SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------
Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
----------------------------------
(exact name of registrant as specified in its charter)
Delaware 87-0461856
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 Heber Avenue, Suite 204
P.O. Box 8000
Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(435) 655-3617
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 and 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
-------------- ---------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The Registrant has
only one class of stock issued and outstanding which is Common Stock with $.0001
par value. As of November 10, 1998, 13,349,210 of the Registrant's Common Shares
were issued and outstanding.
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
-------------------- --------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 36,899 $ 3,211,724
Trade accounts receivable 28,888 16,459
Receivable from Focus Direct, Inc. 700,000 -
Receivable from Gannaway, Inc. 378,172 -
Inventory 28,518 21,046
Current portion of AOL anchor tenant placement costs 3,237,281 3,237,281
Other current assets 165,988 118,721
-------------------- --------------------
Total current assets 4,575,746 6,605,231
-------------------- --------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,580,827 6,225,817
Furniture, fixtures and leasehold improvements 752,419 777,419
-------------------- --------------------
7,333,246 7,003,236
Less accumulated depreciation and amortization (2,530,827) (2,109,736)
-------------------- --------------------
Net property and equipment 4,802,419 4,893,500
-------------------- --------------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of current portion 8,136,841 8,136,841
-------------------- --------------------
GOODWILL, net of accumulated amortization of $288,027 and $67,997,
respectively 10,140,467 1,318,661
-------------------- --------------------
RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL, INC.
- 810,215
-------------------- --------------------
OTHER ASSETS 773,075 1,458,500
==================== ====================
$ 28,428,548 $ 23,222,948
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------------ ------------------
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of capital lease obligations $ 998,069 $ 1,006,906
Note payable 100,000 100,000
Accounts payable 1,046,369 1,458,598
Accrued rental payments for vacated facilities 426,924 544,014
Other accrued liabilities 556,478 531,400
------------------ ---------------------
Total current liabilities 3,127,840 3,640,918
------------------ ---------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 1,150,110 1,384,132
------------------ ---------------------
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, 13,099,085
and 8,268,489 shares
outstanding, respectively 1,310 827
Additional paid-in capital 43,926,111 30,506,614
Warrants outstanding 3,406,106 2,519,106
Receivable to be settled through the repurchase of
common shares by the Company (148,576) (148,576)
Stock subscription receivable (12,000) -
Accumulated deficit (23,022,353) (14,680,073)
------------------ ---------------------
Total stockholders' equity 24,150,598 18,197,898
================== =====================
$ 28,428,548 $ 23,222,948
================== =====================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
<S> <C> <C>
NET SALES $ 319,352 $ 17,545
COST OF SALES 179,881 5,459
-------------------- -------------------
Gross margin 139,471 12,086
-------------------- -------------------
OPERATING EXPENSES:
Write off of in-process research and development 5,600,000 -
Advertising expense related to @Home agreement 1,376,307 -
Depreciation and amortization 641,121 385,904
General and administrative 594,761 548,659
Selling 531,576 642,006
Research and development 38,670 473,350
-------------------- -------------------
Total operating expenses 8,782,435 2,049,919
-------------------- -------------------
OPERATING LOSS (8,642,964) (2,037,833)
-------------------- -------------------
OTHER INCOME (EXPENSE):
Interest and other income 9,894 61,086
Gain on sale of WorldNow assets 333,245 -
Interest expense (42,455) (23)
-------------------- -------------------
Other income, net 300,684 61,063
-------------------- -------------------
LOSS FROM CONTINUING OPERATIONS (8,342,280) (1,976,770)
-------------------- -------------------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
DISCONTINUED OPERATIONS:
<S> <C> <C>
Income from operations of discontinued direct mail advertising
operations, net of income tax provision of $46,144 $ - $ 64,414
Loss from operations of discontinued Internet service provider
subsidiary, net of income tax benefit of $46,144 - (75,287)
-------------------- -------------------
(LOSS) FROM DISCONTINUED OPERATIONS - (10,873)
----------------------------------------
NET LOSS $ (8,342,280) $ (1,987,643)
==================== ===================
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.91) $ (0.23)
==================== ===================
Loss from discontinued operations:
Basic and diluted $ $
- -
==================== ===================
Net loss:
Basic and diluted $ (0.91) $ (0.23)
==================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 9,191,351 8,560,932
==================== ===================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
5
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1998 1997
----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (8,342,280) $ (1,987,643)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write off of acquired in-process research and development 5,600,000 -
Issuance of common stock and warrants in connection with
@Home agreement 1,110,307 -
Depreciation and amortization 641,121 435,733
Gain on sale of WorldNow assets (333,245) -
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (12,429) (4,536)
Inventory (7,472) -
Other current assets 102,734 13,807
Net current assets of discontinued operations - 79,323
Other assets 5,925 -
Accounts payable (580,724) (612,040)
Accrued liabilities (143,014) (176,370)
Other current liabilities - 75,000
----------------- -------------------
Net cash used in operating activities (1,959,077) (2,176,726)
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Digital Courier International, Inc. (849,203) -
Purchase of property and equipment (330,010) (469,344)
Increase in investments - (750,000)
Increase in net long-term assets of discontinued operations - 252,314
----------------- -------------------
Net cash used in investing activities (1,179,213) (967,030)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock upon exercise of stock options
151,250 -
Net proceeds from sale of WorldNow assets 55,074 -
Principal payments on capital lease obligation (242,859) -
----------------- -------------------
Net cash used in financing activities (36,535) -
----------------- -------------------
NET DECREASE IN CASH (3,174,825) (3,143,756)
CASH AT BEGINNING OF PERIOD 3,211,724 4,938,404
----------------- -------------------
CASH AT END OF PERIOD $ 36,899 $ 1,794,648
================= ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 38,999 $ -
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
6
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of September
30, 1998 and for the three months ended September 30, 1998 and 1997 are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation have been
included. The financial statements are condensed and, therefore, do not include
all disclosures normally required by generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998. The results of operations for the three
months ended September 30, 1998 are not necessarily indicative of the results to
be expected for the entire fiscal year ending June 30, 1999. Certain previously
reported amounts have been reclassified to conform to the current period
presentation. These reclassifications had no affect on the previously reported
net loss.
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
Books Now, Inc.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
Inc. ("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 an earn-out of up to
262,500 additional common shares.
The acquisition was accounted for as a purchase and the results of
operations of Books Now are included in the accompanying condensed consolidated
financial statements since the date of acquisition. The tangible assets acquired
included $261 of cash, $21,882 of inventory and $50,000 of equipment.
Liabilities assumed included $112,335 of notes payable, $24,404 of capital lease
obligations and $239,668 of accounts payable and accrued liabilities. The excess
of the purchase price over the estimated fair value of the acquired assets of
$538,639 was recorded as goodwill and is being amortized over a period of five
years.
In November 1998 DCTI and the former owner reached a severance agreement,
wherein, the former owner and President of Books Now is to receive severance
equal to one year's salary ($81,000) and the acceleration of the earn-out for
205,182 shares of the Company's common stock and their issuance to the former
shareholders of Books Now.
7
<PAGE>
WeatherLabs, Inc.
On March 17, 1998, the Company entered into a Stock Exchange Agreement to
acquire all of the outstanding stock of WeatherLabs, Inc. ("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 each of the Company's next three fiscal years.
The acquisition has been accounted for as a purchase and the results of
operations of WeatherLabs are included in the accompanying condensed
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.
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange Agreement
(the "Exchange Agreement") with Digital Courier International, Inc., a Nevada
corporation ("DCII"). Pursuant to the Exchange Agreement, the Company agreed to
issue 4,659,080 shares of its common stock to the shareholders of DCII. The
acquisition and the changing of the Company's name to Digital Courier
Technologies, Inc. ("DCTI") were approved by the shareholders of the Company on
September 16, 1998.
The acquisition of DCII has been accounted for as a purchase and the results of
operations of DCII are included in the accompanying condensed consolidated
financial statements since the date of acquisition (September 16, 1998). The
tangible assets and contra-equity acquired included $250,000 of equipment,
$20,500 of deposits and $12,000 of stock subscriptions receivable. Liabilities
assumed included $219,495 of accounts payable and accrued liabilities. After
entering into the Exchange Agreement, the Company made advances to DCII to fund
its operations. The amount loaned to DCII totaled $1,659,418 as of the date of
acquisition. The excess of the purchase price over the estimated fair value of
the acquired assets was $14,641,836. Of this amount, $9,041,836 was recorded as
goodwill and other intangibles and is being amortized over a period of five
years and $5,600,000 was expensed during the three months ended September 30,
1998 as acquired in-process research and development. The amount of acquired
in-process research and development was estimated based on a third-party
valuation of DCII.
8
<PAGE>
Unaudited Pro Forma Data for Acquisitions of Continuing Operations
The unaudited pro forma results of operations of the Company for the three
months ended September 30, 1998 and 1997 (assuming the acquisitions of Books
Now, WeatherLabs and DCII had occurred as of July 1, 1997 and excluding the
write off of acquired in-process research and dvelopment of $5,600,000 in
connection with the DCII acquisition) are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
<S> <C> <C>
Net sales $ 319,352 $ 102,977
Loss from continuing operations (3,623,196) (2,181,145)
Loss per share from continuing operations (0.28) (0.16)
</TABLE>
Sisna, Inc.
On January 8, 1997, the Company completed the acquisition of Sisna, Inc.
("Sisna") pursuant to an Amended and Restated Agreement and Plan of
Reorganization (the "Agreement"). Pursuant to the Agreement, the Company issued
325,000 shares of its common stock 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 acquired
in-process research and development and expensed at the date of the acquisition.
Sisna has not been profitable since its inception. The tangible assets acquired
consisted of $32,212 of trade accounts receivable, $124,151 of inventory and
$500,000 of computer and office equipment. The liabilities assumed consisted of
$10,550 of bank overdrafts, $278,227 of accounts payable, $233,142 of notes
payable and $134,444 of other accrued liabilities.
In connection with the acquisition, the Company entered into three-year
employment agreements with four of Sisna's key employees and shareholders. The
four employment agreements provided for aggregate base annual compensation of
$280,000. The employment agreements also provided for aggregate bonuses of
$500,000, which were paid as of the date of the acquisition. These bonuses were
earned and expensed as the employees completed certain computer installations.
The employment agreements also included noncompetition provisions for periods
extending three years after the termination of employment with the Company.
In March 1998, the Company sold the operations of Sisna 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,
9
<PAGE>
$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 condensed
consolidated financial statements for the period July 1, 1997 through September
30, 1997 as discontinued operations. The Sisna revenues were $261,351 and the
loss from operations was $121,431 during the three months ended September 30,
1997.
Sale of Direct Mail Advertising Operations
In March 1998, the Company sold its direct mail advertising operations to Focus
Direct, an unrelated Texas corporation. Pursuant to the asset purchase
agreement, Focus Direct purchased all assets, properties, rights, claims and
goodwill, of every kind, character and description, tangible and intangible,
real and personal wherever located of the Company used in the Company's direct
mail operations. Focus Direct also agreed to assume certain liabilities of the
Company related to the direct mail advertising operations.
Pursuant to the agreement, Focus Direct agreed to pay the Company $7,700,000 for
the above described net assets. Focus Direct paid the Company $6,900,000 at
closing and will pay the additional $700,000 by June 30, 1999. The total
purchase price was adjusted for the difference between the assets acquired and
liabilities assumed at November 30, 1997 and those as of the date of closing.
This sale resulted in a pretax gain of $7,031,548. The purchaser acquired
tangible assets consisting of approximately $495,000 of accounts receivable,
$180,000 of inventory, $575,000 of furniture and equipment, and $10,000 of other
assets, and assumed liabilities of approximately $590,000 of accounts payable
and $320,000 of other accrued liabilities.
The direct mail advertising operations have been reflected as discontinued
operations in the accompanying condensed consolidated financial statements for
the three month period ended September 30, 1997. The direct mail advertising
revenues were $2,546,836 and the pretax income from operations was $110,558
during the three months ended September 30, 1997.
Sale of 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
10
<PAGE>
revenues actually received by Gannaway in excess of $100,000 and are to be paid
quarterly. Gannaway acquired tangible assets of approximately $100,000
consisting primarily of computer and office equipment and assumed no
liabilities. The operations of WorldNow have been reflected in the accompanying
condensed consolidated financial statements in loss from continuing operations.
The Company realized a pretax gain of $333,245.
NOTE 3 - 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 period. 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.
Options to purchase 1,348,000 and 1,322,380 shares of common stock at weighted
average exercise prices of $3.82 and $5.36 per share as of September 30, 1998
and 1997, respectively, and warrants to purchase 656,942 shares of common stock
at a weighted average exercise price of $9.37 per share as of September 30, 1998
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 share. As of September 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 2), 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.
NOTE 4 - CONTENT LICENSE AND DISTRIBUTION AGREEMENT WITH AT
HOME CORPORATION
On July 10, 1998, the Company entered into a Content License and Distribution
Agreement with At Home Corporation ("@Home") for an initial term of 36 months.
Under this agreement, the Company has agreed to pay @Home $800,000 in
non-refundable guaranteed cash payments, has issued 20,534 shares of the
Company's common stock and has issued seven-year warrants to purchase 100,00
shares of the Company's common stock at $9.74 per share (the "Warrant Shares"),
and 100,000 shares of the Company's common stock at $19.48 per share (the
"Performance Warrants") in exchange for @Home providing the Company with
advertising, marketing and distribution for the Company's WeatherLabs services
site on the @Home Network and promotion of the Weather@Home site. The Company is
to receive 40 percent of the net advertising revenue generated from
Weather@Home. The Company will retain all of the advertising revenue generated
on the Co-branded Weather@Home site.
11
<PAGE>
The Company made a cash payment to @Home of $266,000 upon execution of the
agreement in July 1998, and is scheduled to make additional payments of $267,000
on July 10, 1999 and $267,000 on July 10, 2000. The Warrant Shares vested on the
effective date of the agreement. The Performance Warrants vest over the term of
the agreement as certain promotion criteria are achieved by @Home. The costs
related to the agreement will be treated as advertising costs and will be
expensed as paid, upon issuance of the related shares, and as the warrants to
purchase common stock vest. 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. As of September
30, 1998, the initial cash payment to @Home of $266,000, the estimated fair
value of the 20,534 shares of common stock of $223,307 and the estimated fair
value of the Warrant Shares of $887,000 which was determined by using the Black
Scholes model in accordance with Financial Accounting have been recorded as
advertising expense during the quarter ended September 30, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and
referred to herein as "DCTI" or the "Company") is developing and marketing
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 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
12
<PAGE>
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.
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 sold
its WorldNow Online Network television affiliate website in July 1998.
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.
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, 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 a purchase. The
results of operations of WeatherLabs are included in the accompanying financial
13
<PAGE>
statements from the date of acquisition.
The Company entered into a Stock Exchange Agreement with Digital
Courier International, Inc., a Nevada corporation ("DCII"), 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 issued 4,659,080 shares of its common stock to the shareholders of
Digital Courier International, Inc. This acquisition was accounted for as a
purchase. The results of operations of Digital Courier International, Inc. are
included in the accompanying financial statements from September 16, 1998,the
date of acquisition.
Results of Operations
Three months ended September 30, 1998 compared with three months ended September
30, 1997
Net Sales
Net sales for the three months ended September 30, 1998 were $319,352
as compared to $17,545 for the three months ended September 30, 1997. Books
Now's operations, which were acquired in January 1998, and WeatherLabs'
operations, which were acquired in May 1998, accounted for $255,882 and $63,336
of the net sales for the three months ended September 30, 1998, respectively.
WorldNow advertiser and subscriber sales accounted for all of the net sales
during the three month period ended September 30, 1997.
Cost of Sales
Cost of sales for the three months ended September 30, 1998 were
$179,881 or 56.3% of net sales. Cost of sales for the three months ended
September 30, 1997 were $5,459 or 31.1% of net sales. The increase in cost of
sales as a percent of net sales is due to the change in products and services.
Operating Expenses
The write off of acquired in-process research and development during
the three months ended September 30, 1998 was $5,600,000, which was attributable
to the acquisition of DCII (see Note 2 to the financial statements).
14
<PAGE>
Advertising expense was $1,376,307 during the three months ended
September 30, 1998 consisting of a cash payment to @Home of $266,000, the
issuance to @Home of 20,534 shares with a quoted fair value of $223,307 and the
estimated fair value of the Warrant Shares issued to @Home of $887,000 which was
determined by using the Black Scholes model in accordance with Financial
Accounting Standard, have been charged to advertising expense during the quarter
ended September 30, 1998. On July 10, 1998, the Company entered into a Content
License and Distribution Agreement with @Home for an initial term of 36 months.
Under this agreement, the Company has agreed to pay @Home $800,000 in
non-refundable guaranteed cash payments, has issued 20,534 shares of the
Company's common stock and has issued seven-year warrants to purchase 100,000
shares of the Company's common stock at $9.74 per share (the "Warrant Shares")
and warrants to purchase 100,000 shares of the Company's common stock at $19.48
per share (the "Performance Warrants") in exchange for @Home providing the
Company with advertising, marketing and distribution for the Company's
WeatherLabs services site on the @Home Network and promotion of the Weather@Home
site. The Company is to receive 40 percent of the net advertising revenue
generated from Weather@Home. The Company will retain all of the advertising
revenue generated on the Co-branded Weather@Home site.
Depreciation and amortization expense increased 66.1% to $641,121
during the three months ended September 30, 1998 from $385,904 during the three
months ended September 30, 1997. The increase in depreciation expense was due to
the equipment acquired in connection with the WeatherLabs and Books Now
acquisitions as well as the acquisition of new equipment to support the
Company's online operations and the amortization of goodwill for acquired
companies.
General and administrative expense increased 8.4% to $594,761 during
the three months ended September 30, 1998 from $548,659 during the three months
ended September 30, 1997. The increase in general and administrative expense was
due to the addition of administrative and support staff and facilities costs
associated with the DCII acquisition offset by the reduction of administrative
and support staff associated with WorldNow Online.
Selling expense decreased 17.2% to $531,576 during the three months
ended September 30, 1998 from $642,006 during the three months ended September
30, 1997. The reduction is selling expense is attributable to the reduction of
selling expense related to the WorldNow Online television activities, offset by
selling expenses related to Books Now, WeatherLabs, and Videos Now.
Research and development expense decreased 91.8% to $38,671 during the
three months ended September 30, 1998 from $473,350 during the three months
ended September 30, 1997. Research and development expense decreased because
Digital Courier International was performing significant research and
development activities prior to its acquisition by the Company, and the
Compnany's strategy was to decrease its own expenditures and acquire the
in-process research and development of DCII..
15
<PAGE>
Discontinued Operations
During the fiscal year ended June 30, 1998, the Company sold its direct
mail advertising and Internet service operations, therefore, their results of
operations are presented as discontinued operations. During the three months
ended September 30, 1997, pretax income from the direct mail advertising
operations was $110,558. During the three months ended September 30, 1997, the
Internet service operations incurred a pretax loss of $121,431.
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. The Company is currently in arrears in making its
payments against this capital lease obligation by $186,556.
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.
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 in cash. 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.
On July 10, 1998, the Company entered into a thirty-six month Content
License and Distribution Agreement with @Home, wherein the Company has agreed to
16
<PAGE>
pay @Home $800,000 in cash. The Company made a cash payment to @Home of $266,000
in July 1998, and is scheduled to make payments to @Home of $267,000 in July
1999 and $267,000 in July 2000.
On October 22, 1998, the Company obtained a loan of $1,200,000 by
pledging certain receivables due to the Company. The Company received $1,000,000
on October 23, 1998 and $200,000 was placed in escrow to be applied against
future interest payments and expenses.
Operating activities used $1,959,077 during the three months ended
September 30, 1998 compared to $2,176,726 during the three months ended
September 30, 1997. The net cash used for operations during the three months
ended September 30, 1998 was principally attributable to the payments made to
AOL of $1,200,000 and @Home of $266,000.
Cash used in investing activities was $1,179,213 and $967,030 during
the three months ended September 30, 1998 and 1997, respectively. During the
three months ended September 30, 1998, the Company's investing activities
included cash advances for operating activities to DCII of $849,203 and the
acquisition of equipment for $330,010. During the three months ended September
30, 1997, the Company's investing activities included the acquisition of
equipment for $469,344, an investment in CommTouch, Ltd of $750,000 and a
decrease in the net long-term assets of discontinued operations of $252,314.
Cash used in financing activities was $36,535 during the three months
ended September 30, 1998 as compared to $0 during the three months ended
September 30, 1997. The increase in cash used was attributable to the receipt of
$151,250 from the exercise of stock options, and $55,074 from the sale of
WorldNow assets, offset by capital lease obligation repayments of $242,859.
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. As of September 30, 1998, the Company had
$36,899 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. 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 September 30, 1998, the Company has a tangible working
capital deficit of $1,789,375 and is scheduled to make substantial payments as
described above to AOL and @Home. 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.
17
<PAGE>
Management's plans in regard to these matters include pursuing various
potential funding sources. The Company is currently in negotiations with various
parties to obtain additional working capital through a private placement of the
Company's debt or equity securities. Certain directors of the Company have made
oral commitments to make loans to and or 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.
Year 2000 Issue
Beginning in October 1997, the Company initiated a review and
assessment of all of 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
results 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 sales, users or advertisers
anticipated, and (ii) the costs to market the Company's Internet services.
18
<PAGE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Date: November 10, 1998 By /s/ Mitchell L. Edwards
--------------------------------------
Mitchell L. Edwards
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 36899
<SECURITIES> 0
<RECEIVABLES> 1107060
<ALLOWANCES> 0
<INVENTORY> 28518
<CURRENT-ASSETS> 4575746
<PP&E> 7333246
<DEPRECIATION> 2530827
<TOTAL-ASSETS> 20977189
<CURRENT-LIABILITIES> 3127840
<BONDS> 0
0
0
<COMMON> 1310
<OTHER-SE> 16697929
<TOTAL-LIABILITY-AND-EQUITY> 20977189
<SALES> 319352
<TOTAL-REVENUES> 319352
<CGS> 179881
<TOTAL-COSTS> 8782435
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42455
<INCOME-PRETAX> (8342280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8342280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8342280)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
