SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
-----------
[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
-------------
[ ] 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)
(435) 655-3617
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
<PAGE>
PART I
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
<TABLE>
The following audited selected financial data should be read in conjunction with
the Company's consolidated financial statements appearing elsewhere herein.
<CAPTION>
For the Year Ended June 30,
---------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
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 1,545,090 398,066 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 -- --
Compensation expense related to
issuance of options by principal
stockholder -- -- 1,484,375 -- --
------------ ------------ ------------ ------------ ------------
8,359,845 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 (8,281,967) (7,158,851) (3,678,412) (618,087)
Income tax benefit 2,684,000 -- 91,999 132,681 --
------------ ------------ ------------ ------------ ------------
Loss from continuing operations $ (5,597,967) $ (485,406) $ (3586,413) $ (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 taxes (265,674) (3,040,643) -- -- --
Gain on sale of Internet service
provider subsidiary, net of
income taxes 232,911 -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from discontinued
operations 4,473,331 (2,740,205) 153,332 221,136 62,998
------------ ------------ ------------ ------------ ------------
Net income (loss) (1,124,636) $ (9,899,056) (3,433,081) (264,270) 62,998
============ ============ ============ ============ ============
Net income (loss) per common share:
Income (loss) from continuing
operations:
Basic (0.66) (0.86) (0.61) (0.10) --
Diluted (0.66) (0.86) (0.61) (0.10) --
Net income (loss):
Basic (0.13) (1.19) (0.58) (0.06) 0.01
Diluted (0.13) (1.19) (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 $ 3,639,313 $ 3,624,308 $12,774,113 $ 794,156 $ 350,428
Total assets 24,020,746 11,320,660 16,222,902 1,073,225 476,210
Long-term obligations 1,384,132 -- -- -- --
Stockholders' equity 18,995,696 9,826,083 15,541,624 1,073,225 476,210
</TABLE>
2
<PAGE>
ITEM 7. 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
1998 and its results of operations for the applicable periods in fiscal 1997 are
classified as discontinued operations in the accompanying condensed 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 businesses
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 and certain related
assets 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 of 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, for an
acquisition price of $2,232,961. In December, 1997, the Board of Directors
reviewed the performance of Sisna in conjunction with a review of the strategic
opportunities available to the Company. Among the conclusions of the Board were
the following: (a) The Internet Service Provider ("ISP") business had become
very competitive during the previous six months, with major corporations such as
US West, America Online, MCI and others aggressively marketing their internet
access offerings; (b) The margins in the ISP business were declining, as
fixed-price, unlimited time access had become prevalent, and (c) Sisna's losses
on a monthly basis were increasing with no apparent near-term prospect of
profitability. For these reasons, the Board concluded that it was in the best
interests of the Company to sell Sisna. The Board solicited offers to buy Sisna
over a period of three months, but due to Sisna's continuing losses of over
$40,000 per month, no offers materialized.
In February 1998, the Board considered terminating the operations of
Sisna to cut the Company's losses, Mr. Henry Smith, a director of the Company
and one of the former owners of Sisna, offered to assume the ongoing cost of
running Sisna. After arms-length negotiations between the independent members of
3
<PAGE>
the Board and Mr. Smith, the Company agreed to sell the operations of Sisna to
Mr. Smith.
In March 1998, the Company sold the operations of Sisna to Mr. Smith
and certain other buyers in exchange for 35,000 shares of the Company's common
stock, valued at $141,904 based on the stock's quoted fair market value. Mr.
Smith and the other buyers received tangible assets of $55,547 of accounts
receivable, $35,083 of prepaid expenses, $47,533 of computer and office
equipment, and $9,697 of other assets and assumed liabilities of $33,342 of
accounts payable, $101,951 of notes payable, and $243,320 of other accrued
liabilities, resulting in a pretax gain on the sale of $372,657. The sales price
to Mr. Smith was determined by arms' length negotiations between Mr. Smith and
the independent directors and was approved by the Board of Directors, with Mr.
Smith abstaining. Sisna's results of operations are included in the accompanying
consolidated financial statements as discontinued operations.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, a seller of books through advertisements in magazines and over the
Internet. The shareholders of Books Now received 100,000 shares of the Company's
common stock valued at $312,500 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 common shares issued were recorded at
the quoted market price on the date of acquisition. The annual number of shares
could increase up to a maximum of 175,000 shares if the Company's average stock
price, as defined, does not exceed $8.50 per share at the end of the three-year
period. The Company granted certain piggyback registration rights and a one time
demand registration right with regard to the shares received under the
agreement. The Company also entered into a three-year employment agreement with
the president of Books Now that provides for base annual compensation of $81,000
and a bonus on pretax income ranging from 5% to 8% based on the level of
earnings.
The acquisition was accounted for as a purchase. Books Now's results of
operations are included in the accompanying consolidated financial statements
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. At closing 253,260 common shares were issued valued at $762,503,
and an additional 523,960 common shares may be issued upon the attainment by
WeatherLabs of certain financial performance targets. The common shares issued
were recorded at the quoted market price on the date of acquisition.
The acquisition was accounted for as a purchase. The results of
operations of WeatherLabs are included in the accompanying consolidated
financial 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 also approved a name change from DataMark Holding,
Inc. to Digital Courier Technologies, Inc. Pursuant to the Exchange Agreement,
the Company issued 4,659,080 shares of its common stock valued at $14,027,338,
the quoted market price of the common shares issued on the date of acquisition.
This acquisition was accounted for as a purchase, $3.7 million of the
total purchase price of approximately $14 million being allocated to in process
research and development which was expensed in the first quarter of fiscal 1999.
DCII 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. DCII's results of operations are not included in the
accompanying financial statements.
Effective June 1, 1998, we entered into a marketing agreement with
America Online ("AOL"), which gave us "permanent anchor tenancy" and advertising
for our Videos Now website on key channels of the America Online Network,
AOL.com and Digital City. Due to low sales volume and unacceptable gross margins
4
<PAGE>
from the sale of videos on our Videos Now website on AOL, we entered into
discussions with AOL beginning in November 1998 to restructure the terms of the
marketing agreement with AOL. Effective January 1, 1999, we amended the
Marketing Agreement to: (1) reduce the previously required January 1, 1999
payment of $4,000,000 to AOL to a payment of $315,000 on or prior to January 31,
1999, and (2) eliminate any additional cash payments to AOL in the future under
the Marketing Agreement.
On February 1, 1999, we entered into a second amendment with AOL, under
which AOL will return to us (a) 636,942 warrants to purchase shares of common
stock and (b) 601,610 of the 955,414 shares of our common stock previously
issued to AOL under the marketing agreement. All advertising will cease
immediately, but we will continue to have a permanent location or "button" on
AOL's shopping channel until August 31, 1999. AOL charges $208,809 per year for
a permanent location on their shopping channel. We have no further financial
obligations to AOL.
Under the original contract with AOL the Company was to be one of only
two ly displayed online stores ("permanent anchor tenant") for the sale of
videos on the AOL channels where subscribers would most likely go to purchase
videos. In addition to the predominant display on the AOL channels, AOL was
providing advertising on its other channels to send customers to the permanent
anchor tenant sites. The permanent anchor tenancy included "above the fold
placement" (no scrolling required to see the Company's video site) and an
oversized logo (larger than a banner or a button). Under the amended contract
with AOL the Company will only receive "button" placement on the AOL shopping
channel. "Button" placement is not predominant on the AOL channels, is smaller,
need not be "above the fold" and is not the beneficiary of AOL advertising
designed to send customers to the site.
As a result of the February 1, 1999 agreement with AOL, the Company
determined that the remaining balance of the AOL anchor tenant placement costs
of $12,364,123 less $139,206, the fair market value of the permanent location on
the shopping channel for 8 months, should be written off as of December 31,
1998. A portion of the write-off has been offset by recording the return of the
601,610 shares of common stock, which had a quoted market value of $4,549,676 as
of the date the agreement was terminated, and by recording the cancellation of
the warrants which had a recorded value of $2,519,106 as of December 31, 1998.
This resulted in a net write-off of $5,156,135 during the three months ended
December 31, 1998.
We have not been in our current businesses long enough to know whether
the quantity of products purchased from our websites will vary during different
seasons, nor have we been in our current businesses long enough to know whether
the amount advertisers spend on Internet advertising varies by season
(advertisers historically spend less during our first and third fiscal
quarters).
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
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.
5
<PAGE>
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 288.1% to $1,545,090
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.
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 a pretax loss of $3,220,906 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
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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
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 $3,220,906.
There were no Internet service operations during the year ended June 30, 1996.
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 amortization 385,904 398,817 387,235 373,134
Research and development 473,350 373,717 454,218 130,721
Selling 642,006 336,355 188,861 122,790
----------- ----------- ----------- -----------
2,049,919 1,534,372 1,769,258 3,006,296
----------- ----------- ----------- -----------
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) (1,668,128) (3,017,452)
Benefit (provision) for income taxes -- (49,829) 2,733,829 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations (1,976,770) (1,669,446) 1,065,701 (3,017,452)
----------- ----------- ----------- -----------
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 (10,873) (72,178) 4,556,382 --
----------- ----------- ----------- -----------
Net income (loss) $(1,987,643) $ 1,741,624 $5,622,0834) $(3,017,452)
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.23) $ (0.19) $ 0.12 $ (0.39)
Diluted (0.23) (0.19) 0.12 (0.39)
Net income (loss):
Basic (0.23) (0.20) 0.64 (0.39)
Diluted (0.23) (0.20) 0.64 (0.39)
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>
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<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 -- (85,663)
----------- ----------- ----------- -----------
Loss from continuing operations (927,857) (1,117,663) (1,660,009) (3,453,322)
----------- ----------- ----------- -----------
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 -- -- (2,381,246) (659,397)
----------- ----------- ----------- -----------
Income (loss) from discontinued
operations 86,356 56,415 (2,260,345) (622,361)
----------- ----------- ----------- -----------
Net loss $ (841,501) $(1,061,248) $(3,920,354) $(4,075,953)
=========== =========== =========== ===========
Net loss per common share:
Income (loss) from continuing operations:
Basic
$ (0.11) $ (0.14) $ (0.20) $ (0.42)
Diluted
(0.11) (0.14) (0.20) (0.42)
Net income (loss):
Basic
(0.10) (0.13) (0.46) (0.49)
Diluted
(0.10) (0.13) (0.46) (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 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 Company sold its equipment at book value resulting in
no deferred gain or loss on the transaction.
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.
8
<PAGE>
In April 1998, the Company purchased 1,800,000 shares of its common
stock held by a former officer of the Company for $1,500,000 in cash.
Effective June 1, 1998, we entered into a marketing agreement with
America Online ("AOL"), which gave us "permanent anchor tenancy" and advertising
for our Videos Now website on key channels of the America Online Network,
AOL.com and Digital City. Due to low sales volume and unacceptable gross margins
from the sale of videos on our Videos Now website on AOL, we entered into
discussions with AOL beginning in November 1998 to restructure the terms of the
marketing agreement with AOL. Effective January 1, 1999, we amended the
Marketing Agreement to: (1) reduce the previously required January 1, 1999
payment of $4,000,000 to AOL to a payment of $315,000 on or prior to January 31,
1999, and (2) eliminate any additional cash payments to AOL in the future under
the Marketing Agreement.
On February 1, 1999, we entered into a second amendment with AOL, under
which AOL will return to us (a) 636,942 warrants to purchase shares of common
stock and (b) 601,610 of the 955,414 shares of our common stock previously
issued to AOL under the marketing agreement. All advertising will cease
immediately, but we will continue to have a permanent location or "button" on
AOL's shopping channel until August 31, 1999. AOL charges $208,809 per year for
a permanent location on their shopping channel. We have no further financial
obligations to AOL.
As a result of the February 1, 1999 agreement with AOL, the Company
determined that the remaining balance of the AOL anchor tenant placement costs
of $12,364,123 less $139,206, the fair market value of the permanent location on
the shopping channel for 8 months, should be written off as of December 31,
1998. A portion of the write-off has been offset by recording the return of the
601,610 shares of common stock, which had a quoted market value of $4,549,676 as
of the date the agreement was terminated, and by recording the cancellation of
the warrants which had a recorded value of $2,519,106 as of December 31, 1998.
This resulted in a net write-off of $5,156,135 during the three months ended
December 31, 1998.
In August and September 1997, the Company made an investment in
CommTouch Software Ltd. in the amount of $750,000. Due to delays in CommTouch's
product development and due to the restricted nature of the investment, the
Company recorded a reserve of $375,000 against the investment in June 1998.
Management believes that the net investment will be realized.
Operating activities used $6,377,970 during the year ended June 30,
1998 compared to $6,334,660 during the year ended June 30, 1997.
Cash provided by investing activities was $4,537,549 during the year
ended June 30, 1998 and used in investing activities was $3,697,694 during the
year ended June 30, 1997, respectively. During the year ended June 30, 1998, the
Company's investing activities included $810,215 of cash advances for operating
activities to Digital Courier International, Inc., the acquisition of equipment
for $794,344, an investment in CommTouch, Ltd. of $750,000 and the receipt of
proceeds from the sale of the direct mail advertising operations of $6,857,300
and from the sale of equipment of $20,938. During the year ended June 30, 1997,
the Company's 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 $113,741 during the year
ended June 30, 1998 as compared to $1,811,354 during the year ended June 30,
1997. The cash provided was attributable to the net receipt of $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, offset in part by the payment of $1,700,000 for the retirement of
common stock owned by former officers of the Company and $690,183 and $264,493
of principal payments on capital leases and debt agreements. During the year
ended June 30, 1997, the Company received $1,854,555 from the issuance of common
stock and paid $43,201 of principal on debt obligations.
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 June 30, 1998, the Company had
9
<PAGE>
$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 accompanying consolidated financial statements, the Company has
incurred losses from continuing operations of $5,597,967, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,377,970,
$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.
On October 22, 1998, the Company borrowed $1,200,000 from a group of
individual lenders (the "Loan"). The annual interest rate on the Loan is 24% and
the Loan is secured by receivables owed to the Company. The maturity date of the
Loan is October 22, 1999. It may be prepaid without penalty any time after
February 22, 1999. In connection with the Loan, the Company paid a finders fee
of $27,750 and issued two-year warrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share. The finders fee and the
fair market value of the two-year warrants have been capitalized and are being
amortized over the life of the loan.
On November 24, 1998, the Company raised $1.8 million by selling its common
stock and warrants to purchase common stock to The Brown Simpson Strategic
Growth Funds (the "Purchasers") pursuant to a Securities Purchase Agreement
between the Company and the Purchasers (the "Purchase Agreement"). On December
2, 1998, the Company sold an additional $1.8 million of common stock to the
Purchasers and amended the Purchase Agreement and related documents (the
"Amended Agreements").
Pursuant to the Purchase Agreement and Amended Agreements, the
Purchasers acquired 800,000 shares of the Company's common stock and five-year
warrants to purchase 800,000 additional shares ("Tranche A"). The exercise price
for 400,000 of the warrants is $5.53 per share and the exercise price of the
remaining 400,000 warrants is $9.49 per share. The exercise price of the
warrants is subject to adjustment on the six month anniversary of each
respective closing to the lesser of the initial exercise price and the average
price of the Company's common stock during any five consecutive business days
during the 22 business days ending on such anniversary of the closing. The
warrants are callable by the Company if for 15 consecutive trading days, the
closing bid price of the Company's stock is at least two times the then-current
exercise price. Because the shares acquired by the purchasers were priced at a
10% discount from the quoted market price no value has been allocated to the
warrants.
The Amended Agreements also require the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 800,000 units, each unit consisting of one share of the Company's
common stock and a warrant to purchase one share of common stock (the "Tranche B
Units"), if certain conditions are met. A condition to the sale of the Tranche B
Units, among others, is that the closing bid price of the Company's common stock
be more than $7 per share for fifteen consecutive trading days. The price for
the Tranche B Units is $7 per Unit and the exercise price of the warrants
contained in the Tranche B Unit will be equal to 110% of the closing bid price
of the Company's stock on the day of the sale of the Tranche B Units.
On March 3, 1999, the Company raised an additional $3.6 million through
the sale of Series A Convertible Preferred Stock (the "Preferred Stock") and
warrants to purchase common stock to the Purchasers pursuant to a Securities
Purchase Agreement between the Company and the Purchasers (the "March Purchase
Agreement").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360
shares of the Preferred Stock convertible into 800,000 shares of common stock
and five-year warrants to purchase an additional 800,000 shares of common stock.
The Preferred Stock is convertible into common stock at a price of $4.50 per
share of common stock. The initial exercise price for the warrants is $5.23 per
share, subject to adjustment on the six month anniversary of the closing, to the
lesser of the initial exercise price and the average price of the Company's
common stock during any five consecutive business days during the 22 business
days ending on such anniversary of the closing. The warrants are callable by the
Company if for 30 consecutive trading days, the closing bid price of the
Company's common stock is at least two times the then-current exercise price.
10
<PAGE>
The March Purchase Agreement also requires the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 1,600,000 units, each unit consisting of Series B Convertible
Preferred Stock convertible into one share of the Company's common stock and a
five-year warrant to purchase one share of common stock (the "Tranche D Units"),
if certain conditions are met. A condition to the sale of the Tranche D Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for 30 consecutive trading days. The price for the
Tranche D Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche D Unit will be $7.70. The March Purchase Agreement terminates the
commitment for Tranche B Units previously discussed.
Management is actively pursuing other 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.
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
Computer systems, software applications, and microprocessor dependent
equipment may cease to function properly or generate erroneous data when the
year 2000 arrives. The problem affects those systems or products that are
programmed to accept a two-digit code in date code fields. To correctly identify
the year 2000, a four-digit date code field will be required to be what is
commonly termed "year 2000 compliant."
To date, the Company has invested approximately $60,000 in an effort to
certify all aspects of its business are year 2000 compliant. The areas of its
business which have been targeted for compliance testing are operations and
software products and services. The Company conducted the certification process
over a three-month period in which all software products and service components
under direct control certified year 2000 compliant. For the operational
components and remaining software and services that are under the control of
third party organizations, the Company has sought their efforts to provide
written confirmation and evidence of compliance. The Company may realize
operational exposure and risk if the systems for which it is dependent upon to
conduct day-to-day operations are not year 2000 compliant. The potential areas
of software exposure include:
o electronic data exchange systems operated by third parties with
whom the Company transacts business,
o server software which the Company uses to present
content and advertising to its customers and partners, and
o computers, software, telephone systems and other equipment used
internally.
In October 1997, the Company initiated the review and assessment of all
of its computerized hardware and internal-use software systems to ensure that
such systems will function properly in the year 2000 and beyond. During the last
two years, its computerized information systems have been substantially upgraded
to be year 2000 compliant.
The Company has not yet developed a contingency plan in the event that
any non-compliant critical systems are not remedied by the year 2000, nor has it
formulated a timetable to create such a contingency plan. It is possible that
costs associated with year 2000 compliance efforts may exceed current
projections of an additional $40,000 to reach total compliance. In such a case,
these costs could have a material impact on the Company's financial position and
results of operations. It is also possible that if systems material to the
Company's operations have not been made year 2000 compliant, or if third parties
fail to make their systems compliant in a timely manner, the year 2000 issue
could have a material adverse effect on its business, financial condition, and
results of operations. This would result in an inability to provide functioning
software and services to the Company's clients in a timely manner, and could
then result in lost revenues from these clients, until such problems are
resolved by the Company or the responsible third parties.
11
<PAGE>
Forward-Looking Information
Statements regarding the Company's expectations as to future revenue
from its business strategy, and certain other statements presented herein,
constitute forward-looking information within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to (1) the
Company has only generated minimal revenue from its Internet businesses, and has
not generated and may not generate the level of purchases, users or advertisers
anticipated, and (2) the costs to market the Company's Internet services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements and report of independent public
accountants are filed as part of this report on pages F-1 through F-26
12
<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
13
<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 (as restated, see Note 1). 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 $5,597,967, $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
May 3, 1999
F-1
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AS RESTATED)
AS OF JUNE 30, 1998 AND 1997
ASSETS
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
CURRENT ASSETS:
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 --
Prepaid expenses and other current assets 793,721 74,742
Net current assets of discontinued operations -- 105,739
-------------------- --------------------
Total current assets 7,280,231 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 $76,699 1,441,459 --
-------------------- --------------------
RECEIVABLE FROM DIGITAL COURIER
INTERNATIONAL, INC. 810,215 --
-------------------- --------------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS -- 709,063
-------------------- --------------------
OTHER ASSETS 1,458,500 38,636
-------------------- --------------------
$ 24,020,746 $ 11,320,660
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AS RESTATED) (Continued)
AS OF JUNE 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1998 1997
------------------ ---------------------
<S> <C> <C>
CURRENT LIABILITIES:
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 31,196,354 23,272,606
Warrants outstanding 2,519,106 --
Receivable to be settled through the repurchase of common
shares by the Company (148,576) --
Accumulated deficit (14,572,015) (13,447,379)
------------------ ---------------------
Total stockholders' equity 18,995,696 9,826,083
------------------ ---------------------
$ 24,020,746 $ 11,320,660
================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
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 1,545,090 398,066 86,828
Research and development 1,432,006 3,966,185 1,478,890
Selling 1,290,012 1,897,665 --
Compensation expense related to issuance of options by
principal stockholder -- -- 1,484,375
------------------- -------------------- -------------------
Total operating expenses 8,359,845 7,662,832 3,735,621
------------------- -------------------- -------------------
OPERATING LOSS (8,302,705) (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 (8,281,967) (7,158,851) (3,678,412)
INCOME TAX BENEFIT 2,684,000 - 91,999
------------------- -------------------- -------------------
LOSS FROM CONTINUING OPERATIONS (5,597,967) (7,158,851) (3,586,413)
------------------- -------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED) (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
------------------- -------------------- -------------------
<S> <C> <C> <C>
DISCONTINUED OPERATIONS:
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) (3,040,643) --
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 (2,740,205) 153,332
------------------- -------------------- -------------------
NET LOSS $ (1,124,636) $ (9,899,056) $ (3,433,081)
=================== ==================== ===================
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.66) $ (0.86) $ (0.61)
=================== ==================== ===================
Income (loss) from discontinued operations:
Basic and diluted $ 0.53 $ (0.33) $ 0.03
=================== ==================== ===================
Net Loss:
Basic and diluted $ (0.13) $ (1.19) $ (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>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AS RESTATED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<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 2,232,961 --
Net loss -- -- -- --
------------ ------------ ------------ -----------
BALANCE, June 30, 1997 8,560,932 856 23,272,606 --
------------ ------------ ------------ -----------
<CAPTION>
Stock
Receivable To Subscriptions Accumulated
Be
Settled In Receivable Deficit
Stock
---------------- ----------------- ----------------
<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 -- -- --
Issuance of common stock to acquire Sisna -- -- --
Net loss -- -- (9,899,056)
--------- ------------ ---------------
BALANCE, June 30, 1997 -- -- (13,447,379)
--------- ------------ ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AS RESTATED) (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<CAPTION>
Additional
Common Stock Paid-in Warrants
Shares Amount Capital Outstanding
--------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1997 8,560,932 $ 856 $ 23,272,606 $
--
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 10 312,490
Issuance of common stock to acquire WeatherLabs,
Inc. 253,260 26 762,478 --
Issuance of common stock and warrants in connection
with AOL agreement 955,414 96 8,329,920 2,519,106
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 $ 31,196,354 $ 2,519,106
=============== =========== ================= =================
<CAPTION>
Stock
Receivable To Subscriptions Accumulated
Be
Settled In Receivable Deficit
BALANCE, June 30, 1997 Stock
---------------- ----------------- ----------------
<S> <C> <C> <C>
Exercise of stock options $ -- $ -- $(13,447,379)
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 -- -- --
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 -- -- --
Net loss
(148,576) -- --
BALANCE, June 30, 1998 -- -- (1,124,636)
---------------- ----------------- ----------------
$ (148,576) $ -- $ (14,572,015)
================ ================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
<CAPTION>
1998 1997 1996
------------------ ------------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,124,636) $ (9,899,056) $ (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 1,545,090 398,066 86,828
Provision for reserve against CommTouch Ltd. investment 375,000 -- --
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 - 2,232,961 --
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) -- --
Prepaid expenses and other current assets (520,737) (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 (6,377,970) (6,334,660) (1,385,567)
------------------ ------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (794,344) (3,188,360) (2,589,212)
Net proceeds from the sale of direct mail advertising operations 6,857,300 -- --
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 -- --
Investment in CommTouch, Ltd. (750,000) -- --
------------------ ------------------- ---------------
Net cash used in investing activities 4,537,549 (3,697,694) (2,659,840)
------------------ ------------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED) (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
<CAPTION>
1998 1997 1996
------------------ ------------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
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 113,741 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.
<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. Approximately
$3,700,000 of the total purchase price of approximately $14,000,000 will be
allocated to in process research and development and will be expensed in the
first quarter of fiscal year 1999. 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,
F-9
<PAGE>
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 the 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
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 a portion of the
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.
Subsequent Restatement of Amounts Previously Reported
Subsequent to the Company filing its Annual Report on Form 10-K for the year
ended June 30, 1998 with the Securities and Exchange Commission ("SEC"), the
Company restated certain amounts previously reported for fiscal years 1998 and
1997. Changes have been made in the method used for valuing the shares of common
stock issued in connection with the acquisitions of Sisna, Books Now and
WeatherLabs (see Note 2). Previously the Company had applied discounts to the
quoted market prices on the dates of the acquisitions due to the shares being
restricted and the Company's stock thinly traded. The restated amounts in the
accompanying financial statements reflect the shares of common stock valued at
the quoted market price on the dates of the acquisitions, which increased the
Sisna purchase price by $558,240, increased the Books Now purchase price by
$78,125 and increased the WeatherLabs purchase price by $53,375. In addition,
the Company had previously expensed $675,000 of direct response advertising
related to the AOL Agreement (see Note 4) as paid because the amount paid was
nonrefundable and the Company had no experience on which to evaluate the
effectiveness of the direct response advertising. The restated amount of direct
expense advertising will be expensed as the advertising services are received.
The impacts of the restatement on loss from continuing operations and net loss
are as follows:
<TABLE>
<CAPTION>
Previously Previously
Reported Restated Reported Restated
-------------------------------- -----------------------------
Year Ended June 30, 1998 1997
- ----------------------------------------------------- -------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Loss from continuing operations $(6,264,265) $(5,597,967) $(7,158,851) $(7,158,851)
Net loss $(1,790,934) $(1,124,636) $(9,340,816) $(9,899,056)
Diluted loss per share:
Loss from continuing operations $(0.74) $(0.66) $(0.86) $(0.86)
Net loss $(0.21) $(0.13) $(1.12) $(1.19)
</TABLE>
F-10
<PAGE>
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 to 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.
As reflected in the accompanying consolidated financial statements, the Company
has incurred losses from continuing operations of $5,597,967, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,377,970,
$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.
F-11
<PAGE>
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. In October 1998, the Company borrowed $1,200,000 from a group
of individual lenders. The loan bears interest at 24 percent, is secured by
certain receivables due to the Company, and is due October 22, 1999. In November
1998, the Company raised $1,800,000 through the sale of 400,000 shares of common
stock and warrants to purchase 400,000 shares of common stock at an initial
price $5.53 per share to The Brown Simpson Strategic Growth Funds (the
"Purchasers"). On December 2, 1998, the Company raised an additional $1,800,000
by selling 400,000 shares of common stock and warrants to purchase 400,000
shares of common stock at an initial price of $9.49 per share to the Purchasers.
In March 1999, the Company raised an additional $3,600,000 through the sale of
Series A Convertible Preferred Stock and warrants to purchase common stock to
the Purchasers. The Purchasers acquired 360 shares of the preferred stock
convertible into 800,000 shares of common stock and warrants to purchase an
additional 800,000 shares of common stock at an initial price of $5.23 per
share. Additionally, in connection with the above transactions, the Purchasers
have agreed to purchase 1,600,000 additional units, each unit consisting of one
share of common stock and one warrant to purchase one share of common stock, if
certain conditions are met. A condition to the sale of the additional units is
that the closing bid price of the Company's common stock be more than $7 per
share for 30 consecutive days. Management is actively pursuing other
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
F-12
<PAGE>
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.
Other Assets
As of June 30, 1998 and 1997, other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <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.
Accounting for Impairment of Long-Lived Assets
The Company accounts for its property and equipment, AOL anchor tenant placement
costs and other long lived assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the book value of the asset may not be
recoverable. If the sum of the expected future net cash flows (undiscounted and
without interest charges) from an asset to be held and used is less than the
book value of the asset, an impairment loss must be recognized in the amount of
the difference between the book value and fair value. As discussed above, as of
June 30, 1998 the Company determined that its investment in CommTouch was
partially impaired.
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
F-13
<PAGE>
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.
Options to purchase 1,445,000, 1,424,815, and 1,072,215 shares of common stock
at weighted average exercise prices 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 as of June 30, 1998, 1997 and 1996,
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 share. 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.
F-14
<PAGE>
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 Books 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 SFAS No.
130, "Reporting Comprehensive Income" and SFAS 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,
geographic 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.
Reclassifications
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal year 1998 presentation.
F-15
<PAGE>
(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 purchase price (as restated, see Note 1) has been
determined based on the quoted market price of the Company's common stock on 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 $616,764 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 purchase price (as restated, see Note 1) has
been determined based on the quoted market price of the Company's common stock
on 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 $901,394 has been recorded as goodwill and is being
amortized over a period of five years.
F-16
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
---------------------- -----------------------
<S> <C> <C>
Revenues $ 1,171,200 $ 368,802
Loss from continuing operations (6,344,701) (7,600,932)
Loss from continuing operations per share (0.73) (0.88)
</TABLE>
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 restricted common
stock in exchange for all of the issued and outstanding shares of Sisna. The
acquisition was accounted for as a purchase. The purchase price (as restated,
see Note 1) has been determined based on the quoted market price of the
Company's common stock on the date of acquisition. The excess of the purchase
price over the estimated fair value of the acquired assets less liabilities
assumed was $2,232,961, 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 former
major shareholder, who was a director of the Company, in exchange for 35,000
shares of the Company's common stock with a quoted market value of approximately
$141,000. The purchaser of Sisna received tangible assets with carrying values
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 with carrying values 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.
F-17
<PAGE>
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.
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 AOL for an initial term of 39 months (the "Agreement"). Under the
Agreement, the Company agreed to 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 agreed 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. During the term of the Agreement, AOL agreed
to deliver 500 million impressions to the Company's Videos Now site. The
Performance Warrant vests quarterly over the term of the agreement as the
specified quarterly impressions are delivered by AOL. During the second through
fifth quarters of the Agreement AOL agreed to deliver at least 25 million
impressions each quarter and during the sixth through thirteenth quarters AOL
agreed to deliver at least 50 million impressions each quarter.
The agreement included 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 $12,000,000 of cash payments and the estimated fair market value of
the Performance Warrant, to be determined as the warrant vests, will be
accounted for as follows: (i) the estimated fair market 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 occurred in
November 1998, through the term of the agreement; and (ii) the remaining amount
will be treated as advertising costs and will be expensed as the advertising
services are received (as restated, see Note 1). The estimated fair market value
F-18
<PAGE>
of the permanent anchor tenant placements on the AOL Network was determined
based on information obtained from AOL as to the amounts paid by other companies
to AOL for comparable placements.
The fair market value of the common shares issued of $8,330,016 and the
estimated fair market value of the Option Warrant of $2,519,106 represent the
value of the permanent anchor tenant placements on AOL.com (a separate and
distinct website from the AOL Network) and will be charged to expense ratably
over the period from the launch of the Company's interactive site on AOL.com,
which occurred in November 1998, through the 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 prepaid advertising expense.
The fair market value of the common stock issued and the Option Warrant was
recorded as AOL anchor tenant placement costs in the accompanying consolidated
financial statements.
Effective January 1, 1999, the Company and AOL amended the Agreement to: (1)
reduce the previously required January 1, 1999 payment of $4,000,000 to AOL to a
payment of $315,000 on or before January 31, 1999, and (2) eliminate any
additional cash payments to AOL in the future under the Agreement. On February
1, 1999, the Company and AOL entered into a second amendment, under which AOL
agreed to return to the Company the warrants to purchase 636,942 shares of
common stock and 601,610 of the 955,414 shares of common stock previously issued
to AOL under the Agreement. All advertising was ceased immediately; however, the
Company continues to have a permanent location or "button" on AOL's shopping
channel until August 31, 1999.
Under the original contract with AOL the Company was to be one of only two
predominantly displayed online stores ("permanent anchor tenant") for the sale
of videos on the AOL channels where subscribers would most likely go to purchase
videos. In addition to the predominant display on the AOL channels, AOL was
providing advertising on its other channels to send customers to the permanent
anchor tenant sites. The permanent anchor tenancy included "above the fold
placement" (no scrolling required to see the Company's video site) and an
oversized logo (larger than a banner or a button). Under the amended contract
with AOL the Company will only receive "button" placement on the AOL shopping
channel. "Button" placement is not predominant on the AOL channels, is smaller,
need not be "above the fold" and is not the beneficiary of AOL advertising
designed to send customers to the site.
As a result of the amendments to the Agreement, the Company determined that the
AOL anchor tenant placement costs, less the fair market value of the permanent
location on the AOL shopping channel of $139,206, should be written off as of
December 31, 1998. A portion of the write-off was offset by recording the return
of the 601,610 shares of common stock, which had a fair market value of
$4,549,676 as of the date the Agreement was terminated, and by recording the
cancellation of the warrants which had a recorded value of $2,519,106 as of
December 31, 1998. This resulted in a net write-off of $5,156,135 as of December
31, 1998 related to the AOL Agreement.
(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.
F-19
<PAGE>
(6) INCOME TAXES
<TABLE>
The components of the net deferred income tax assets as of June 30, 1998 and
1997 are as follows:
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Net operating loss carryforwards $ 3,341,000 $ 3,464,800
Accrued liabilities 271,400 83,400
Receivable reserves and other 162,000 22,000
---------------------- ----------------------
Total deferred income tax assets 3,777,400 3,570,200
Valuation allowance (3,777,400) (3,570,200)
====================== ======================
Net deferred income tax asset $ -- $ --
====================== ======================
</TABLE>
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>
Operating Leases
Minimum ------------------------------------------------------
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>
F-20
<PAGE>
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.
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.
In November 1998, the Company and the former owner reached a severance
agreement, wherein, the former owner will receive severance payments equal to
one year's salary of $81,000 and the Company will issue 205,182 shares of common
stock to the former shareholders of Books Now. The additional shares had a value
of $1,051,558 based on the quoted market price on the date of the severance
agreement. Because the operations of Books Now were not achieving the
performance goals pursuant to the purchase agreement, the severance payments and
the value of the common shares were expensed at the date of the severance
agreement.
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.
F-21
<PAGE>
(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.
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.
F-22
<PAGE>
As discussed in Note 1, subsequent to June 30, 1998 the Company has issued
800,000 shares of common stock in exchange for $3,600,000 and has issued 360
shares of Series A Convertible Preferred Stock in exchange for $3,600,000. The
360 Series A preferred shares are convertible into 800,000 shares of common
stock. In connection with the above transactions, the Company also issued
warrants to purchase up to 1,600,000 shares of common stock at various prices
per share.
(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.
<TABLE>
<CAPTION>
Options Outstanding
Number of Option Price
Shares Per Share
------------------- ----------------------
<S> <C> <C>
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
=================== ======================
</TABLE>
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 exercisable 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.
F-23
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding
Number of Option Price
Shares Per Share
------------------- -------------------------
<S> <C> <C> <C>
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, 1996 950,000 2.75-9.00
=================== =========================
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Net loss:
As reported $ (1,124,636) $ (9,899,056) $ (3,433,081)
Pro forma (4,229,002) (10,936,543) (3,926,658)
Net loss per share (basic and diluted):
As reported (0.13) (1.19) (0.58)
Pro forma (0.50) (1.32) (0.66)
</TABLE>
F-24
<PAGE>
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 a portion of the
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
F-25
<PAGE>
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 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.
F-26
<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: June 14, 1999 By /s/ James A. Egide
--------------------------
James A. Egide, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James A. Egide Director and Chairman June 14, 1999
- ------------------------- of the Board
James A. Egide
/s/ Raymond J. Pittman Director and Chief June 14, 1999
- ------------------------- Operating Officer
Raymond J. Pittman
/s/ Mitchell L. Edwards Director, Executive Vice President, June 14, 1999
- ------------------------- and Chief Financial Officer
Mitchell L. Edwards
- ------------------------- Director June , 1999
Glen Hartman
- ------------------------- Director June , 1999
Kenneth Woolley
/s/ Michael D. Bard Controller June 14, 1999
- -------------------------
Michael D. Bard
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 3211724
<SECURITIES> 0
<RECEIVABLES> 16859
<ALLOWANCES> 0
<INVENTORY> 21046
<CURRENT-ASSETS> 7280231
<PP&E> 7003236
<DEPRECIATION> 2109736
<TOTAL-ASSETS> 24020746
<CURRENT-LIABILITIES> 3640916
<BONDS> 1384132
0
0
<COMMON> 827
<OTHER-SE> 18994869
<TOTAL-LIABILITY-AND-EQUITY> 24020746
<SALES> 803011
<TOTAL-REVENUES> 803011
<CGS> 745871
<TOTAL-COSTS> 745871
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157616
<INCOME-PRETAX> (8281967)
<INCOME-TAX> (2684000)
<INCOME-CONTINUING> (5597967)
<DISCONTINUED> (4473331)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1124636)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.13)
</TABLE>
