SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
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(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 Heber Avenue, Suite 204
P.O. Box 8000
Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(435) 655-3617
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. The Registrant has two
classes of stock issued and outstanding, Common Stock with $.0001 par value, of
which 35,158,645 shares were issued and outstanding and Series A Convertible
Preferred Stock with a stated value of $10,000 per share, of which 360 shares
were issued and outstanding as of October 15, 1999.
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
September 30, June 30,
1999 1999
------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,811,917 $ 2,381,356
Trade accounts receivable 1,382,394 650,096
Other receivables 700,000 800,000
Available for sale security - CommTouch Software, Ltd. 3,091,620 --
Prepaid software license 903,456 903,456
Prepaid advertising 458,772 458,772
Receivable from an officer -- 56,000
Prepaid expenses and other current assets 151,665 194,658
------------------------------
Total current assets 8,499,824 5,444,338
------------------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,440,012 6,314,571
Furniture, fixtures and leasehold improvements 1,006,186 998,199
------------------------------
7,446,198 7,312,770
Less accumulated depreciation and amortization (3,989,597) (3,604,888)
------------------------------
Net property and equipment 3,456,601 3,707,882
------------------------------
GOODWILL, net of accumulated amortization
of $4,818,772 and $2,596,675, respectively 29,243,580 30,927,702
------------------------------
PREPAID SOFTWARE LICENSE, net of current portion 3,162,096 3,387,960
------------------------------
INVESTMENT IN COMMTOUCH SOFTWARE, LTD -- 750,000
------------------------------
OTHER ASSETS 3,146,209 3,157,865
------------------------------
$ 47,508,310 $ 47,375,747
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, June 30,
1999 1999
------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 2,003,342 $ 2,210,614
Current portion of capital lease obligations 1,132,113 1,102,084
Accounts payable 519,348 330,510
Deferred revenue 1,287,356 298,439
Other accrued liabilities 1,424,435 1,425,729
------------------------------
Total current liabilities 6,366,594 5,367,376
------------------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 134,267 432,704
------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares authorized; 360 shares
of Series A convertible issued and outstanding 3,600,000 3,600,000
Common stock, $.0001 par value; 50,000,000 shares
authorized, 18,558,645 and 18,557,390 shares outstanding,
respectively 1,856 1,856
Additional paid-in capital 72,766,731 72,759,439
Accumulated other comprehensive income 2,341,620 --
Warrants outstanding 1,363,100 1,363,100
Stock subscription receivable (12,000) (12,000)
Accumulated deficit (39,053,858) (36,136,728)
------------------------------
Total stockholders' equity 41,007,449 41,575,667
------------------------------
$ 47,508,310 $ 47,375,747
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
NET SALES $ 3,020,171 $ 319,352
COST OF SALES 1,346,794 179,881
------------------------------
Gross margin 1,673,377 139,471
------------------------------
OPERATING EXPENSES:
Depreciation and amortization 2,068,831 695,728
Selling 995,683 531,576
General and administrative 883,766 594,761
Research and development 576,219 38,670
Acquired in-process research and development -- 3,700,000
------------------------------
Total operating expenses 4,524,499 5,560,735
------------------------------
OPERATING LOSS (2,851,122) (5,421,264)
------------------------------
OTHER INCOME (EXPENSE):
Interest and other income 75,834 9,894
Net gain on sale of assets -- 333,245
Interest and other expense (141,842) (42,455)
------------------------------
Other expense, net (66,008) 300,684
------------------------------
NET LOSS $ (2,917,130) $ (5,120,580)
==============================
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.16) $ (0.56)
==============================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 18,557,499 9,191,351
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
------------------------------
NET LOSS $(2,917,130) $(5,120,580)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gains arising during
the period on available for sale securities 2,341,620 --
------------------------------
COMPREHENSIVE LOSS $ (575,510) $(5,120,580)
==============================
See accompanying notes to condensed consolidated financial statements
5
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<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
Increase (Decrease) in Cash
<CAPTION>
1999 1998
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,917,130) $(5,120,580)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,068,831 695,728
Compensation expense related to cashless exercise of stock
options 7,292 --
Acquired in-process research and development -- 3,700,000
Issuance of common stock and warrants in connection
with @Home agreement -- 1,110,307
Gain on sale of WorldNow assets -- (333,245)
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (732,298) (12,429)
Other receivables 100,000 --
Inventory -- (7,472)
Prepaid expenses and other current assets 42,993 (1,273,573)
Prepaid software license 225,864 --
Receivable from an officer 56,000 --
Other assets 11,656 5,925
Accounts payable 188,838 (580,724)
Deferred revenue` 988,917 --
Accrued liabilities (1,294) (143,014)
-----------------------------
Net cash provided by (used in) operating activities 39,669 (1,959,077)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (133,428) (330,010)
Advances to Digital Courier International, Inc. -- (849,203)
Net cash proceeds from sale of WorldNow assets -- 55,074
-----------------------------
Net cash used in investing activities (133,428) (1,124,139)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (268,408) (242,859)
Principal payments on borrowings (207,272) --
Net proceeds from exercise of stock options -- 151,250
-----------------------------
Net cash used in financing activities (475,680)
-----------------------------
NET DECREASE IN CASH (569,439) (3,174,825)
CASH AT BEGINNING OF PERIOD 2,381,356 3,211,724
-----------------------------
CASH AT END OF PERIOD $ 1,811,917 $ 36,899
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 115,689 $ 38,999
</TABLE>
See accompanying notes to condensed consolidated financial statemen
6
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DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of September 30, 1999
and for the three months ended September 30, 1999 and 1998 are unaudited. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation have been included. The financial
statements are condensed and, therefore, do not include all disclosures normally
required by generally accepted accounting principles. These financial statements
should be read in conjunction with the Company's annual financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1999. The results of operations for the three months ended September
30, 1999 are not necessarily indicative of the results to be expected for the
entire fiscal year ending June 30, 2000. Certain previously reported amounts
have been reclassified to conform to the current period presentation. These
reclassifications had no affect on the previously reported net income (loss).
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange Agreement
(the "Exchange Agreement") with Digital Courier International, Inc. ("DCII")
Pursuant to the Exchange Agreement, the Company agreed to issue 4,659,080 shares
of its common stock valued at $14,027,338 to the shareholders of DCII. The
issuance of the common shares was recorded at the quoted market price on the
date of acquisition. The acquisition was approved by the shareholders of the
Company on September 16, 1998.
The acquisition of DCII has been accounted for as a purchase and the results of
operations of DCII are included in the accompanying consolidated financial
statements since the date of acquisition. The tangible assets and contra-equity
acquired included $250,000 of equipment, $20,500 of deposits and $12,000 of
stock subscriptions receivable. Liabilities assumed consisted of $219,495 of
accounts payable and accrued liabilities. After entering into the Exchange
Agreement, the Company made advances to DCII to fund its operations. The amount
loaned to DCII totaled $1,659,418 as of the date of acquisition. The excess of
the purchase price over the estimated fair market value of the acquired assets
was $15,623,750. Of this amount, $11,923,750 was recorded as goodwill and other
intangibles and is being amortized over a period of five years and $3,700,000
was expensed as acquired in-process research and development.
Upon consummation of the DCII acquisition, the Company immediately expensed
$3,700,000 representing purchased in-process technology that had not yet reached
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technological feasibility and has no alternative future use. The in-process
projects were focused on the continued development and evolution of internet
e-commerce solutions including: netClearing and two virtual store projects
(videos and books). The nature of these projects is to provide full service
credit card clearing and merchant banking services over the Internet for
businesses and financial institutions and to market software to help customers
develop virtual stores on the Internet. When completed, the projects will enable
the creation of any "virtual store" through a simplified interface.
As of the date of acquisition, DCII had invested $1,300,000 in the in-process
projects identified above. The developmental projects at the time of the
acquisition were not technologically feasible and had no alternative future use.
This conclusion was attributable to the fact that DCII had not completed a
working model that had been tested and proven to work at performance levels
which were expected to be commercially viable, and that the technologies
constituting the projects had no alternative use other than their intended use.
Development of the acquired in-process technology into commercially viable
products and services required efforts principally related to the completion of
all planning, designing, coding, prototyping, scalability verification, and
testing activities necessary to establish that the proposed technologies would
meet their design specifications, including functional, technical, and economic
performance requirements. Management estimates that approximately $1,500,000
will be required over the next 3 to 6 months to develop the aforementioned
products to commercial viability.
Management estimates that the projects were approximately 50% complete at the
date of the acquisition given the nature of the achievements to date. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur.
The net cash flows resulting from the projects underway at DCII, which were used
to value the purchased research and development, are based on management's
estimates of revenues, cost of revenues, research and development costs,
selling, general, and administrative costs, and income taxes from such projects.
These estimates assume that the revenue projections are based on the potential
market size that the projects are addressing, the Company's ability to gain
market share in these segments, and the life cycle of in-process technology.
Estimated total revenues from the purchased in-process projects peak in the
fiscal years 2001 and 2002 and then decline rapidly in the fiscal years 2003 and
2004 as other new products are expected to enter the market. There can be no
assurances that these assumptions will prove accurate, or that the Company will
realize the anticipated benefit of the acquisition. The net cash flows generated
from the in-process technology are expected to reflect earnings before interest
and taxes, of approximately 35% to 48% for the sales generated from in-process
technology.
The discount of the net cash flows to their present value is based on the
weighted average cost of capital ("WACC"). The WACC calculation produces the
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average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
the enterprise. The discount rates used to discount the net cash flows from the
purchased in-process technology were 45% for DCII. This discount rate reflects
the uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, if any, and the uncertainty of technological
advances, all of which are unknown at this time.
As evidenced by its continued support for these projects, management believes
the Company is well positioned to successfully complete the research and
development projects. However, there is risk associated with the completion of
the projects, and there is no steadfast assurance that each will meet with
either technological or commercial success. The substantial delay or outright
failure of these e-commerce solutions would negatively impact the Company's
financial condition. If these projects are not successfully developed, the
Company's business, operating results, and financial condition may be negatively
affected in future periods. In addition, the value of other intangible assets
acquired may become impaired.
To date, DCII results have not differed significantly from the forecast
assumptions. The Company's research and development expenditures since the DCII
acquisition have not differed materially from expectations. Revenue contribution
from the acquired technology falls within an acceptable range of plans in its
role in the Company's suite of internet and e-commerce solutions.
Access Services, Inc.
Effective April 1, 1999, the Company acquired all of the outstanding stock of
Access Services, a credit card processing company. The shareholders of Access
Services were issued 300,000 shares of the Company's common stock valued at
$1,631,400 (based on the quoted market price of the Company's common stock on
the date of the acquisition), $75,000 in cash and warrants to purchase 100,000
shares of the Company's common stock at $5.50 per share valued at $440,000. The
acquisition of Access Services has been accounted for as a purchase and the
results of operations of Access Services are included in the accompanying
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $97,999 of cash, $110,469 of accounts receivable,
$25,939 of equipment and $2,780 of deposits. Liabilities assumed consisted of
$264,794 of accounts payable and accrued liabilities and $10,100 of notes
payable.
The excess of the purchase price over the estimated fair market value of the
acquired net assets of $2,327,866 has been recorded as goodwill and is being
amortized over a period of 5 years.
In connection with the acquisition of Access Services, the Company entered into
a 2-year employment agreement with a key officer. Pursuant to the employment
agreement, the Company has committed to pay a base annual salary of $120,000 and
bonuses as determined by the Company. If the Company terminates the officer's
employment without cause, the officer is generally entitled to the salary,
bonuses and benefits otherwise payable under the agreement as severance. The
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employment agreement automatically continues after the initial term on a year to
year basis until terminated by either party.
SB.com, Inc.
Effective June 1, 1999, the Company acquired all of the outstanding stock of
SB.com, a credit card transaction processing company. The shareholders of SB.com
were issued 2,840,000 shares of the Company's common stock valued at $17,838,040
(based on the quoted market price of the Company's common stock on the date of
the acquisition). The acquisition of SB.com has been accounted for as a purchase
and the results of operations of SB.com are included in the accompanying
consolidated financial statements since the date of acquisition. The former
shareholders of SB.com retained all tangible assets and liabilities existing at
the date of acquisition. Accordingly, the purchase price of $17,838,040 has been
recorded as goodwill and is being amortized over a period of 5 years. In
connection with the acquisition of SB.com, the Company made loans of $500,000
each to four of SB.com's' prior shareholders. The notes receivable bear interest
at 6 percent, which is less than the current market interest rate. The notes
have been discounted using a 10 percent interest rate and the difference between
the discounted value of $1,856,240 and the $2,000,000 face value of the notes
amounting to $143,760 has been recorded as additional purchase price.
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
valued at $312,500 and an earn-out of up to 262,500 additional common shares.
The issuance of the common shares was recorded at the quoted market price on the
date of acquisition.
The acquisition was accounted for as a purchase and the results of operations of
Books Now are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $261 of
cash, $21,882 of inventory and $50,000 of equipment. Liabilities assumed
included $112,335 of notes payable, $24,404 of capital lease obligations and
$239,668 of accounts payable and accrued liabilities. The excess of the purchase
price over the estimated fair market value of the acquired assets of $616,764
was recorded as goodwill and was being amortized over a period of 5 years.
During the year ended June 30, 1999, the Company sold certain assets of Books
Now to ClickSmart.com (see additional discussion below).
In November 1998, the Company and the former owner reached a severance
agreement, wherein, the former owner and President of Books Now is to receive
severance payments equal to one year's salary ($81,000). Additionally, the
Company agreed to issue 205,182 shares of the Company's common stock valued at
$1,051,558, based on the quoted market price of the shares on the date of the
severance agreement, to the former shareholders of Books Now. Because the
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operations of Books Now were not achieving the performance criteria, both the
$81,000 of cash and the $1,051,558 of common stock was expensed as of the date
of the severance agreement.
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 valued at $762,503. The
issuance of the common shares was recorded at the quoted market price on the
date of acquisition. These shareholders were entitled to receive a total of
523,940 additional shares over the next 3 years based on the stock price of the
Company's common stock, as defined, at the end of the Company's next 3 fiscal
years. As of June 30, 1999, an additional 101,035 shares of common stock with a
fair market value of $593,580 were issuable pursuant to the contingency
provisions. Based on the stock price of the Company's common stock, as defined,
at the end of fiscal years 2000 and 2001, the shareholders may be entitled to
receive up to a total of 375,200 shares of the Company's common stock.
The acquisition has been accounted for as a purchase and the operations of
WeatherLabs are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $3,716 of
cash, $19,694 of accounts receivable, $115,745 of equipment and $13,300 of
deposits. Liabilities assumed included $100,000 of notes payable, $56,902 of
capital lease obligations and $134,444 of accounts payable and accrued
liabilities. The excess of the purchase price over the estimated fair value of
the acquired assets of $1,441,599 has been recorded as goodwill and is being
amortized over a period of 5 years.
The Board of Directors has recently determined that it is in the Company's long
term best interests to focus solely on the Internet payment processing business.
As a result, the Company is in discussions regarding alternative strategies with
respect to WeatherLabs.
Unaudited Pro Forma Data Related to Acquisitions
The unaudited pro forma results of operations of the Company for the three
months ended September 30, 1999 and 1998 (assuming the acquisitions of DCII,
Access Services and SB.com had occurred as of July 1, 1998) are as follows:
1999 1998
--------------------------------
Revenues $ 3,020,171 $ 459,362
Loss from continuing operations (2,917,130) (2,373,175)
Loss from continuing operations per (0.16) (0.15)
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Sale of Certain Assets Related to WorldNow
On July 15, 1998, the Company signed an agreement to sell a portion of its
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 primarily related to the national Internet-based
network of local television stations. Pursuant to the asset purchase agreement,
Gannaway agreed to pay $487,172 (less certain amounts as defined) in
installments over a one-year period from the date of closing and agreed to pay
earn-out amounts of up to $500,000. The earn-out amounts are calculated as ten
percent of monthly revenues actually received by Gannaway in excess of $100,000
and are to be paid quarterly. Gannaway acquired tangible assets of approximately
$100,000 consisting primarily of computer and office equipment and assumed no
liabilities. The operations of WorldNow through the date of the sale of the
assets are reflected in the accompanying condensed consolidated financial
statements in loss from continuing operations.
The Company realized a pretax gain of $308,245 on the sale.
Sale of Certain Assets Related to Books Now and the Company's Videos Now
Operations
Effective May 28, 1999, the Company entered into an Asset Purchase Agreement
with ClickSmart.com, Inc., a new corporation formed for the purpose of combining
the assets acquired from the Company with certain assets contributed by Video
Direct Inc. Pursuant to the agreement, the Company exchanged certain assets for
19.9 percent of the common stock of ClickSmart.com. The assets exchanged by the
Company primarily related to the operations of Books Now and Videos Now and
consisted of $57,183 of net equipment, $52,204 of prepaid advertising and
certain intangibles represented by net goodwill of $442,020. ClickSmart did not
assume any existing liabilities related to Books Now and Videos Now. The
operations of Books Now and Videos Now were not generating positive cash flows
prior to the exchange and the operations of Video Direct did not have any
history of profitability. Due to these uncertainties with respect to the future
cash flows and profitability of ClickSmart.com, at the time of the exchange
management determined that the Company's investment in ClickSmart.com of
$551,407 should be written off. Prior to the exchange, management was
considering the termination of the Books Now and Videos Now operations. In
connection with the exchange, the Company loaned ClickSmart $300,000 under a
promissory note bearing interest at 8 percent and due in May of 2000.
NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted EPS") reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised or converted into common stock. The
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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 1,646,305 and 1,348,000 shares of common stock at weighted
average exercise prices of $5.56 and $4.36 per share as of September 30, 1999
and 1998, respectively, warrants to purchase 3,015,000 and 656,942 shares of
common stock at weighted average exercise prices of $6.50 and $9.37 per share as
of September 30, 1999 and 1998, respectively, and 360 shares of Series A
preferred stock convertible to 800,000 shares of common stock at $4.50 per share
at September 30, 1999 were not included in the computation of Diluted EPS. The
inclusion of the options, warrants and preferred stock would have been
antidilutive, thereby decreasing net loss per common share. As of September 30,
1999, the Company has agreed to issue up to an additional 375,200 shares of
common stock in connection with the acquisition of WeatherLabs, contingent on
the future price of the Company's common stock.
These contingent shares have also been excluded from the computation of diluted
EPS.
NOTE 4 - SOFTWARE LICENSE AGREEMENT
On March 25, 1999, the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for ACI's BASE24(R) software which
will be used to enhance the Company's existing Internet-based platforms that
offer secure payments processing for business-to-consumer electronic commerce.
Pursuant to the agreement, the Company agreed to pay ACI $5,941,218 during the
life of the contract. The Company made a payment upon signing the contract of
$591,218 and was scheduled to make equal payments at the beginning of each
quarter totaling $1,000,000 for calendar year 2000, $1,200,000 for calendar year
2001, $1,400,000 for calendar year 2002, $1,400,000 for calendar year 2003 and a
final payment of $350,000 on January 1, 2004.
As discussed in Note 5, on June 14, 1999 Transactions Systems Architects, Inc.
("TSAI"), the parent of ACI, purchased 1,250,000 shares of the Company common
stock and warrants to purchase an additional 1,000,000 shares of the Company's
common stock in exchange for $6,500,000. As part of the securities purchase
agreement, the Company agreed to amend the software license agreement with ACI.
Pursuant to the amended software license agreement, the Company agreed to
immediately pay ACI the discounted future payments under the original agreement
that amounted to $3,888,453. The amounts paid under the agreement have been
recorded as prepaid software license in the accompanying consolidated financial
statements and are being expensed ratably over the term of the agreement.
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NOTE 5 - SUBSEQUENT EVENT
Stock Purchase and Exchange Agreement with DataBank International SKB, Ltd.
The Company has entered into a Stock Purchase and Exchange Agreement with
DataBank International SKB, Ltd., a company organized under the laws of St.
Christopher and Nevis ("DataBank"), and the selling shareholders of DataBank
(the "Selling Shareholders") (the "Exchange Agreement"), dated as of August 13,
1999. Pursuant to the Exchange Agreement, the Company agreed to issue up to
29,660,000 shares of its common stock (the "DCTI Shares") to the Selling
Shareholders in exchange for all of the issued and outstanding shares of
DataBank. If the full number of DCTI Shares are issued pursuant to the Exchange
Agreement, the Selling Stockholders will own approximately 62 percent of the
outstanding shares of the Company. The shareholders of the Company approved the
acquisition of DataBank at a Special Shareholders Meeting on October 5, 1999. On
that date the Company exchanged 16,600,000 shares of common stock for the
outstanding shares of DataBank and if DataBank meets certain performance
criteria, as defined, the Company may be required to issue up to an additional
13,066,000 shares of common stock to the Selling Shareholders.
Debt Financing
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 October 15, 1999 the Company extended the loan for the current
principal amount of $753,342 with a maturity date of October 20, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Digital Courier Technologies, Inc. (referred to herein as "DCTI" or the
"Company") provides state of the art real-time banking and credit card
processing solutions for merchants and financial institutions worldwide through
an integrated solution called netClearing(TM). netClearing is a suite of
commerce-enabling technologies designed specifically for merchants and the
merchant banks. The Company also operates WeatherLabs(TM). The WeatherLabs
14
<PAGE>
division supplies proprietary real-time weather information to online businesses
throughout the world, and hosts its own web site for consumers and business
customers.
The Company was incorporated under the laws of the State of Delaware on May 16,
1985. It was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
The Company recruited an experienced management and technical team to design and
implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, the Company acquired an Internet access business and entered
into strategic alliances with companies in the electronic mail ("e-mail")
business. The Company formed a division to create a network of interconnected
Web communities to be promoted by local television station affiliates. The
Company divested its direct marketing and internet access businesses in fiscal
1998. The Company divested its television web site hosting businesses, Books Now
operations and Videos Now operations in fiscal 1999. In March 1998, the Company
signed an agreement to acquire Digital Courier International, Inc., a private
Internet software development company. The acquisition was consummated in
September 1998, and the Company formally changed its name to Digital Courier
Technologies, Inc. The Company acquired Access Services, Inc. and SB.com, Inc.,
both credit card processors, during the fourth quarter of fiscal 1999.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
Inc. ("Books Now") a book reseller, in exchange for a maximum of 362,500 shares
of the Company's common stock. One hundred thousand common shares valued at
$312,500 were issued at closing and 262,500 common shares were subject to a
three-year earn-out contingency based upon achieving certain financial
performance objectives. The fair market value of the common shares issued was
determined to be the quoted market price on the date of acquisition. The
acquisition was accounted for as a purchase.
In May 1999, the Company sold certain assets related to Books Now and the
Company's VideosNow division to Clicksmart, Inc. in exchange for 19.9% of
Clicksmart's common stock and is entitled to receive $2,000,000 from Clicksmart
either by receiving 75% of Clicksmart's net cash flows until DCTI receives an
aggregate amount of $2,000,000 or from proceeds received by Clicksmart as an
equity investment of not less than $10,000,000. The Company loaned Clicksmart
$300,000 to be paid from Clicksmart's net cash flows before payment of the
$2,000,000 deferred payment. The assets transferred to Clicksmart included
$52,204 of prepaid advertising, $57,183 of computer and office equipment, and
$442,020 of unamortized goodwill, resulting in a pretax loss on the sale of
$551,407.
In May 1998, the Company acquired all of the outstanding stock of WeatherLabs,
Inc., ("WeatherLabs") 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,
15
<PAGE>
and an additional 523,960 common shares may be issued upon the attainment by
WeatherLabs of certain financial performance targets. The fair market value of
the common shares issued was determined to be the quoted market price on the
date of acquisition. The acquisition was accounted for as a purchase.
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 fair market value of the common shares issued based on the quoted market
price on the date of acquisition. This acquisition was accounted for as a
purchase. The results of operations of DCII are included in the accompanying
consolidated financial statements from September 16, 1998, the date of
acquisition.
In April 1999, the Company acquired all of the outstanding stock of Access
Services, Inc. ("Access Services"), a credit card processing company, in
exchange for 300,000 shares of the Company's common stock valued at $1,631,400,
the quoted market price of the common shares issued on the date of acquisition
and $75,000 in cash. The former owners of Access Services also received warrants
to purchase 20,000 shares of the Company's common stock at $5.50 per share
valued at $440,000.
In June 1999, the Company acquired all of the outstanding stock of SB.com, Inc.
("Secure Bank") a credit card processing company, in exchange for 2,840,000
shares of the Company's common stock valued at $17,838,040, the quoted market
price of the common shares issued on the date of acquisition. The Company also
loaned $2,000,000 to the officers of Secure Bank. The loans are payable with 6
percent interest and are to be repaid within 2 years or from the proceeds from
the sale of the Company's common stock, whichever is earlier. In addition, each
of the four principal former stockholders' of Secure Bank received individual
one year employment contracts with an annual salary of $150,000.
The Company's Board of Directors has recently determined that it is in the
Company's long term best interests to focus solely on the payment processing
business. As a result, the Company is in discussions regarding alternative
strategies with respect to WeatherLabs.
16
<PAGE>
Results of Operations
Three months ended September 30, 1999 compared with three months ended September
30, 1998.
Net Sales
Net sales for the three months ended September 30, 1999 were $3,020,171 as
compared to $319,352 for the three months ended September 30, 1998. Access
Services operations, which were acquired in April 1999, accounted for $1,723,622
of the total net sales, Secure Bank operations which were acquired in June 1999,
accounted for $1,065,009 of total net sales, WeatherLabs' operations accounted
for $187,242 of total net sales and technical support services sales accounted
for $44,298 of total net sales for the three months ended September 30, 1999.
The Books Now operations which were sold in May 1999, accounted for $255,882 of
total net sales, WeatherLabs' operations accounted for $63,336 of total net
sales and WorldNow operations accounted for $134 of total net sales for the
three months ended September 30, 1998.
Cost of Sales
Cost of sales for the three months ended September 30, 1999 were $1,346,794 or
44.6% of net sales. Cost of sales for the three months ended September 30, 1998
were $179,881 or 56.3% of net sales. The change in cost of sales as a percent of
net sales is due to the change in products and services sold.
Operating Expenses
Depreciation and amortization expense increased 197.4% to $2,068,831 during the
three months ended September 30, 1999 from $695,728 during the three months
ended September 30, 1998. The increase in depreciation and amortization expense
was principally due to the amortization of goodwill related to the acquired
companies.
Selling expense increased 87.3% to $995,683 during the three months ended
September 30, 1999 from $531,576 during the three months ended September 30,
1998. The increase in selling expense is attributable to selling expense related
to the Company's payment processing operations and $114,693 of advertising
expense associated with the @ Home contract.
On July 10, 1998, the Company entered into a Content License and Distribution
Agreement with @Home for an initial term of 36 months. Under this agreement, the
Company has agreed to pay @Home $800,000 in non-refundable guaranteed cash
payments, has issued 20,534 shares of the Company's common stock, has issued
seven-year warrants to purchase 100,000 shares of the Company's common stock at
$9.74 per share (the "Warrant Shares") and has issued warrants to purchase
17
<PAGE>
100,000 shares of the Company's common stock at $19.48 per share (the
"Performance Warrants") in exchange for @Home providing the Company with
advertising, marketing and distribution for the Company's WeatherLabs services
site on the @Home Network and promotion of the WeatherLabs Weather@Home site.
The Company is to receive 40 percent of the net advertising revenue generated
from Weather@Home on the @Home Network. The Company will retain all of the
advertising revenue generated on the co-branded Weather@Home site. Included in
selling expense for the three months ended September 30, 1999 is $114,693,
related to the @Home agreement.
General and administrative expense increased 48.6% to $883,766 during the three
months ended September 30, 1999 from $594,761 during the three months ended
September 30, 1998. The increase in general and administrative expense was due
to the addition of administrative and support staff and facilities costs
associated with the three acquisitions in the past twelve months.
Research and development expense increased 1390.1% to $576,219 during the three
months ended September 30, 1999 from $38,670 during the three months ended
September 30, 1998. Research and development expense increased because of the
acquisition of DCII which is performing significant research and development
activities for the Company's payment processing operations. Research and
development expense during the three months ended September 30, 1998 was
principally for the WorldNow Online operations.
The write off of acquired in-process research and development during the three
months ended September 30, 1998 was $3,700,000, which was attributable to the
acquisition of DCII (see Note 2 to the condensed consolidated financial
statements).
Liquidity and Capital Resources
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 October 15, 1999 the Company extended the loan for the current
principal amount of $753,342 with a maturity date of October 20, 2000.
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
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<PAGE>
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.
The Amended Agreements also required 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.
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"),
19
<PAGE>
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.
On March 25 1999, the Company entered into a 5 year software licensing agreement
with ACI Worldwide, Inc. ("ACI") to license ACI's BASE24 software to enhance the
Company's existing Internet-based platforms that offer secure payments
processing for business-to-consumer electronic commerce. The license agreement
called for payments totaling $5,941,218 to be made over a 5 year period. The
Company made a payment to ACI of $591,248 in March 1999.
On June 3, 1999, the Company entered into a 3 year international software
distribution agreement with ACI to market the Company's netClearing product. The
Company received a $700,000 deposit against this contract from ACI in July 1999.
On June 14, 1999, the Company raised $6,500,000 by selling 1,250,000 shares of
its common stock and warrants to purchase 1,000,000 shares of common stock at
$5.20 per share to Transaction Systems Architects, Inc. ("TSAI"), the parent
company of ACI. In connection with this stock purchase agreement the software
licensing agreement with ACI was modified to reduce the total payments due under
the software license agreement to $4,517,296. The Company made the additional
required payment to ACI of $3,888,435 from the proceeds received from TSAI.
Operating activities provided $39,669 during the three months ended September
30, 1999 compared to using $1,959,077 during the three months ended September
30, 1998.
Cash used in investing activities was $133,428 and $1,124,139 during the three
months ended September 30, 1999 and 1998, respectively. During the three months
ended September 30, 1999, the Company's investing activities included the
acquisition of equipment for $133,428. During the three months ended September
30, 1998, the Company's investing activities included cash advances for
operating activities to DCII of $849,203, the acquisition of equipment for
$330,010, offset by the receipt of $55,074 form the sale of certain WorldNow
assets.
Cash used in financing activities was $475,680 during the three months ended
September 30, 1999 as compared to $91,609 during the three months ended
September 30, 1998. The cash used during the three months ended September 30,
1999 was attributable to principal repayments on capital lease obligations of
$268,408 and repayments against borrowings of $207,272. The cash used during the
three months ended September 30, 1998 was attributable to repayments on capital
lease obligations of $242,859 offset by the receipt of proceeds from the
issuance of common stock upon the exercise of stock options for $151,250.
20
<PAGE>
Management projects that with the acquisition of DataBank International, Ltd.
there will be sufficient cash flows from operating activities during the next
twelve months to provide capital for the Company to sustain its operations. As
of September 30, 1999, the Company had $1,811,917 of cash. Although, the Company
has incurred losses from continuing operations of $21,564,713, $5,597,967 and
$7,158,851 and the Company's operating activities have used $7,783,023,
$6,377,970 and $6,334,660 of cash during the years ended June 30, 1999, 1998 and
1997, respectively, operating activities for the three months ended September
30, 1999 provided $39,669 of cash. The recently acquired Access Services and
Secure Bank and DataBank operations are generating positive cash flows.
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 be sufficient cash flows from operating
activities with the acquisition of DataBank 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 we have invested $60,000 in an effort to certify all aspects of the
business are year 2000 compliant. The areas of the business which have been
targeted for compliance testing are our operations and our software products and
services. We conducted the certification process over a three-month period in
which all software products and service components under our direct control
certified year 2000 compliant. For the major operational components and
remaining software and services that are under the control of third party
organizations, we have received written confirmation and evidence of year 2000
compliance. We may realize operational exposure and risk if the systems for
which we are 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 we
transact business;
o server software which we use to present content and advertising to our
customers and partners; and
o computers, software, telephone systems and other equipment used
internally.
In October 1997, we initiated the review and assessment of all of our
computerized hardware and internal-use software systems to ensure that such
21
<PAGE>
systems will function properly in the year 2000 and beyond. During the last two
years, our computerized information systems have been substantially upgraded to
be year 2000 compliant.
We have not yet determined a contingency plan in the event that any
non-compliant critical systems are not remedied by the year 2000, nor have we
formulated a timetable to create such a contingency plan. It is possible that
costs associated with year 2000 compliance efforts may exceed our current
projections of an additional $20,000 to reach total compliance. In such a case,
these costs could have a material negative impact on our financial position and
results of operations. It is also possible that if systems material to our
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 our business, financial condition, and results of
operations. This would result in an inability to provide functioning software
and services to our customers in a timely manner, and could then result in lost
revenues from these customers, until such problems are resolved by us or the
responsible third parties.
Forward-Looking Information
Statements regarding the Company's expectations as to future revenue from its
business strategy, and certain other statements presented herein, constitute
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to (1) the
Company has only generated minimal revenue from its Internet businesses, and has
not generated and may not generate the level of purchases, users or advertisers
anticipated, and (2) the costs to market the Company's Internet services.
22
<PAGE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Date: October 19, 1999 By /s/ Mitchell L. Edwards
---------------------------------------
Mitchell L. Edwards
Chief Financial Officer
23
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