy, does not justify the application of such
procedures.
7.3. The arbitration panel will consist of three (3) arbitrators.
Each Party will name an arbitrator within ten (10) days after
the delivery of the Demand. The two arbitrators named by the
Parties may have prior relationships with the naming Party,
which in a judicial setting would be considered a conflict of
interest. The third arbitrator, selected by the first two, will
be a neutral participant, with no prior working relationship
with either Party. If the two arbitrators are unable to select a
third arbitrator within ten (10) days, a third neutral
arbitrator will be appointed by the AAA from the panel of
commercial arbitrators of any of the AAA Large and Complex
Resolution Programs. If a vacancy in the arbitration panel
occurs after the hearings have commenced, the remaining
arbitrator or arbitrators may not continue with the hearing and
determination of the controversy, unless the Parties agree
otherwise.
7.4. The Federal Arbitration Act, 9 U.S.C. Secs. 1-16, and not state
law, will govern the arbitrability of all Disputes. The
arbitrators will allow such discovery as is appropriate to the
purposes of arbitration in accomplishing a fair, speedy and
cost-effective resolution of the Disputes. The arbitrators will
reference the Federal Rules of Civil Procedure then in effect in
setting the scope and timing of discovery. The Federal Rules of
Evidence will apply in toto. The arbitrators may enter a default
decision against any Party who fails to participate in the
arbitration proceedings.
7.5. The arbitrators will have the authority to award compensatory
damages only. Any award by the arbitrators will be accompanied
by a written opinion setting forth the findings of fact and
conclusions of law relied upon in reaching the decision. The
award rendered by the arbitrators will be final, binding and
non-appealable, and judgment upon such award may be entered by
any court of competent jurisdiction. The Parties agree that the
existence, conduct and content of any arbitration will be kept
confidential and no Party will disclose to any person any
information about such arbitration, except as may be required by
law or by any governmental authority or for financial reporting
purposes in each Party's financial statements.
7.6. Each Party will pay the fees of its own attorneys, expenses of
witnesses and all other expenses and costs in connection with
the presentation of such Party's case (collectively, "Attorneys'
Fees"). The remaining costs of the arbitration, including
without limitation, fees of the arbitrators, costs of records or
transcripts and administrative fees (collectively, "Arbitration
Costs") will be born equally by the Parties. Notwithstanding the
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foregoing, the arbitrators may modify the allocation of
Arbitration Costs and award Attorneys' Fees in those cases where
fairness dictates a different allocation of Arbitration Costs
between the Parties and an award of Attorneys' Fees to the
prevailing Party as determined by the arbitrators.
7.7. Any Dispute that is not subject to final resolution by the
Management Committee or to arbitration under this Section 6 or
by law (collectively, "Non-Arbitration Claims") will be brought
in a court of competent jurisdiction in the Commonwealth of
Virginia. Each Party irrevocably consents to the exclusive
jurisdiction of the courts of the Commonwealth of Virginia and
the federal courts situated in the Commonwealth of Virginia,
over any and all Non-Arbitration Claims and any and all actions
to enforce such claims or to recover damages or other relief in
connection with such claims.
8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
forth on Exhibit F attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit G attached hereto are each hereby made
a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. DATAMARK HOLDING, INC., D/B/A DIGITAL
COURIER TECHNOLOGIES, INC.
By: By:
---------------------------------- ----------------------------------
Print Name: Print Name:
-------------------------- --------------------------
Title: Title:
------------------------------- -------------------------------
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EXHIBIT A
AOL Service Placement/Promotions
--------------------------------
Screen Description
------ -----------
- --------------------------- -------------------------------------------
Level I Promotions 100,000,000 Impressions
- --------------------------- -------------------------------------------
1 Entertainment Channel Permanent Anchor Tenant Placement;
- Home Video Main Premier Screen (launch scheduled for 8/98)
- --------------------------- -------------------------------------------
2 Families Channel - Permanent Anchor Tenant Placement;
Weekend Activities Premier Screen (launch scheduled for 8/98)
Main
- --------------------------- -------------------------------------------
3 Entertainment Channel, Premium Rotational Banners
Run of Channel
(Movies, TV, Video, etc.)
- --------------------------- -------------------------------------------
4 Network Programming Seasonal and Holiday Promotional
-Seasonal/Holiday Packages; Premium Rotational Banners
Contextual Packages
- --------------------------- -------------------------------------------
5 AOL Shopping Permanent Anchor Tenant Placement (will
Channel: Books,Music launch at next re-design, scheduled for 8/98)
Video Department
- --------------------------- -------------------------------------------
6 Aol Shopping Seasonal and Holiday Premium Rotational
Channel: Holiday Gift Banners
Programs
- --------------------------- -------------------------------------------
7 Digital Cities National Rotational placements-banners or
Page graphic/text intergration
- --------------------------- -------------------------------------------
8 DCI Main City Level Rotational placements-banners or
Page graphic/text intergration
- --------------------------- -------------------------------------------
9 Digital Cities-Movie Permanent Anchor Tenant
Guide
- --------------------------- -------------------------------------------
10 DCI Entertainment Main Rotational placements-banners or
Screens graphic/text intergration
- --------------------------- -------------------------------------------
11 DCI News Screens Rotational placements-banners or
graphic/text intergration
- --------------------------- -------------------------------------------
12 DCI Dining and Event Rotational placements-banners or
Guides graphic/text intergration
- --------------------------- -------------------------------------------
13 Sports, Lifestyles, Contextual Promotion and/or Rotational
Interests, Personal Banners
Finance, Health,
Computing, Travel,
Research & Learn,
Influence and Games
Channels: AOL Live
- --------------------------- -------------------------------------------
14 Three (3) AOL Service Three (3) permanent Keywords for
keywords, VideosNow brand
- --------------------------- -------------------------------------------
15 Other Comparable As determined by the Parties
Promotions
- --------------------------- -------------------------------------------
Level 2 Promotions 150,000,000 Impressions
- --------------------------- -------------------------------------------
1 People Connection: Rotational Banners in Contextually Relevant
Arts and Entertainment Chat
- --------------------------- -------------------------------------------
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- --------------------------- -------------------------------------------
2 Run of Service- Rotational Banners Targeted by Key
Demographically Demographic/Psychographic Variables
Targeted Banners
- --------------------------- -------------------------------------------
3 Entertainment Channel Rotational Banners
Newsletters
- --------------------------- -------------------------------------------
4 Other Comparable As determined by the Parties
Promtions
- --------------------------- -------------------------------------------
Level 3 Promotions 250,000,000 Impressions
- --------------------------- -------------------------------------------
1 Run of Service- Rotational Banners; Random Serving
General
- --------------------------- -------------------------------------------
2 Run of E-Mail- Rotational Banners
General
- --------------------------- -------------------------------------------
3 Additional Placements Rotational Banners
in People Connections
- --------------------------- -------------------------------------------
4 Other Comparable As determined by the Parties
Promotions
- --------------------------- -------------------------------------------
Annual Impressions Target
- --------------------------------------------------------------------------------
Year 1 100,000,000
- --------------------------------------------------------------------------------
Year 2 200,000,000
- --------------------------------------------------------------------------------
Year 3 200,000,000
- --------------------------------------------------------------------------------
TOTAL 500,000,000
- --------------------------------------------------------------------------------
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EXHIBIT A-1
AOL.com Promotions
------------------
- --------------------------- -------------------------------------------
Screen Description
- --------------------------- -------------------------------------------
Level 1 Promotions
- --------------------------- -------------------------------------------
AOL.com Shopping Permanent Anchor Tenant Placement (or
Channel: Books, Music equivalent in case of redesign)
Video Department (or
equivalent in case of
redesign
- --------------------------- -------------------------------------------
AOL.com movies, Contextual Placement and/or Rotational
Entertainment, other Promotion
channels
- --------------------------- -------------------------------------------
AOL.com Keyword Keywords to be determined
Package
- --------------------------- -------------------------------------------
Level 3 Promotions
- --------------------------- -------------------------------------------
AOL.com Run of Service
- --------------------------- -------------------------------------------
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EXHIBIT B
Definitions
-----------
The following definitions will apply to this Agreement:
Additional MP Channel. Any other distribution channel (e.g., an Interactive
Service other than AOL) through which MP makes available an offering comparable
in nature to the Affiliated MP Site.
Additional Revenues. Any revenues other than Transaction Revenues and
Advertising Revenues.
Advertising Revenues. The combination of AOL Advertising Revenues and Internet
Advertising Revenues:
AOL Advertising Revenues, Aggregate amounts collected plus the fair market value
of any other compensation received (such as barter advertising) by MP, AOL or
either Party's agents, as the case may be, arising from the license or sale of
advertisements, promotions, links or sponsorships ("Advertisements") that appear
within any pages of the Affiliated MP Site which may be exclusively available to
AOL Users, less applicable Advertising Sales Commissions. AOL Advertising
Revenues do not include amounts arising from Advertisements on any screens or
forms preceding, framing or otherwise directly associated with the Affiliated MP
Site, which will be sold exclusively by AOL.
Internet Advertising Revenues. For each Advertisement on a page of the
Affiliated MP Site which is not exclusively available to AOL Users, the product
of: (a) the amount collected plus the fair market value of any other
compensation received (such as barter advertising) by MP or its agents arising
from the license or sale of such Advertisement attributable to a given period of
time and (b) the quotient of (i) Impressions on the page containing such
Advertisement by AOL Users for such period of time divided by (ii) total
Impressions on the page containing such Advertisement by all users for such
period of time (the "Internet Advertising Quotient") (or such other percentage
or formula as is mutually agreed upon in writing by the Parties), less
applicable Advertising Sales Commissions. MP will be responsible for calculating
the Internet Advertising Quotient related to Internet Advertising Revenues. For
any period during which MP fails to calculate the Internet Advertising Quotient
(other than as a sole result of AOL's failure to provide necessary Impressions
information), such quotient will be deemed to be one hundred percent (100%).
Advertising Sales Commission. (i) Actual amounts paid as commission to third
party agencies by either buyer or seller in connection with sale of the
Advertisement or (ii) fifteen percent (15%), in the event the Party has sold the
Advertisement directly and will not be deducting any third party agency
commissions.
Affiliated MP Site. The specific area created by MP to be promoted and
distributed by AOL hereunder through which MP can market and complete
transactions regarding its Products.
AOL Interactive Site. Any Interactive Site which is managed, maintained, owned
or controlled by AOL or its agents.
AOL Member. Any authorized user of the AOL Service, including any sub-accounts
using the AOL Service under an authorized master account.
AOL Network. (i) The AOL Service, (ii) AOL.com and (iii) any other product or
service owned, operated, distributed or authorized to be distributed by or
through AOL or its affiliates worldwide (and including those properties excluded
from the definitions of the AOL Service or AOL.com). It is understood and agreed
that the rights of MP relate only to the AOL Service and not generally to the
AOL Network.
AOL Purchaser. (i) Any person or entity who enters the Affiliated MP Site from
the AOL Network including, without limitation, from any third party area therein
(to the extent entry from such third party area is traceable through both
Parties' commercially reasonable efforts), and generates Transaction Revenues
(regardless of whether such person or entity provides an e-mail address during
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registration which includes a domain other than an "AOL.com" domain); and (ii)
any other person or entity who, when purchasing a product, good or service
through an MP Interactive Site, provides an AOL.com domain name as part of such
person or entity's e-mail address; provided that any person or entity who has
previously satisfied the definition of AOL Purchaser will remain an AOL
Purchaser, and any subsequent purchases by such person or entity will also give
rise to Transaction Revenues hereunder(and will not be conditioned on the person
or entity's satisfaction of clauses (i) or (ii) above).
AOL Service.The standard, narrow-band U.S. version of the America Online(R)
brand service, specifically excluding (a) AOL.com or any other AOL Interactive
Site, (b) the international versions off the America Online(R) brand service
(e.g., AOL Japan), (c) "Driveway,""AOL NetFind(TM)" "AOL Instant Messenger(TM)",
"NetMail(TM)" or any similar independent product or service offered by or
through the U.S. version of the America Online brand service, (d) any
programming or Content area offered by or through the U.S. version of the
America Online brand service over which AOL does not exercise complete
operational control (including, without limitation, Content areas controlled by
other parties and member-created Content areas), (e) any programming or Content
area offered by or through the U.S. version of the America Online brand service
which was operated, maintained or controlled by the former AOL Studios division
(e.g., Electra, Thrive, Real Fans, Love@AOL, Entertainment Asylum, Digital
Cities), (f) any yellow pages, white pages, classifieds or other search,
directory or review services or Content offered by or through the U.S. version
of the America Online brand service, (g) any property, feature, product or
service which AOL or its affiliates may acquire subsequent to the Effective Date
and (h) any other version of an America Online service which is materially
different from the narrow-band U.S. version of the America Online brand service,
by virtue of its branding, distribution, functionality, Content and services,
including, without limitation, any co-branded version of the service and any
version distributed through any broadband distribution platform or through any
platform or device other than a desktop personal computer.
AOL User. Any user of the AOL Service, AOL.com or the AOL Network.
AOL.com. AOL's primary Internet-based Interactive Site marketed under the "AOL.
COMBAT" brand, specifically excluding (a) the AOL Service, (b) any international
versions of such site, (c) "Driveway," "AOL NetFind," "AOL Instant Messenger
"NetMail or any similar independent product or service offered by or through
such site or any other AOL Interactive Site, (d) any programming or Content area
offered by or through such site over which AOL does not exercise complete
operational control (including, without limitation, Content areas controlled by
other parties and member-created Content areas), (e) any programming or Content
area offered by or through the U.S. version of the America Online) brand service
which was operated, maintained or controlled by the former AOL Studios division
(e.g., Electra, Thrive, Real Fans, Love@AOL, Entertainment Asylum, Digital
Cities), (f) any yellow pages, white pages, classifieds or other search,
directory or review services or Content offered by or through such site or any
other AOL Interactive Site, (g) any property, feature, product or service which
AOL or its affiliates may acquire subsequent to the Effective Date and (h) any
other version of an America Online Interactive Site which is materially
different from AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM" brand, by virtue of its branding, distribution, functionality, Content
and services, including, without limitation, any co-branded versions and any
version distributed through any broadband distribution platform or through any
platform or device other than a desktop personal computer.
Change of Control. (a) The consummation of a reorganization, merger or
consolidation or sale or other disposition of substantially all of the assets of
a party; or (b) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1933,
as amended) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under such Act) of more than 50% of either (i) the then outstanding
shares of common stock of such party; or (ii) the combined voting power of the
then outstanding voting securities of such party entitled to vote generally in
the election of directors.
Confidential information. Any information relating to or disclosed in the course
of the Agreement, which is or should be reasonably understood to be confidential
or proprietary to the disclosing Party, including, but not limited to, the
material terms of this Agreement, information about AOL Members, AOL Users, AOL
Purchasers and-MP customers, technical processes and formulas, source codes,
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product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from any
third party.
Content. Text, images, video, audio (including, without limitation, music used
in synchronization or timed relation with visual displays) and other data,
products, advertisements, promotions, links, pointers and software, including
any modifications, upgrades, updates, enhancements and related documentation.
Impression. User exposure to the applicable promotion or advertisement, as such
exposure may be reasonably determined and measured by AOL in accordance with its
standard methodologies and protocols.
Interactive Service. Any entity that offers online or Internet connectivity (or
any successor form of connectivity), aggregates (for sale or otherwise) and/or
distributes a broad selection of third-party Content, or provides interactive
navigational services (including, without limitation, any online service
providers, Internet service providers, WebTV, @Home or other broadband
providers, search or directory providers, "push" product providers such as the
Pointcast Network or providers of interactive navigational environments such as
Microsoft's "Active Desktop").
Interactive Site. Any interactive site or area, including, by way of example and
without limitation, (i) an MP site on the World Wide Web portion of the Internet
or (ii) a channel or area delivered through a "push" product such as the
Pointcast Network or interactive environment such as Microsoft's Active Desktop.
Licensed Content. All Content offered through the Affiliated MP Site pursuant to
this Agreement or otherwise provided by MP or its agents in connection herewith
(e.g., offline or online promotional Content, Promotions, AOL "slideshows" ,
etc.), including in each case, any modifications, upgrades, updates,
enhancements, and related documentation.
MP Interactive Site. Any Interactive Site (other than the Affiliated MP Site)
which is managed, maintained, owned or controlled by MP or its agents.
Premier Products. Consumer movies and other consumer oriented video content
delivered in fixed media formats (including, without limitation, VHS cassettes,
digital video disks, DIVX and laserdiscs, ("Video Products"), specifically
excluding, however, (i) music audio entertainment products, (ii) any form of
computer software (e.g. games and entertainment programs) and (iii) any movie or
video content or other products distributed or delivered through an electronic
data transfer format.
Product. Any product, good or service which MP (or others acting on its behalf
or as distributors) offers, sells, provides, distributes or licenses to AOL
Users directly or indirectly through (i) the Affiliated MP Site (including
through any Interactive Site linked thereto), (ii) any other electronic means
directed at AOL Users (e.g., e-mail offers), or (iii) an "offline" means (e.g.,
toll-free number) for receiving orders related to specific offers within the
Affiliated MP Site requiring purchasers to reference a specific promotional
identifier or tracking code, including, without limitation, products sold
through surcharged downloads (to the extent expressly permitted hereunder).
Revenue Threshold. Aggregate Transaction Revenues and Advertising Revenues
generated hereunder equal to One Hundred Million Dollars (US$ 100,000,000).
Site Revenues. The combination of Transaction Revenues, Advertising Revenues and
Additional Revenues.
Transaction Revenues. Aggregate amounts paid by AOL Purchasers in connection
with the sale, licensing, distribution or provision of any Products, including,
in each case, handling, shipping, service charges, and excluding, in each case,
(a) amounts collected for sales or use taxes or duties and (b) credits and
chargebacks for returned or canceled goods or services, but not excluding cost
of goods sold or any similar cost.
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EXHIBIT C
MP Cross-Promotion
------------------
Online
- ------
In each MP Interactive Site, MP will include:
A prominent promotional banner linking to AOL-designated Content on AOL.com
or the AOL Service (if feasible) appearing "above the fold" on the first
screen of the MP Interactive Site:
A prominent "Try AOL" feature where users can obtain promotional information
about AOL products and services and, at AOL's option, download or order AOL's
then-current version of client software for the AOL Service or software for
any other AOL products or services (e.g., AOL's Instant Messenger service)*;
and
To the extent MP offers or promotes any products or services similar to AOL's
"component" products and services (e.g., "Driveway,""AOL NetFind "AOL Instant
Messenger" "NetMail" or any similar products or services, chat, buddy list
and/or message board technology, yellow pages, white pages, classifieds or
other search, directory or review services, voice communications), prominent
offers or promotions related to such AOL-designated products or services.
Additionally, MP shall make available to AOL remnant advertising inventory
which is available in any MP Interactive Site, on terms and conditions that
are no less favorable than those offered to any other third party.
Off line
--------
In MP's television, radio and print advertisements and in any publications,
programs, features or other forms of media over which MP exercises at least
partial editorial control, MP will include:
Specific references or mentions (verbally where possible) of the Affiliated
MP Site's availability through America Online prior to, and at least as
prominent as, any reference to any MP Interactive Site; and
For instance, listing of the "URL(s)" for any MP Interactive Site will be
accompanied by the AOL "keyword" for the Affiliated MP Site.
- -----------------------
*AOL will pay MP a one-time standard bounty for each person who registers for
the AOL Service using MP's special identifier for this promotion and
subsequently pays AOL monthly usage fees across at least three billing cycles
for the use of the AOL Service. Note that if this promotion is delivered through
Microsoft's Active Desktop or any other "push" product (an "Operating System"),
such feature will link users directly to AOL software within the Operating
System or direct users without Internet access to an AOL application setup
program within the Operating System (all subject to any standard policies of the
Operating System).
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EXHIBIT D
Description of Products and Other Content
-----------------------------------------
[MP TO PROVIDE]
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EXHIBIT E
Operating Standards
-------------------
1. General. The Affiliated MP Site and/or load testing will be related to
(including the Products and other the following areas AOL compatibility
Content contained therein) will be in testing (AOL client V3.0, Windows
the top three (3) online sites in the 95/Macintosh, Browser: MSIE 3.X/MSIE
video sale and rental industry, as 2.1; AOL client V4.0, Windows
determined by both of the following 95/Macintosh, Browser: MSIE 3.X);
methods: (a) based on a cross-section caching implementation; graphics
of third-party reviewers who are quality; user interface and functional
recognized authorities in such testing; review of advanced web
industry and (b) with respect to all technologies; load testing: website
material quality averages or standards architecture (hardware, network
in such industry, including each of configuration software - web servers,
the following: (i) pricing of databases, etc.); network redundancy
Products. (ii) scope and selection of and reliability: performance
Products, (iii) quality of Products, thresholds (network bandwidth, web
(iv) customer service and fulfillment server capacity, simultaneous users);
associated with the marketing and sale and electronic commerce (encryption
of Products and (v) ease of use. validation, encryption technology -SSL
V2/V3, PCT, commerce implementation
2. Hosting; Capacity. MP will provide review - cookies, iCat, webforce,
all computer hardware (e.g., servers, etc., facility physical security,
routers, network devices, switches and safeguards related to private customer
associated hardware) in an amount information.
necessary to meet anticipated traffic
demands, adequate power supply 4. User Interface. MP will maintain a
(including generator back-up) and graphical user interface within the
HVAC, adequate insurance, adequate Affiliated MP Site that is competitive
service contracts and all necessary in all material respects with
equipment racks, floor space, network interfaces of other similar sites
cabling and power distribution to based on similar form technology. AOL
support the Affiliated MP Site. MP is reserves the right to review and
fully responsible for the maintenance approve the user interface and site
implementation and the day-to-day design prior to launch of the
operation of the Affiliated Site and Promotions and to conduct focus group
MP will provide AOL with a detailed testing to assess compliance with
diagram of MP's network. In addition, respect to such consultation and with
MP will provide AOL with detailed respect to MP's compliance with the
information regarding separate file preceding sentence. With respect to
downloads available from the the foregoing, MP shall provide AOL
Affiliated MP Site, including file with no less than three (3) weeks
size, type and download/installation notice of the launch of the Affiliated
procedures. MP Site, so that AOL will have an
adequate amount of time to review the
3. Speed: Accessibility. MP will user interface of the Affiliated MP
ensure that the performance and Site and any other component of the
availability of the Affiliated MP Affiliated MP Site as AOL may
Site (a) is monitored on a continuous, reasonably request.
24/7 basis and (b) remains competitive
in all material respects with the 5. Service Level Response. MP agrees
performance and availability of other to use commercially reasonable efforts
similar sites based on similar form to provide the following service
technology. MP will use commercially levels in response to problems with or
reasonable efforts to ensure that: (a) improvements to the Affiliated MP
the functionality and features within Site: o For material functions of
the Affiliated MP Site are optimized software that are or have become
for the client software then in use by substantially inoperable (e.g.,
AOL Users: and (b) the Affiliated MP inability to access website or conduct
Site is designed and populated in a transactions), MP will provide a bug
manner that minimizes delays when AOL fix or workaround within four (4)
Users attempt to access such site. At hours after the first report of such
a minimum, MP will ensure that error to AOL or MP. o For functions of
Affiliated MID Site's data transfer the software that are impaired or
initiates within fewer than fifteen otherwise fail to operate in
(15) seconds on average. Prior to accordance with agreed upon
launch of any promotions described specifications (e.g., search engine),
herein, MP will permit AOL to conduct MP will provide a bug fix or
performance and/or load testing of the workaround within twenty-four (24)
Affiliated MP Site (in person or hours after the first report of such
through remote communications) until error to AOL or MP. o For errors
AOL is reasonably satisfied that disabling only certain non-essential
launch can occur. AOL's performance functions (e.g., broken links or
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noncritical applications), MP will 9. Technical Performance. MP will
provide a bug fix or workaround within perform the following technical
fourteen (14) days after the first obligations (and any reasonable
report of such error to AOL or MP. For updates thereto from time to time by
all other errors, MP will address AOL):
these requests on a case-by-case basis MP will design the Affiliated MP Site
as soon as reasonably feasible. to support the Windows version of the
Microsoft Internet Explorer 3.0 and
6. Monitoring. MP will provide AOL 4.0 Browser, the Macintosh version of
with MP's detailed escalation the Microsoft Internet Explorer 2.1
procedures (e.g., contact names and and 3.0, and make commercially
notification mechanisms such as email, reasonable efforts to support all
phone, page, etc.) and notification of other AOL browsers listed at "http:
any scheduled or unscheduled // webmaster. info. aol. com/
downtimes. AOL Network Operations BrowTable. html."
Center will work with MP's designated MP will configure the server from
technical contacts in the event of any which it serves the site to examine
performance malfunction or other the HTTP User-Agent field in order to
emergency related to the Affiliated identify the "AOL Member-Agents"
MP Site and will either assist or listed at: "http: // webmaster. info.
work in parallel with MP's contact aol. com/ Brow2Text. html."
using MP tools and procedures, as MP will design its site to support
applicable. The Parties will develop a HTTP 1.0 or later protocol as defined
process to monitor performance and in RFC 1945 (available at "http: //
member behavior with respect to ds. internic. net1rfc/rfc 1945.text")
access, capacity, security and related and to adhere to AOL's parameters for
issues both during normal operations refreshing cached information listed
and during special promotions/events. at "http: // webmaster. info. aol.
com/CacheText. html."
7. Telecommunications. The Parties 10. AOL Internet Products Partner
agree to explore encryption Support. AOL will provide MP with
methodology to secure data access to the standard online
communications between the resources, standards and guidelines
Parties'data centers such that no documentation, technical phone
private member information requested support, monitoring and after-hours
by MP will be transferred in an assistance that AOL makes generally
unencrypted format. The network available to similarly situated
between the Parties will be configured web-based partners on similar terms
such that no single component failure and conditions . AOL support will not,
will significantly impact AOL Users. in any case, be involved with content
The network will be sized such that no creation on behalf of MP or support
single line runs at more than seventy for any technologies, databases,
percent (70%) average utilization for software or other applications which
a 5-minute peak in a daily period. are not supported by AOL or are
related to any MP area other than the
8. Security Review. MP and AOL will Affiliated MP Site. Support to be
work together to perform an initial provided by AOL is contingent on MP
security review of, and to perform providing to AOL demo account
tests of, the MP system, network, and information (where applicable), a
service security in order to evaluate detailed description of the Affiliated
the security risks and provide MP Site's software, hardware and
recommendations to MP. including network architecture and access to the
periodic follow-up reviews as Affiliated MP site for purposes of
reasonably required by MP or AOL. MP such performance and load testing as
will use commercially reasonable best AOL elects to conduct.
efforts to fix any security risks or
breaches of security as may be
identified by AOL's Operations
Security team. Specific services to be
performed on behalf of AOL's
Operations Security team will be as
determined by AOL in its sole
discretion.
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EXHIBIT F
Standard Online Commerce Terms & Conditions
-------------------------------------------
1 . AOL Network Distribution. MP will transactions are solely between MP and
not authorize or permit any third AOL Users purchasing Products from MP.
party to distribute or promote the
Affiliated MP Site or any MP 6. AOL Look and Feel. MP acknowledges
Interactive Site through the AOL and agrees that AOL will own all
Network absent AOL's prior written right, title and interest in and to
approval. The Promotions and any other the elements of graphics, design,
promotional or advertising rights or organization, presentation, layout,
space purchased from or provided by user interlace, navigation and
AOL will link only to the Affiliated stylistic convention (including the
MP Site, will be used by MP solely for digital implementations thereof) which
its own benefit and will not be are generally associated with online
resold, traded, exchanged, bartered, areas contained within the AOLNetwork,
brokered or otherwise offered to any subject to MP's ownership rights in
third party any MP trademarks or copyrighted
material within the Affiliated MP
2. Provision of Other Content. In the Site.
event that AOL notifies MP that (i) as
reasonably determined by AOL, any 7. Management of the Affiliated MP
Content within the Affiliated MP Site Site. MP will manage. review, delete,
violates AOL's then applicable edit, create, update and otherwise
standard Terms of Service (as set manage all Products available on or
forth on the America Online brand through the Affiliated MP Site. in a
service), the terms of this Agreement timely and professional manner and in
or any other standard, written AOL accordance with the terms of this
policy or (ii) AOL reasonably objects Agreement. MP will ensure that each
to the inclusion of any Content within Affiliated MP Site is current,
the Affiliated MP Site (other than any accurate and well-organized at all
specific items of Content which may be times. MP warrants that the Products
expressly identified in this and other Licensed Content: (i) will
Agreement), then MP will take not infringe on or violate any
commercially reasonable steps to block copyright, trademark. U.S. patent or
access by AOL Users to such Content any other third party right, including
using MP's then-available technology. without limitation, any music
In the event that MP cannot, through performance or other music-related
its commercially reasonable efforts, rights; (ii) will not violate AOL's
block then MP will provide AOL prompt then-applicable Terms of Service: and
written notice of such fact.AOL may (iii) will not violate any applicable
then, at its option, restrict access law or regulation, including those
from the AOL Network to the Content in relating to contests, sweepstakes or
question using technology available to similar promotions. Additionally, MP
AOL, MP will cooperate with AOL's represents and warrants that it owns
reasonable requests to the extent AOL or has a valid license to all rights
elects to implement any such access to any Licensed Content used in AOL
restrictions. "slideshow" or other formats embodying
elements such as graphics, animation
3. Contests. MP will take all steps and sound, free and clear of all
necessary to ensure that any contest, encumbrances and without violating the
sweepstakes or similar promotion rights of any other person or entity.
conducted or promoted through the MP also warrants that a reasonable
Affiliated MP Site (a "Contest") basis exists for all Product
complies with all applicable federal, performance or comparison claims
state and local appearing through the Affiliated MP
Site. MP shall not in any manner,
4. Navigational Icons. Subject to the including, without limitation in any
prior consent of MP, which consent Promotion, the Licensed Content or the
will not be unreasonably withheld, AOL Materials state or imply that AOL
will be entitled to establish recommends or endorses MP or MP's
navigational icons, links and pointers Products (e.g., no statements that MP
connecting the Affiliated MP Site (or is an "official" or "preferred"
portions thereof) with other content provider of products or services for
areas on or outside of the AOL AOL). AOL will have no obligations
Network. with respect to the Products available
on or through the Affiliated MP Site,
5. Disclaimers. Upon AOL's request, MP including, but not limited to, any
agrees to include within the duty to review or monitor any such
Affiliated MP Site a product Products.
disclaimer (the specific form and
substance to be mutually agreed upon
by the Parties) indicating that
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<PAGE>
8. Duty to Inform. MP will promptly estimated development schedule for
inform AOL of any information related such work. To the extent the Parties
to the Affiliated MP Site which could reach agreement regarding
reasonably lead to a claim, demand, or implementation of agreed-upon
liability of or against AOL and/or its Production Plan, such agreement will
affiliates by any third party. be reflected in a separate work order
signed by the Parties. To the extent
9. Customer Service. It is the sole MP elects to retain a third party
responsibility of MP to provide provider to perform any such
customer service to persons or production work, work produced by such
entities purchasing Products through third party provider must generally
the AOL Network ("Customers"). MP will conform to AOL's production Standards
bear full responsibility for all & Practices (a copy of which will be
customer service, including without supplied by AOL to MP upon request).
limitation, order processing, billing, The specific production resources
fulfillment, shipment, collection and which AOL allocates to any production
other customer service associated with work to be performed on behalf of MP
any Products offered, sold or licensed will be as determined by AOL in its
through the Affiliated MP Site, and sole discretion.
AOL will have no obligations
whatsoever with respect thereto. MP 11. Overhead Accounts. To the extent
will receive all emails from Customers AOL has granted MP any overhead
via a computer available to MP's accounts on the AOL Service, MP will
customer service staff and generally be responsible for the actions taken
respond to such emails within one under or through its overhead
business day of receipt. MP will accounts, which actions are subject to
receive all orders electronically and AOL's applicable Terms of Service and
generally process all orders within for any surcharges, including, without
one business day of receipt, provided limitation, all premium charges,
Products ordered are not advance order transaction charges, and any
items. MP will ensure that all orders applicable communication surcharges
of Products are received, processed, incurred by any overhead Account
fulfilled and delivered on a timely issued to MP, but MP will not be
and professional basis. MP will offer liable for charges incurred by any
AOL Users who purchase Products overhead account relating to AOL's
through such Affiliated MP Site a standard monthly usage fees and
money back satisfaction guarantee. MP standard hourly charges, which charges
will bear all responsibility for AOL will bear. Upon the termination of
compliance with federal, state and this Agreement, all overhead accounts,
local laws in the event that Products related screen names and any
are out of stock or are no longer associated usage credits or similar
available at the time an order is rights, will automatically terminate.
received. MP will also comply with the AOL will have no liability for loss of
requirements of any federal. state or any data or content related to the
local consumer protection or proper termination of any overhead
disclosure law. Payment for Products account.
will be collected by MP directly from
customers. MP's order fulfillment 12. Navigation Tools. To the extent
operation will be subject to AOL's AOL grants MP any "keywords" on the
reasonable review. AOL Service or "search terms" on
AOL.corn (collectively, "Keywords"),
10. Production Work. In the event that the Keywords will be subject to
MP requests AOL's production availability and will consist only of
assistance in connection with (i) MP's registered trademarks. AOL
ongoing programming and maintenance reserves the right at any time to
related to the Affiliated MP Site, revoke MP's use of any Keywords that
(ii) a redesign of or addition to the are not registered trademarks of MP.
Affiliated MP Site (e.g.. a change to To the extent AOL allows AOL Users to
an existing screen format or "bookmark" the URL or other locator
construction of a new custom form), for the Affiliated MP Site, such
(iii) production to modify work bookmarks will be subject to AOL's
performed by a third party provider or control at all times. Upon the
(iv) any other type of production termination of this Agreement, MP's
work, MP will work with AOL to develop rights to any Keywords and bookmarking
a detailed production plan for the will terminate.
requested production assistance (the
"Production Plan"). Following receipt 13. AOL User Communications. To the
of the final Production Plan, AOL will extent MP sends any form of
notify MP of (i) AOL's availability to communications to AOL Users, MP will
perform the requested production work, promote the Affiliated MP Site as the
(ii) the proposed fee or fee structure location at which to purchase Products
for the requested production and (as compared to any more general or
maintenance work and (iii) the other site or location). In addition,
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<PAGE>
MP will not encourage AOL Users to
take any action inconsistent with the
scope and purpose of this Agreement.
including without limitation, the
following actions: (a) using Content
other than the Licensed Content; (b)
bookmarking of Interactive Sites; (c)
using Interactive Sites other than
those covered by the revenue-sharing
provisions herein; (d) changing the
default home page on the AOL browser:
or (e) using any Interactive Service
other than AOL. Any email newsletters
sent to AOL Users by MP or its agents
will (i) be subject to AOL's policies
on use of the email functionality,
including but not limited to AOL's
policy on unsolicited bulk email. (ii)
be sent only to AOL Users requesting
to receive such newsletters, (iii) not
contain Content which violates AOL's
Terms of Service. and (iv) not contain
any advertisements, marketing
or promotion for any other Interactive
Service. In any commercial e-mail
communications to AOL Users which are
otherwise permitted hereunder. MP will
provide the recipient with a prominent
and easy means to "opt-out" of
receiving any future commercial e-mail
communications from MP.
14. Merchant Certification Program MP
will participate in any generally
applicable "Certified Merchant"
program operated by AOL or its
authorized agents or contractors. Such
program may require merchant
participants on an ongoing basis to
meet certain reasonable, generally
applicable standards relating to
provision of electronic commerce
through the AOL Network (including, as
a minimum, use of 40-bit SSL
encryption and if requested by AOL,
128-bit encryption) and may also
require the payment of certain
reasonable certification fees to the
applicable entity operating the
program. Each Certified Merchant in
good standing will be entitled to
place on its affiliated Interactive
Site an AOL designed and approved
button promoting the merchants status
as an AOL Certified Merchant.
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<PAGE>
EXHIBIT G
Standard Legal Terms & Conditions
---------------------------------
1. Promotional Materials/Press the other Party. Each Party
Releases. Each Party will submit to acknowledges that its utilization of
the other Party, for its prior the other Party's Marks will not
written approval, which will not be create in it, nor will it represent
unreasonably withheld or delayed, any it has, any right, title, or
marketing, advertising. press interest in or to such Marks other
releases, and all other promotional than the licenses expressly granted
materials related to the Affiliated herein. Each Party agrees not to do
MP Site and/or referencing the other anything contesting or impairing the
Party and/or its trade names, trademark rights of the other Party.
trademarks. and service marks (the
"Materials"); provided, however, that 5. Quality Standards. Each Party
either Party's use of screen shots of agrees that the nature and quality
the Affiliated MP Site for of its products and services
promotional purposes will not require supplied in connection with the
the approval of the other Party so other Party's Marks will conform to
long as America Online is clearly quality standards set by the other
identified as the source of such Party. Each Party agrees to supply
screen shots; and provided further, the other Party, upon request. with
however, that, following the initial a reasonable number of samples of
public announcement of the business any Materials publicly disseminated
relationship between the Parties in by such Party which utilize the
accordance with the approval and other Party's Marks. Each Party will
other requirements contained herein, comply with all applicable laws,
either Party's subsequent factual regulations, and customs and obtain
reference to the existence of a any required government approvals
business relationship between the pertaining to use of the other
Parties will not require the approval Party's marks.
of the other Party. Each Party will
solicit and reasonably consider the 6. Infringement Proceedings. Each
views of the other Party in designing Party agrees to promptly notify the
and implementing such Materials. Once other Party of any unauthorized use
approved, the Materials may be used of the other Party's Marks of which
by a Party and its affiliates for the it has actual knowledge. Each Party
purpose of promoting the Affiliated will have the sole right and
MP Site and the content contained discretion to bring proceedings
therein and reused for such purpose alleging infringement of its Marks
until such approval is withdrawn with or unfair competition related
reasonable prior notice. In the event thereto; provided, however, that
such approval is withdrawn, existing each Party agrees to provide the
inventories of Materials may be other Party with its reasonable
depleted. Notwithstanding the cooperation and assistance with
foregoing, either Party may issue respect to any such infringement
press releases and other disclosures proceedings.
as required by law or as reasonably
advised by legal counsel without the 7. Representations and Warranties.
consent of the other Party and in, Each Party represents and warrants
such event, the disclosing Party will to the other Party that: (i) such
provide at least five (5) business Party has the full corporate right,
days prior written notice of such power and authority to enter into
proposed disclosure to the other this Agreement and to perform the
Party. acts required of it hereunder; (ii)
the execution of this Agreement by
2. License. MP hereby grants AOL a such Party, and the performance by
non-exclusive worldwide license to such Party of its obligations and
market, license, distribute, duties hereunder, do not and will
reproduce, display, perform, transmit not violate any agreement to which
and promote the Licensed Content (or such Party is a party or by which it
any portion thereof) through such is otherwise bound; (iii) when
areas or features of the AOL Network executed and delivered b such Party,
as AOL deems appropriate. MP this Agreement will constitute the
acknowledges and agrees that the legal, valid and binding obligation
foregoing license permits AOL to of such Party, enforceable against
distribute portions of the Licensed such Party in accordance with its
Content in synchronization or timed terms: and (iv) such Party
relation with visual displays acknowledges that the other Party
prepared by MP or AOL (e.g., as part makes no representations, warranties
of an AOL "slideshow"). In addition, or agreements related to the subject
AOL Users will have the right to matter hereof that are not expressly
access and use the Affiliated MP provided for in this Agreement.
Site.
8. Confidentiality. Each Party
3. Trademark License. In designing acknowledges that Confidential
and implementing the Materials and Information may be disclosed to the
subject to the other provisions other Party during the course of
contained herein, MP will be entitled this Agreement. Each Party agrees
to use the following trade names, that it will take reasonable steps,
trademarks, and service marks of AOL: at least substantially equivalent to
the "America Online" brand service, the steps it takes to protect its
"AOL" service/software and AOL's own proprietary information, during
triangle logo; and AOL and its the term of this Agreement, and for
affiliates will be entitled to use a period of three (3) years
the trade names, trademarks, and following expiration or termination
service marks of MP for which MP of this Agreement, to prevent the
holds all rights necessary for use in duplication or disclosure of
connection with this Agreement Confidential Information of the
(collectively, together with the AOL other Party, other than by or to its
marks listed above, the "Marks"); employees or agents who must have
provided that each Party: (i) does access to such Confidential
not create a unitary composite mark Information to perform such Party's
involving a Mark of the other Party obligations hereunder, who will each
without the prior written approval of agree to comply with this section.
such other Party; and (ii) displays Notwithstanding the foregoing,
symbols and notices clearly and either Party may issue a press
sufficiently indicating the trademark release or other disclosure
status and ownership of the other containing Confidential Information
Party's Marks in accordance with without the consent of the other
applicable trademark law and Party, to the extent such disclosure
practice. is required by law, rule, regulation
or government or court order. In
4. Ownership of Trademarks. Each such event, the disclosing Party
Party acknowledges the ownership of will provide at least five (5)
the other Party in the Marks of the business days prior written notice
other Party and agrees that all use of such proposed disclosure to the
of the other Party's Marks wi11 inure other Party. Further, in the event
to the benefit, and be on behalf, of such disclosure is required of
either Party under the laws, rules
or regulations of the Securities
24
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<PAGE>
and Exchange Commission or any other 9.4. Claims. If a Party entitled to
applicable governing body, such Party indemnification hereunder (the
will (i) redact mutually agreedupon "Indemnified Party") becomes aware
portions of this Agreement to the of any matter it believes is
fullest extent permitted under indemnifiable hereunder involving
applicable laws, rules and any claim, action, suit,
regulations and (ii) submit a request investigation, arbitration or other
to such governing body that such proceeding against the Indemnified
portions and other provisions of this Party by any third party (each an
Agreement receive confidential "Action"), the Indemnified Party
treatment under the laws, rules and will give the other Party (the
regulations of the Securities and "Indemnifying Party") prompt written
Exchange Commission or otherwise be notice of such Action. Such notice
held in the strictest confidence to will (i) provide the basis on which
the fullest extent permitted under indemnification is being asserted
the laws, rules or regulations of any and (ii) be accompanied by copies of
other applicable governing body. all relevant pleadings, demands, and
other papers related to the Action
9. Limitation of Liability and in the possession of the
Disclaimer; Indemnification. Indemnified Party. The Indemnifying
Party will have a period of ten (10)
9.1. Liability. UNDER NO days after delivery of such notice
CIRCUMSTANCES WILL EITHER PARTY BE to respond. If the Indemnifying
LIABLE TO THE OTHER PARTY FOR Party elects to defend the Action or
INDIRECT, INCIDENTAL, CONSEQUENTIAL, does not respond within the
SPECIAL OR EXEMPLARY DAMAGES (EVEN IF requisite ten (10) day period, the
THAT PARTY HAS BEEN ADVISED OF THE Indemnifying Party will be obligated
POSSIBILITY OF SUCH DAMAGES), ARISING to defend the Action. at its own
FROM BREACH OF THE AGREEMENT, THE expense, and by counsel reasonably
SALE OF PRODUCTS, THE USE OR satisfactory to the Indemnified
INABILITY TO USE THE AOL NETWORK, THE Party. The Indemnified Party will
AOL SERVICE, AOL.COM OR THE cooperate, at the expense of the
AFFILIATED MP SITE, OR ARISING FROM Indemnifying Party, with the
ANY OTHER PROVISION OF THIS Indemnifying Party and its counsel
AGREEMENT, SUCH AS, BUT NOT LIMITED in the defense and the Indemnified
TO, LOSS OF REVENUE OR ANTICIPATED Party will have the right to
PROFITS OR LOST BUSINESS participate fully, at its own
(COLLECTIVELY, "DISCLAIMED DAMAGES"); expense, in the defense of such
PROVIDED THAT EACH PARTY WILL REMAIN Action. if the Indemnifying Party
LIABLE TO THE OTHER PARTY TO THE responds within the required ten
EXTENT ANY DISCLAIMED DAMAGES ARE (10) day period and elects not to
CLAIMED BY A THIRD PARTY AND ARE defend such Action, the Indemnified
SUBJECT TO INDEMNIFICATION PURSUANT Party will be free, without
TO SECTION 9.3. EXCEPT AS PROVIDED IN prejudice to any of the Indemnified
SECTION 9.3, (1) LIABILITY ARISING Party's rights hereunder, to
UNDER THIS AGREEMENT WILL BE LIMITED compromise or defend (and control
TO DIRECT, OBJECTIVELY MEASURABLE the defense of) such Action. In such
DAMAGES, AND (11) THE MAXIMUM case, the Indemnifying Party will
LIABILITY OF ONE PARTY TO THE OTHER cooperate, at its own expense, with
PARTY FOR ANY CLAIMS ARISING IN the Indemnified Party and its
CONNECTION WITH THIS AGREEMENT WILL counsel in the defense against such
NOT EXCEED THE AGGREGATE AMOUNT OF Action and the Indemnifying Party
PAYMENT OBLIGATIONS OWED TO THE OTHER will have the right to participate
PARTY HEREUNDER IN THE YEAR IN WHICH fully, at its own expense, in the
LIABILITY ACCRUES; PROVIDED THAT EACH defense of such Action. Any
PARTY WILL REMAIN LIABLE FOR THE compromise or settlement of an
AGGREGATE AMOUNT OF ANY PAYMENT Action will require the prior
OBLIGATIONS OWED TO THE OTHER PARTY written consent of both Parties
PURSUANT TO THE AGREEMENT. hereunder, such consent not to be
unreasonably withheld or delayed.
9.2. No Additional Warranties. EXCEPT
AS EXPRESSLY SET FORTH IN THIS 9.5. Acknowledgment. AOL and MP each
AGREEMENT, NEITHER PARTY MAKES ANY, acknowledges that the provisions of
AND EACH PARTY HEREBY SPECIFICALLY this Agreement were negotiated to
DISCLAIMS ANY REPRESENTATIONS OR reflect an informed, voluntary
WARRANTIES, EXPRESS OR IMPLIED, allocation between them of all risks
REGARDING THE AOL NETWORK, THE AOL (both known and unknown) associated
SERVICE, AOL.COM OR THE AFFILIATED MP with the transactions contemplated
SITE, INCLUDING ANY IMPLIED WARRANTY hereunder. The limitations and
OF MERCHANTABILITY OR FITNESS FOR A disclaimers related to warranties
PARTICULAR PURPOSE AND IMPLIED and liability contained in this
WARRANTIES ARISING FROM COURSE OF Agreement are intended to limit the
DEALING OR COURSE OF PERFORMANCE. circumstances and extent of
WITHOUT LIMITING THE GENERALITY OF liability. The provisions of this
THE FOREGOING, AOL SPECIFICALLY Section 9 will be enforceable
DISCLAIMS ANY WARRANTY REGARDING THE independent of and severable from
PROFITABILITY OF THE AFFILIATED MP any other enforceable or
SITE. unenforceable provision of this
Agreement.
9.3. Indemnity. Either Party will
defend, indemnity, save and hold 10. Solicitation of AOL Users.
harmless the other Party and the During the term of this Agreement,
officers ' directors, agents, and for the two-year period
affiliates, distributors, franchisees following the expiration or
and employees of the other Party from termination of this Agreement,
any and all third party claims, neither MP nor its agents will use
demands, liabilities, costs or the AOL Network to (i) solicit, or
expenses. including reasonable participate in the solicitation of
attorneys' fees ("Liabilities"), AOL Users when that solicitation is
resulting from the indemnifying for the benefit of any entity
Party's material breach of any duty. (including MP) which could
representation. or warranty of this reasonably be construed to be or
Agreement. become in competition with AOL or
(ii) promote any services which are
ancillary to the sale of MP's
Products hereunder or which could
reasonably be construed to be in
competition with AOL including, but
not limited to, services available
through the Internet. In addition,
MP may not send AOL Users email
communications promoting MP's
Products through the AOL Network
without a "Prior Business
Relationship." For purposes of this
Agreement, a "Prior Business
Relationship" will mean that the AOL
User has either (i) engaged in a
transaction with MP through the AOL
Network or (ii) voluntarily provided
information to MP through a contest,
registration, or other
communication, which included notice
to the AOL User that the information
provided by the AOL User could
result in an e-mail being sent to
that AOL User by MP or its agents. A
Prior Business Relationship does not
exist by virtue of an AOL User's
visit to the Affiliated MP Site
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<PAGE>
or any MP Interactive Site (absent Agreement will be given in writing
the elements above). More generally, and will be deemed to have been
MP will be subject to any standard delivered and given for all purposes
policies regarding e-mail (i) on the delivery date if
distribution through the AOL Network delivered by electronic mail on the
which AOL may implement. AOL Network (to screenname
"[email protected]" in the case of
11. Collection of User Information. AOL) or by confirmed facsimile. (ii)
MP is prohibited from collecting AOL on the delivery date if delivered
User screennames from public or personally to the Party to whom the
private areas within the AOL Service same is directed; (iii) one business
or AOL.com, except as specifically day after deposit with a commercial
provided below. MP will ensure that overnight carrier, with written
any survey, questionnaire or other verification of receipt; or (iv)
means of collecting User Information five business days after the mailing
including, without limitation, date, whether or not actually
requests directed to specific AOL received, if sent by U.S. mail,
User screennames or email addresses return receipt requested, postage
and automated methods of collecting and charges prepaid, or any other
screennames (an "Information means of rapid mail delivery for
Request") complies with (i) all which a receipt is available. In the
applicable laws and regulations, (ii) case of AOL, such notice will be
AOL's applicable Terms of Service. provided to both the Senior Vice
and (iii) any privacy policies which President for Business Affairs (fax
have been issued by AOL in writing no. 703-265-1206) and the Deputy
during the term (or, in the case of General Counsel (fax no.
the Affiliated MP Site, MP's standard 703-265-1105), each at the address
privacy policies, to the extent such of AOL set forth in the first
policies are prominently published on paragraph of this Agreement. In the
the site and provide adequate notice case of MP, except as otherwise
and disclosure to users regarding specifie herein, the notice address
MP's collection, use and disclosure will be the address for MP set forth
of any user information) in the first paragraph of this
(collectively, the "Applicable Agreement, with the other relevant
Privacy Policies"). Each Information notice information, including the
Request will clearly and recipient for notice and, as
conspicuously specify to the AOL applicable, such recipient's fax
Users at issue the purpose for which number or AOL e-mail address, to be
User Information collected through as reasonably identified by AOL.
the Information Request will be used
(the "Specified Purpose"). 16. Launch Dates. In the event that
any terms contained herein relate to
12. Use of User Information. MP will or depend on the commercial launch
restrict use of the User Information date of the Affiliated MP Site
collected through an Information contemplated by this Agreement (the
Request to the Specified Purpose. In 'Launch Date"), then it is the
no event will MP (i) provide User intention of the Parties to record
Information to any third party such Launch Date in a written
(except to the extent specifically instrument signed by both Parties
(a) permitted under the AOL Privacy promptly following such Launch Date;
Policies or (b) authorized by the provided that, in the absence of
members in question), (ii) rent, sell such a written instrument, the
or barter User Information, (iii) Launch Date will be as reasonably
identity, promote or otherwise determined by AOL based on the
disclose such User Information in a information available to AOL.
manner that identifies AOL Users as
end-users of the AOL Service, AOL.com 17. No Waiver. The failure of either
or the AOL Network or (iv) otherwise Party to insist upon or enforce
use any User Information in strict performance by the other
contravention of Section 10 above. Party of any provision of this
Notwithstanding the foregoing, in the Agreement or to exercise any right
case of AOL Members who purchase under this Agreement will not be
Products from MP, MP will be entitled construed as a waiver or
to use User Information from such AOL relinquishment to any extent of such
Members as part of MP's aggregate Party's right to assert or rely upon
list of customers; provided that MP's any such provision or right in that
use does not in any way identify, or any other instance; rather, the
promote or otherwise disclose such same will be and remain in full
User Information in a manner that force and effect.
identifies such AOL Members as
end-users of the AOL Service, 18. Return of Information. Upon the
AOL.corn or the AOL Network. In expiration or termination of this
addition, MP will not use any User Agreement. each Party will, upon the
Information for any purpose written request of the other Party,
(including any Specified Purpose) not return or destroy (at the option of
directly related to the business the Party receiving the request) all
purpose of the Affiliated MP Site. confidential information, documents,
manuals and other materials
13. Excuse. Neither Party will be specified the other Party.
liable for, or be considered in
breach of or default under this 19. Survival. Sections 8 through 29
Agreement on account of, any delay or of this Exhibit will survive the
failure to perform as required by completion, expiration, termination
this Agreement as a result of acts of or cancellation of this Agreement.
god, general telecommunications
outages, or any causes or conditions 20. Entire Agreement. This Agreement
which are beyond such Party's sets forth the entire agreement and
reasonable control and which such supersedes any and all prior
Party is unable to overcome by the agreements of the Parties with
exercise of reasonable diligence. respect to the transactions set
forth herein. Neither Party will be
14. Independent Contractors. The bound by, and each Party
Parties to this Agreement are specifically objects to. any term,
independent contractors. Neither condition or other provision which
Party is an agent, representative or is different from or in addition to
partner of the other Party. Neither the provisions of this Agreement
Party will have any right, power or (whether or not it would materially
authority to enter into any agreement alter this Agreement) and which is
for or on behalf of, or incur any proffered by the other Party in any
obligation or liability of, or to correspondence or other document,
otherwise bind, the other Party. This unless the Party to be bound thereby
Agreement will not be interpreted or specifically agrees to such
construed to create an association, provision in writing.
agency, joint venture or partnership
between the parties or to impose any 21. Amendment. No change, amendment
liability attributable to such a or modification of any provision of
relationship upon either Party. this Agreement will be valid unless
set forth in a written instrument
15. Notice. Any notice, approval, signed by the Party subject to
request. authorization, direction or enforcement of such amendment, and
other communication under this in the case of AOL, by an executive
of at least the same standing to the
executive who signed the Agreement.
26
34434-3
<PAGE>
22. Further Assurances. Each Party
will take such action (including, but
not limited to, the execution,
acknowledgment and delivery of
documents) as may reasonably be
requested by any other Party for the
implementation or continuing
performance of this Agreement.
23. Assignment. MP will not assign
this Agreement or any right, interest
or benefit under this Agreement
without the prior written consent of
AOL. Assumption of the Agreement by
any successor to MP (including,
without limitation, by way of merger
or consolidation) will be subject to
AOL's prior written approval. Subject
to the foregoing, this Agreement will
be fully binding upon, inure to the
benefit of and be enforceable by the
Parties hereto and their respective
successors and assigns.
24. Construction: Severability. In
the event that any provision 7f this
Agreement conflicts with the law
under which this Agreement is to be
construed or if any such provision is
held invalid by a court with
jurisdiction over the Parties to this
Agreement, (i) such provision will be
deemed to be restated to reflect as
nearly as possible the original
intentions of the Parties in
accordance with applicable law, and
(ii) the remaining terms, provisions,
covenants and restrictions of this
Agreement will remain in full force
and effect.
25. Remedies. Except where otherwise
specified, the rights and remedies
granted to a Party under this
Agreement are cumulative and in
addition to, and not in lieu of, any
other rights or remedies which the
Party may possess at law or in
equity; provided that, in connection
with any dispute hereunder, MP will
be not entitled to offset any amounts
that it claims to be due and payable
from AOL against amounts otherwise
payab!e by MP to AOL.
26. Applicable Law. Except as
otherwise expressly provided herein,
this Agreement will be interpreted,
construed and enforced in all
respects in accordance with the laws
of the Commonwealth of Virginia
except for its conflicts of laws
principles.
27. Export Controls. Both Parties
will adhere to all applicable laws,
regulations and rules relating to the
export of technical data and will not
export or re-export any technical
data, any products received from the
other Party or the direct product of
such technical data to any proscribed
country listed in such app!icable
laws, regulations and rules unless
properly authorized.
28. Headings. The captions and
headings used in this Agreement are
inserted for convenience only and
will not affect the meaning or
interpretation of this Agreement.
29. Counterparts. This Agreement may
be executed in counterparts, each of
which will be deemed an original and
all of which together will constitute
one and the same document
27
34434-3
<PAGE>
EXHIBIT H
To be provided by AOL
---------------------
28
34434-3
<PAGE>
Confidential Draft
June 18, 1998
EXHIBIT I
29
34434-2
<PAGE>
arbitrators may modify the allocation of Arbitration Costs and
award Attorneys' Fees in those cases where fairness dictates a
different allocation of Arbitration Costs between the Parties
and an award of Attorneys' Fees to the prevailing Party as
determined by the arbitrators.
7.7. Any Dispute that is not subject to final resolution by the
Management Committee or to arbitration under this Section 6 or
by law (collectively, "Non-Arbitration Claims") will be brought
in a court of competent jurisdiction in the Commonwealth of
Virginia. Each Party irrevocably consents to the exclusive
jurisdiction of the courts of the Commonwealth of Virginia and
the federal courts situated in the Commonwealth of Virginia,
over any and all Non-Arbitration Claims and any and all actions
to enforce such claims or to recover damages or other relief in
connection with such claims.
8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
forth on Exhibit F attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit G attached hereto are each hereby made
a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the Effective Date.
AMERICA ONLINE, INC. DATAMARK HOLDING, INC., D/B/A DIGITAL
COURIER TECHNOLOGIES, INC
By: By:
------------------------------ ------------------------------
Print Name: Print Name:
---------------------- ----------------------
Title: Title:
--------------------------- ---------------------------
30
34434-3
Exhibit 10.4
@HOME NETWORK/DATAMARK HOLDING, INC.
CONTENT LICENSE AND DISTRIBUTION AGREEMENT
This Content License and Distribution Agreement (the "Agreement") is made
as Of July 10, 1998 (the "Effective Date") by and between At Home Corporation, a
Delaware corporation with principal offices at 425 Broadway, Redwood City, CA
94063 ("@Home"), and DataMark Holding, Inc. d.b.a. Digital Courier Technologies,
Inc., a Delaware corporation with principal offices at 448 East 6400 South,
Suite 400, Salt Lake City, UT 84107 by and through its wholly-owned subsidiary,
WeatherLabs, Inc. ("DCTI").
In consideration of the representations, warranties and covenants
contained herein, and other good and valuable consideration, the parties agree
to be bound by the terms and conditions contained in this Agreement.
1. Definitions.
a) "@Home Service" means @Home's International subscription broadband
service offering.
b) "Above the Fold" means situated within that portion of a page that
is designed to be visible on a standard computer screen with a
resolution of 800 pixels by 600 pixels without requiring the user to
scroll horizontally or vertically through the page.
c) "Channel Home Page" means the first page or top level page accessed
by a subscriber when entering a given channel on The @Home Service
(e.g. "News" or "Finance") using a persistent navigation button with
the name of the channel depicted which is directly accessible from
anywhere within the @Home Service.
d) "Co-branded Weather@Home" means a customized, optimized and mirrored
version of Weather@Home that is located within WeatherLabs Online
which will contain a comprehensive offering of the products and
services that are substantially similar to those offered on
Weather@Home.
e) "Contract Year" means a period beginning on the Effective Date or
any anniversary thereof, and ending one year later.
f) "Cover Feature" means the portion of a Channel Home Page that is
produced daily by the @Home editorial staff.
g) "DCTI Competitors" means Accuweather, The Weather Channel,
WeatherNews Inc., Weather Services Corporation, Intellicast,
National Weather Center, and USA Today.
h) "Distribution Affiliates" means at any given time, @Home's
then-current domestic and International distribution affiliates who
offer the @Home Service. As of the Effective Date, the Distribution
Affiliates are: Tele-Communications Inc., Cablevision Systems Corp.,
<PAGE>
Comcast Corporation, Cox Communications, Bresnan Communications
Company, Insight Communications, Jones Intercable, Garden State
Cable, Cogeco Cable, Lenfest Communications, InterMedia Partners,
Marcus Cable, Century Communications, Rogers Cablesystems Limited
and Shaw Communications.
i) "Impression" means a single viewing of a page. An Impression is
recorded whether or not the viewer acts on an advertisement located
on that page.
j) "Net Advertising Revenue" means the gross advertising and
sponsorship revenue collected by @Home which is directly
attributable solely to Weather@Home, less third party agency
commissions and seller sales costs to be computed as 20% of the
gross advertising and sponsorship revenue on Weather@Home.
k) "News Channel" means a collection of web pages on the @Home Service
that are grouped together by a persistent, dedicated navigation HTML
button currently labeled "News", which is directly accessible from
anywhere within the @Home Service.
l) "News Home Page" means the first page accessed by a subscriber when
entering the News Channel.
m) "Semiannual Period" means, with respect to any Contract Year, a six
month period starting at either. (i) the beginning of such Contract
Year; or (ii) six months after the beginning of such Contract Year.
n) "WeatherLabs Online" means the World Wide Web site with URL:
www.weatherlabs.com.
o) "Weather@Home" means an HTML feature page embedded within the @Home
News Channel, and accessible via a dedicated subchannel HTML button,
containing weather content and customized for placement on the @Home
Service, all as further described herein and in Exhibit A, which
represents a sample Weather@Home Home Page (with navigation
depicted) for illustrative purposes.
p) "Weather Video Wall" means an HTML feature page that may be embedded
within Weather@Home (via an HTML link) or other channels and
applications on the @Home Service, with any additional placements
determined by @Home. The Weather Video Wall will contain one or more
.jpeg or .gif images hyperlinked to multimedia videos with a weather
focus that may be provided by DCTI and/or other content providers.
2. @Home Channel Contribution.
a) Weather@Home Page During the term of this Agreement, the
Weather@Home page will display and provide content, navigation, and
features which are Substantially Similar to those shown in Exhibit
A. For purposes of this Section 2(a), "Substantially Similar" means
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<PAGE>
approximately the same relative branding size and prominence for
WeatherLabs content as depicted in Exhibit A. The Weather@Home page
will be free of charge to all @Home subscribers.
b) Persistent Channel Navigation During the term of this Agreement,
@Home will provide one button in the News Channel navigation bar
exclusively dedicated to accessing Weather@Home (the "Weather
Button"). This button will receive persistent placement, will be
accessible from any page within the News Channel area, and will link
to Weather@Home. The button will appear in a position that best
encourages use of the @Home News Channel and will appear Above the
Fold. In addition, @Home may, in its sole discretion, add additional
navigational elements or links across the @Home Service which link
to all or part of Weather@Home.
c) DCTI Exclusive Position. DCTI will receive an Exclusive Position
within the @Home Service. As used in this Agreement this "Exclusive
Position" means:
i) Elimination of Navigation Placement. @Home will not include in
the News Channel any persistent navigation or any persistent
button which links to pages displaying content from DCTI
Competitors.
ii) DCTI Competitor Content With the exception of video, @Home will
not display any content from DCTI Competitors on the
Weather@Home page during the term of this Agreement.
iii) Video from Other Providers. DCTI agrees and acknowledges that
@Home has made commitments to another weather provider for
placement of one or more video weather segments on the
Weather@Home page (as generally depicted on Exhibit A - "Video
Assets"), and may launch a Weather Video Wall on the @Home
Service at some future date during the term of the Agreement.
In no event will @Home's placement of video from a weather
provider other than DCTI on the Weather@Home page or the
integration of a Weather Video Wall from a weather provider
other than DCTI constitute a breach of this Agreement.
d) Editorial Autonomy . Notwithstanding the provisions of Section 2(c)
above, DCTI's Exclusive Position will not preclude @Home from:
i) Permitting @Home editors to place editorial content from DCTI
Competitors (which may include a link back to the content
provider) in any Cover Feature.
a) In those cases where a variety of sources provide similar
information or materially similar coverage of a weather
story that appears in a Cover Feature, and where The
Weather Labs provides similar information or materially
similar coverage of such a weather story, @Home's editors
will give preferential treatment to The Weather Labs
Source within the respective Channel Home Page Cover
Feature.
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b) In those cases where The Weather Labs provides only
tangentially related or less extensive coverage for a
Cover Feature topic than other sources, @Home reserves the
right to link to other information sources within or
outside of the Channel Home Page on a basis which provides
preferential treatment to such other sources. However, in
cases where The Weather Labs has material that
beneficially supplements an @Home weather feature, @Home
will make reasonable efforts to link to that material.
ii) Permitting @Home editors to place their own news and weather
stories within the News Channel or other Channels across the
service.
iii) Permitting the Distribution Affiliates complete autonomy in the
programming of the local area of the @Home Service.
e) DCTI will offer @Home the option to integrate any newly developed
online weather products, content and software tools that DCTI
invents. If a competing weather content provider offers @Home a
weather service or product that WeatherLabs does not offer at that
time, @Home will give DCTI, upon a 60-day written notice, an
opportunity to develop and produce a similar or superior weather
service or product first before using any DCTI Competitor's service
or product.
3. @Home Marketing Contribution.
a) Ad Inventory . At part of its consideration hereunder, @Home will
provide DCTI with Above the Fold advertising at no additional cost
in the amounts set forth herein to promote Weather@Home. The
advertisements will be cross-promoted across the @Home Channels (run
of site) such as "Finance", "News", "Entertainment", and
"Technology", at the following levels: 200,000 Impressions during
the first Contract Year, 450,000 Impressions during the second
Contract Year, and 700,000 Impressions during the third Contract
Year. @Home will also provide creative services to assist the
production of up to four B*Box advertisements per year. This may
include a marketing campaign to build a broader consumer awareness
of Weather@Home and/or Co-Branded Weather@Home.
b) Outbound Marketing. Home will use reasonable efforts with its
Distribution Affiliates to include the WeatherLabs in any
content-related external marketing pieces. These marketing pieces
will, at a minimum, include the WeatherLabs logo but may also
include the WeatherLabs descriptions, screen shots, video of the
@Home Service which includes Weather@Home, etc. Possible marketing
avenues may include, but are not limited to, cable TV spots,
newspaper ads, bill stuffers, postcards, door hangers, direct mail,
and take-one brochures.
c) Other Online Marketing . @Home and DCTI will work together to
include the WeatherLabs in other appropriate online mechanisms for
showcasing Weather@Home and other offerings as these mechanisms are
developed.
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<PAGE>
d) Usage Data. @Home will provide DCTI with aggregated usage data
concerning access (unique site visitation, total Impressions, etc.)
by visitors to Weather@Home. Usage data reports will be provided
semi-annually and as reasonably requested by DCTI The reports will
be delivered in the format most commonly collected by @Home. All
usage data will be considered Confidential Information of @Home.
Unless @Home is legally or contractually otherwise required, @Home
will not provide to any third party, other than Distribution
Affiliates, usage data specific to WeatherLabs Online or
Weather@Home that has not been aggregated with other data, without
DCTIs prior consent.
4. @Home Network and Distribution Contribution.
a) @Home Distribution. @Home will distribute Weather@Home through all
means by which it distributes its national content to subscribers
using personal computers.
b) Channel Serving and Distribution. @Home. will provide backbone
transport, caching, and network management associated with the
distribution of Weather@Home and any related content to @Home
subscribers over the @Home Network. Without limiting any rights
@Home. may have under applicable laws, DCTI agrees that @Home may
promote (as contemplated by this Agreement), transport (i.e.
transmit and serve), cache on proxy servers, replicate on
replication servers and reproduce on related storage devices
operated by @Home and its Distribution Affiliates, the content
provided by DCTI to @Home for Weather@Home.
c) Connectivity to the @Home Backbone If both parties together
determine that a direct connection is required between @Home and the
WeatherLabs, @Home and DCTI will share equally (50/50) the cost of
direct connectivity from the DCTI Data Server Farm and the nearest
@Home Network backbone access point.
5. DCTI Contribution.
a) Co-branded Weather@Home site. DCTI will create and host the
Co-branded Weather@Home. Except as mutually agreed in writing by the
parties, the Co branded Weather@Home site will contain, at a
minimum, the content described in Section 5b and will not contain
any third-party products, services, programming or elements
generally not depicted in Exhibit A. DCTI will review, delete, edit,
create, update and otherwise manage all content available on or
through the Co branded Weather@Home site in accordance with the
terms of this Agreement. DCTI will ensure that the Co-branded
Weather@Home site does not in any respect promote, advertise, market
or distribute the products, services or content of any other
interactive service or any entity reasonably construed to be in
competition with @Home. Additionally DCTI will bear responsibility
for the implementation, management and costs associated with the
Co-branded Weather@Home site.
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<PAGE>
b) Weather Content. Weather@Home and Co-branded Weather@Home will
consist of a News On-Line weather service that is rich in graphics,
text, and animations and will include, at a minimum, weather data
supplied by DCTI as follows:
i) 24-hour round-the-clock weather information;
ii) Day Local Forecast, Regional Forecast, & National Forecast;
iii) Local, Regional, and National Radar Map;
iv) Local, Regional, and National Satellite Imagery;
v) Severe Weather Report; and
vi) Weather Personalization Features.
c) Ad Inventory At part of its consideration hereunder, DCTI will
provide @Home with advertising banners at no cost in the amounts set
forth herein to promote Weather@Home or other @Home offerings. Such
banner Impressions shall be provided on a "run-of-site" basis, that
is, the banner Impressions shall be substantially distributed
randomly both throughout The Weather Labs Online and over the course
of a twenty-four (24) hour day, until such banner Impressions are
achieved at the following levels: 2,000,000 banner Impressions
during the first Contract Year, 3,500,000 banner Impressions during
the second Contract Year, and 5,000,000 banner Impressions during
the third Contract Year. If DCTI is unable to deliver the minimum
number of Impressions, subject to @Home's approval (which shall not
be unreasonably withheld), DCTI will provide @Home, as its sole
remedy, with a comparable promotional placement.
d) Production Work. DCTI will be responsible for all production work
associated with Co-branded Weather@Home, including all related costs
and expenses.
e) Hosting; Communications. DCTI will be responsible for all
communications, hosting and connectivity costs and expenses
associated with the Co-branded Weather@Home site. In addition, DCTI
will provide all computer hardware (e.g., servers, network devices,
routers, switches, telephones and other similar equipment) and all
computer software (e.g., web servers, operating systems,
applications, databases and other similar resources) necessary for
DCTI to access the @Home Network.
f) Traffic Flow. DCTI will take reasonable efforts to ensure that @Home
traffic is either kept within the Co-branded Weather@Home site or
channeled back into the @Home Network (with the exception of
advertising links sold and implemented pursuant to the Agreement).
The Parties will work together on implementing mutually acceptable
links from the Co-branded Weather@Home site back to the @Home
Service.
g) Active Web Presence. During the term of this Agreement, WeatherLabs
will maintain an Active Web Presence. For the purpose of this
Agreement, "Active Web Presence" means the maintenance of the
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<PAGE>
WeatherLabs World Wide Web site that offers at least the level of
performance and functionality as offered on the Effective Date
(including breadth and depth of offerings, services and suppliers).
h) Quality of Services. If the quality of the primary features and
functions of Weather@Home (including frequency of updates, breadth
and depth of coverage, usability, etc.) are not substantially equal
to or better than the analogous functions and features provided by
other third party content providers of weather information, then
@Home may so notify DCTI in writing of such deficiencies, including
a description of how Weather@Home is deficient. Within thirty (30)
days of receiving such notice DCTI will provide @Home with a
reasonable plan for rectifying such deficiencies. Such plan must be
completed as soon as possible and in no event later than ninety (90)
days after the date DCTI received the notice of deficiency. If DCTI
fails to provide such plan or to implement it within such periods,
or if such implementation does not rectify the specified
deficiencies, then @Home may terminate all or any relevant portion
of the "Exclusive Position" granted to DCTI under Section 2 above.
i) @Home Exclusive Position. During the term of this Agreement, DCTI
will not directly distribute the WeatherLabs content through any
Distribution Affiliates.
j) Customer Support. @Home will forward all telephone calls and e-mails
@Home receives related to Weather@Home to DCTI personnel if weather
support is needed.
k) Weather Data Feed. DCTI will provide @Home HTTP access to a
regularly updated weather data file, in a mutually agreed upon
format defined by both parties.
1) Problem Escalation. DCTI will provide a contact point for problem
escalation. DCTI will make all reasonable efforts to respond to
problem escalation within one hour of notification.
6. Joint @Home/DCTI Contribution.
a) User Interface and Content. @Home and DCTI will mutually agree on
the User interface design and on the types of content which appear
in:
i) The Weather@Home page, which shall be consistent with the @Home
look-and-feel, and
ii) The Co-branded Weather@Home site.
b) Technical Specifications. DCTI and @Home will mutually agree upon
the technical specifications for Weather@Home and Co-branded
Weather@Home. If @Home makes changes in the applicable technical
specifications, DCTI will make good faith efforts to comply with
such changes.
c) @Home User Interface Change @Home reserves the right to change the
@Home Service user interface at its discretion; provided that: (a)
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@Home will give DCTI reasonable advance notice of any change that is
reasonably likely to have a material impact on DCTI promotional
placements (including, among other things, the size, functionality,
prominence or relative importance of such placements) or advertising
Impressions and an opportunity to consult with @Home regarding such
change, and (b) following any such change, @Home will provide DCTI
with promotional and exclusivity placements substantially similar to
those described in this Agreement.
7. Cash Compensation.
a) Guaranteed Service Payments to @Home The parties have agreed that
the cash value of the services provided by @Home during the term of
the agreement (as outlined hereunder) are One Hundred Fifty Thousand
Dollars ($150,000) in Contract Year one, Three Hundred Fifty
Thousand Dollars ($350,000) in Contract Year two, and Five Hundred
Thousand Dollars ($500,000) in Contract Year 3. In consideration for
the above services, DCTI will pay @Home a non-refundable guaranteed
payment of One Million Dollars US ($1,000,000) as follows:
i) Upon execution of this Agreement:
a) Two Hundred Sixty-Six Thousand Dollars (US$266,000); and
b) 20,534 shares common stock of DCTI to be registered on an
S3 Shelf Registration Statement (the "Common Stock"), such
number of shares of Common Stock as determined by dividing
the 12-day trailing average price per share of DCTI Common
Stock for the 12 days prior to the Effective Date,
computed as nine dollars and seventy four cents ($9.74)
per share, as reported on the NASDAQ Stock Market (the
"Market Price") into Two Hundred Thousand Dollars (US
$200,000).
c) DCTI represents and warrants that it is eligible to file
an S-3 Shelf Registration (the "Registration Statement")
and will complete such registration within ninety (90)
days of the Effective Date. The Registration Statement
shall remain in effect for a period of one year from its
effective date.
ii) On the first anniversary of the Effective Date: Two Hundred
Sixty-Seven Thousand Dollars (US $267,000); and
iii) On the second anniversary of the Effective Date: Two Hundred
Sixty-Seven Thousand Dollars (US $267,000).
b) Method of Payment. Cash payments will be made by check or wire
transfer to the following account: Silicon Valley Bank Santa Clara,
Routing/ Transit # 121140399, For Credit of At Home Corporation,
Credit Account # 3300113199, By Order of: DCTI.
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8. Warrants.
a) Grant of Warrants.
i) First Warrant. DCTI will grant to @Home a warrant representing
the right for a seven (7) year period to purchase an aggregate
of One Hundred Thousand (100,000) shares of unrestricted DCTI
Common Stock (the "Warrant Shares") at an exercise price of
nine dollars and seventy four cents ($9.74) per share. Such
warrant shall be covered by the Registration Statement.
ii) Second Warrant. DCTI will grant to @Home a warrant representing
the right for a seven (7) year period to purchase an aggregate
of One Hundred Thousand (100,000) shares of unrestricted DCTI
Common Stock (the "Performance Warrant Shares") at an exercise
price equal nineteen dollars and forty-eight cents ($19.48) per
share. Such warrant shall be covered by the Registration
Statement.
iii) The parties will work together to execute warrant documents
within thirty (30) days of the Effective Date.
b) Vesting of Warrant Shares. The Warrant Shares granted hereunder
shall vest and become exercisable immediately upon the Effective
Date.
c) Vesting of Performance Warrant Shares. The Performance Warrant
Shares granted hereunder shall vest and become exercisable in
accordance with the following schedule:
i) At the end of the first Contract Year, provided that
Weather@Home shall have received at least three million
(3,000,000) Impressions during each of the foregoing quarters
or a total of twelve million (12,000,000) Impressions over the
course of the Contract Year, thirty-three percent (33%) of the
Performance Warrant Shares (33,333.33 shares) shall vest and
become immediately exercisable.
ii) At the end of the second Contract Year, provided that
Weather@Home shall have received at least ten million
(10,000,000) Impressions during each of the foregoing quarters
or a total of forty million (40,000,000) Impressions over the
course of the Contract Year, thirty-three percent 33% of the
Performance Warrant Shares (33,333.33 shares) shall vest and
become immediately exercisable. In addition, up to 33%
(33,333.33) additional Performance Warrant Shares shall vest
and become immediately exercisable as of this date to the
extent that: (1) these shares did not vest in the prior
Contract Year due to @Home's failure to reach the Impression
target set forth herein for that Contract Year; and (ii) @Home
has subsequently performed hereunder to remedy any such
shortfall.
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iii) At the end of the third Contract Year, provided that
Weather@Home shall have received at least twenty-one million
(21,000,000) Impressions during each of the foregoing quarters
or a total of eighty four million (84,000,000) Impressions over
the course of the Contract Year, thirty-three percent 33% of
the Performance Warrant Shares (33,333.34 shares) shall vest
and become immediately exercisable. In addition, up to 66%
(66,666.66) additional Performance Warrant Shares shall vest
and become immediately exercisable as of this date to the
extent that:(i) these shares did not vest in the prior Contract
Years due to @Home's failure to reach the Impression target set
forth herein for those Contract Years; and (ii) @Home has
subsequently performed hereunder to remedy any such shortfall.
iv) The warrant agreement shall contain a net exercise provision
such that @Home can commence its Rule 144 holding period on the
date of issuance of the warrants.
v) Notwithstanding the foregoing, all Performance Warrant Shares
shall immediately vest in the event that: (a) @Home and DCTI
enter into a binding agreement with respect to the promotion by
@Home of other content or commerce offerings that may include
either VideosNow or netClearing, both products of DCTI; or (b)
a change of control of DCTI occurs, whichever is earlier.
9. Other Financial Considerations.
a) Advertising Revenue .
i) Inventory Selling on Weather@Home @Home has the exclusive right
to sell advertising inventory on the Weather@Home page.
ii) Inventory Selling on Co-branded Weather@Home DCTI has the
exclusive right to sell promotions, advertisements, links
pointers or similar services or rights on the Co-branded
Weather@Home site. The specific advertising inventory within
the Co-branded Weather@Home site win be as reasonably
determined by DCTI. Notwithstanding the foregoing, in the event
that DCTI desires to retain a third party to sell
advertisements in the Co-branded Weather@Home site on behalf of
DCTI, DCTI shall first offer to @Home the right to sell such
Advertisements on behalf of DCTI. All advertisements in the
Co-branded Weather@Home site shall be subject to @Home's
then-applicable advertising policies, exclusivity obligations
and prior approval.
iii) Revenue Split on Weather@Home During the term of this
Agreement, @Home will remit to DCTI 40% of its Net Advertising
Revenue generated from Weather@Home.
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<PAGE>
iv) No Revenue Split on Co-branded Weather@Home During the term of
this Agreement, DCTI will keep all Advertising and Sponsorship
Revenue generated from Co-branded Weather@Home.
b) Payment Frequency . All Net Advertising Revenue amounts owed from
one party to the other shall be paid within thirty (30) days of the
end of each Semiannual Period of each Contract Year.
c) Alternative Revenue Streams. In the event DCTI or any of its
affiliates receives or desires to receive, directly or indirectly,
any additional revenues in connection with the Co-branded
Weather@Home site (an "Alternative Revenue Stream"), DCTI will
promptly inform @Home in writing, and the Parties will negotiate in
good faith regarding whether DCTI will be allowed to market products
producing such Alternative Revenue Stream through the Co-branded
Weather@Home site, and if so, the equitable portion of revenues from
such Alternative Revenue Stream (if applicable) that will be shared
with @Home.
d) Audit Rights . DCTI will maintain complete, clear and accurate
records of all expenses, revenues and fees in connection with the
performance of this Agreement. For the sole purpose of ensuring
compliance with this Agreement, @Home will have the right, at its
expense, to direct an independent certified public accounting firm
to conduct a reasonable and necessary inspection of portions of the
books and records of DCTI which are relevant to DCTIs performance
pursuant to this Agreement. Any such audit may be conducted after
twenty (20) business days prior written notice.
e) Taxes. DCTI will be solely responsible for the payment of, and will
indemnify and hold @Home harmless from, any sales, use, excise,
import or export value added or similar tax or duty not based on
@Home's net income, including any penalties and interest, as well as
any costs associated with the collection or withholding thereof,
including attorneys' fees.
10. Commencement.
a) Both parties agree to use reasonable commercial efforts to cause
Weather@Home to become commercially available to @Home subscribers
on or before sixty (60) days from the Effective Date.
11. Term and Termination.
a) Initial Term. The initial term of this Agreement will begin on the
Effective Date and will end three (3) years after the date that
Weather@Home page is first commercially available to @Home
subscribers.
b) Termination Due to Breach. Either party may terminate this
Agreement, effective upon thirty (30) days' written notice, if the
Page 11
<PAGE>
other party fails to cure a material breach of any material
obligation under this Agreement within thirty (30) days following
written notice to such party.
c) No Liability for Termination. Neither @Home nor DCTI will have any
liability to the other merely as a result of termination of this
Agreement in accordance with this Section 11, however all amounts
earned but unpaid as of such termination shall be due and payable to
either party in accordance with the terms set forth in this
Agreement.
12. Trademarks.
a) Use During Agreement. @Home and DCTI each will have the right,
without charge, to use in promoting Weather@Home and the @Home
Service the other's business name and any tradenames, trademarks and
service marks that @Home may adopt for use with the @Home Service
(collectively, "@Home Marks") and that DCTI may adopt for use with
Weather@Home and/or Co-branded Weather@Home (collectively, "DCTI
Marks"). However, any such use must be identical to use by the party
that owns the Mark, and as approved by the owner in writing in
advance, or otherwise in accordance with any trademark usage
guidelines communicated by the owner. DCTI expressly authorizes the
use of DCTI Marks in connection with the outbound marketing
described in Section 3(b), and will provide @Home with guidelines
for how to describe/display the WeatherLabs in @Home marketing
efforts.
b) Proprietary Rights . The owner retains all goodwill and all other
rights thereto, and the other party obtains no goodwill or any other
rights thereto as a result of the use of the owner's Marks. Except
as explicitly set forth herein, no other licenses or rights are
granted or implied.
13. Representatives and Warranties; Indemnification.
a) Mutual Representations and Warranties. Each party to this Agreement
represents and warrants to the other party that: (a) such party has
the full corporate right, power and authority to enter into this
Agreement and to perform the acts required of it hereunder; (b) the
execution of this Agreement by such party, and the performance by
such party of its obligations and duties hereunder, do not and will
not violate any agreement to which such party is a party or by which
it is otherwise bound; and (c) when executed and delivered by such
party, this Agreement will constitute the legal, valid and binding
obligation of such party, enforceable against such party in
accordance with its terms.
b) DCTI Representations and Warranties. DCTI warrants that it has full
power and authority to provide the data provided hereunder (the
"Weather Data") and the Weather Data will be substantially similar
to the specifications set forth in Exhibit A. DCTI represents that
it will deliver the Weather Data to @Home in the form of electronic
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<PAGE>
data file(s) via the Internet. DCTI makes no representation or
warranty as to the capability of the Internet to provide a
continuous on-line connection for delivery of the Weather Data. DCTI
will make commercially reasonable efforts to ensure that such online
connection to the Internet is upheld. DCTI does not warrant or
guarantee the accuracy of its weather, forecasts. ALL OTHER
WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
PARTICULAR PURPOSE ARE HEREBY EXCLUDED.
c) @Home Representations and Warranties. EXCEPT AS OTHERWISE SET FORTH
IN THIS AGREEMENT: (A) @HOME DOES NOT MAKE ANY WARRANTIES CONCERNING
THE @HOME NETWORK OR THE @HOME SERVICE, EXPRESS, IMPLIED OR
OTHERWISE, (B) @Home SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES
OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT WITH RESPECT TO THIRD PARTY RIGHTS, AND (C) THE
@HOME NETWORK, THE @HOME SERVICE, AND ANY AND ALL CONTENT AND TOOLS
AND RELATED DELIVERABLES PROVIDED BY @HOME IN CONNECTION WITH: THIS
AGREEMENT ARE PROVIDED BY @HOME "AS IS".
d) Indemnification. Each party will indemnify the other party and its
customers and affiliates for, and hold them harmless from, any loss,
expense (including reasonable attorney's fees and court costs),
damage or liability arising out of any claim, demand or suit
resulting from a breach of any of the warranties of the indemnifying
party in this Section 13. As a condition to indemnification (a) the
indemnified party will promptly inform the indemnifying party in
writing of any such claim, demand or suit and the indemnifying party
will fully cooperate in the defense thereof; and (b) the indemnified
party will not agree to the settlement of any such claim, demand or
suit prior to a final judgment thereon without the consent of the
indemnifying party.
14. Limitation Of Liability.
a) @HOME, @HOME's DISTRIBUTION AFFILIATES AND DCTI WILL NOT BE LIABLE
TO ONE ANOTHER, UNDER ANY LEGAL OR EQUITABLE THEORY, FOR ANY
CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES OF ANY KIND,
SUFFERED BY OR OTHERWISE CONPENSABLE TO THE OTHER, ARISING OUT OF,
UNDER OR RELATING TO THIS AGREEMENT, WHETHER OR NOT ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WITH @HOME OR @HOME'S
DISTRIBUTION AFFILIATES HAVE ANY LIABILITY OF ANY NATURE OR AMOUNT
WHATSOEVER To DCTI ARISING OUT OF, UNDER OR RELATING TO ANY FAILURE
OF THE DISTRIBUTION OF THE CONTENT OR ANY PART THEREOF OR ANY
SOFTWARE PROGRAM, SOFTWARE OR WEB SITE LINK OR LINK MECHANISM, OR
OTHER MATERIAL OR ITEMS THROUGH THE @HOME NETWORK OR OTHERWISE
(INCLUDING BUT NOT LIMITED TO ANY SUCH FAILURE OF DISTRIBUTION
RESULTING FROM A DISTRIBUTION AFFILIATE'S ELECTION NOT TO DISTRIBUTE
MATERIAL OR ITEMS, OR DUE TO TECHNICAL DIFFICULTIES OR OTHERWISE).
IN NO EVENT WILL EITHER PARTYS LIABILITY TO THE OTHER FOR DAMAGES
ARISING OUT
Page 13
Exhibit 21.1
DATAMARK HOLDING, INC.
Subsidiaries of the Registrant
The Company has three wholly owned operating subsidiaries; namely,
Books Now, Inc., WorldNow Online Network, Inc., and WeatherLabs, Inc.
Books Now, Inc. and WorldNow Online Network, Inc. are Nevada
corporations. WeatherLabs, Inc is an Illinois corporation.
Exhibit 22.0
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated September 23, 1998 included in the Form 10-K, into the Company's
previously filed Registration Statement File No. 333-51183.
Arthur Andersen LLP
Salt Lake City, Utah
October 12, 1998
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