SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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.
(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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 24, 1999, 18,557,390 of the Registrant's Common Shares
were outstanding. As of September 8, 1999, the aggregate market value of voting
stock held by non-affiliates of the Registrant was approximately $65,000,000
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.
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PART I
ITEM 1. BUSINESS
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SUMMARY
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and
referred to herein as "DCTI" or the "Company") provides state of the art payment
processing solutions for merchants and financial institutions worldwide through
an integrated solution called netClearing. netClearing is a suite of
commerce-enabling technologies designed specifically for merchants and merchant
banks.
Our two operating divisions include netClearing(TM), and
WeatherLabs(TM). The netClearing division utilizes both e-commerce tools and
transaction software suite to provide a complete electronic commerce package for
conducting business and facilitating credit card payment processing over the
Internet. The WeatherLabs division supplies proprietary real-time weather
information to online business throughout the world, and hosts its own web site
for consumers and business customers.
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.
netClearing: E-Commerce Payments Processing
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Introduction
We provide state of the art payment processing solutions for merchants
and financial institutions worldwide through an integrated solution called
netClearing. netClearing is a suite of commerce-enabling technologies designed
specifically for merchants and merchant banks.
Merchant Services
Online transactions need to be fast, secure and efficient. As a
technology driven payment-processing expert, netClearing delivers
next-generation software and an a highly secure payment system that provides
fast transactions at a lower cost. Our technologies and services help merchants
set up their merchant bank account, install payment processing software, and
manage payments processing transactions from credit card authorization to final
sale. netClearing's Payment Plug-in is e-commerce software for transaction
processing. The Payment Plug-in is a lightweight file that connects a merchant's
commerce server through our Internet Payment Gateway to the major card networks
(Visa(TM), MasterCard(TM), American Express(TM), Discover(TM)). At the
merchant's request, transactions are recorded in a secure transaction database
and screened by sophisticated fraud detection software as they pass through the
Internet Payment Gateway. These functions enable reporting capabilities and
enhance fraud control.netClearing's reporting system allows merchants to search,
sort and analyze transaction reports by such criteria as:
o netClearing transaction ID
o Merchant order tracking ID
o Date ranges
o Credit card number
o Customer name
netClearing's reports can be used to track a variety of information
about the merchant's business and are available 24 hours a day on the Merchant
Access Web site. Custom reports can be generated and custom formats are
available for download to merchants requiring unique information. The reports
available are:
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Authorizations report
Authorization reports detail all orders that have been authorized but
not yet settled. These reports are used to view the total number and
value of orders the merchant has received in any date range--daily,
monthly or yearly.
Settlement report
This report details all cash receipts that have been deposited into the
merchant's account (this amount does not include credit card company
fees). This report is used to understand the cash amounts being
transferred into a merchant's bank account.
Credit report
Credit reports detail all credits or refunds for various transactions.
netClearing provides a list of credits issued as well as details about
why the credit was given.
Declined report
This report details all orders that have been declined either by the
card network or by netClearing's internal fraud check. The reason the
cards have been declined is detailed in the report. Merchants can
determine if fraud is being attempted on a systematic basis on their
site or if the design of their Web site is causing problems with the
entry of credit card information.
By combining these services into a single solution, we streamline the
process for merchants to begin doing business on the Internet. Once the merchant
is up and running, netClearing provides merchants with a complete set of tools
for managing their online business transactions. Merchants can track and
initiate payments on continuing shipments using one order number. Card lookup
and transaction history reports and analysis can help customer service
departments identify and correct problems stemming from possibly erroneous
transactions. netClearing will also maintain a database of tax jurisdictions
worldwide to provide reliable tax assessment on transactions originating from
and shipping from any domestic or VAT tax nexus.
Merchant Banking Services
For financial institutions and netClearing resellers, netClearing's
real-time merchant management, transaction monitoring, and fraud auditing tools
enable these institutions to monitor merchants and manage merchant portfolio
risk. The Internet Payment Gateway incorporates all of netClearing's risk
management, reporting and merchant management tools while interacting directly
with legacy financial and banking networks, operating systems, acquiring
gateways, VAPS (Visa's access point) and MIPS (Mastercard's access point). The
Gateway is comprised of a commerce server, a transaction database and fraud
screening software that easily integrate with existing systems. This enables us
to integrate any components of our platform with participating banks. These
components can be customized to the bank's specifications and allow for a
seamless integration of the applications into the ongoing banking transactions.
Integrating a portfolio of merchants with the Internet Payment Gateway
is straightforward and efficient. The product comes with an easy to use
administration interface that allows the bank to perform functions such as
adding and updating merchants, accessing reports and monitoring fraud across an
entire portfolio of merchants that want to accept credit card transactions to
process the sales of their products across the Internet.
This important technology is available to financial institutions either
remotely through a standard Web browser, or by electing to install the hardware
and software directly at the bank location for direct access to the networks.
Through its Bank Access secure Web site, netClearing offers complete settlement
activity reports for financial institutions. All reports are generated from the
live transaction database. This valuable information includes:
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Settlement Report
According to netClearing, summary of portfolio activity for reporting
period.
Merchant ledger
According to the Settlement Authority, the amount that has been settled
into a merchant's account.
Adjustments
Users can view a list and edit a report including pre- and
post-authorizations, credits, fees, etc.
Processing Services
netClearing ensures that the merchant and the bank maintain a solid
business relationship by protecting each party from fraud, theft, and
mismanagement of accounts. netClearing can process credit, debit, and ACH
transactions directly through its own proprietary Authorization Network or
through any other third party Authorization Network such as FDC/FDR, MAPP,
VisaNet, and others. Our service bureau provides payments processing and related
services to merchants and merchant banks. By integrating our transaction service
bureau with our automated Internet Payment Gateway, common settlement mistakes
and clerical errors are virtually eliminated. The business operation is divided
into two parts, transaction processing and direct merchant sales and support.
The transaction processing system is based on HP-9000 server systems
operating a modified version of Verifone's "Omnihost" acquiring processing
platform. The facility supports merchant transaction acquisition, capture, and
settlement transmission for all popular credit card types. This operation
currently supports more than three thousand merchants and its clients include
Equifax Merchant Services and First Tennessee Bank. This is fully integrated
with our Internet Payment Gateway to manage and route a high volume of Internet
transactions through the traditional financial networks for settlement.
The direct merchant sales and support function provides complete
services for merchant portfolios. The services include merchant risk management,
transaction processing, charge-back and retrieval services, payments settlement
and reporting, around the clock merchant terminal and bank help-desk, and
point-of-sale terminal implementation. The operation leverages netClearing
technologies to ensure its merchants receive complete fraud control as well as
the total online transaction and settlement reporting. In addition, the
operation distributes and maintains credit card payments processing products and
services developed in-house as well as products fielded by VisaNet, First USA
and other payment solutions providers.
Risk Management and Internet Fraud Control
netClearing offers data screening software to help merchants reduce
risk due to credit card fraud and data entry errors. As with all netClearing
products, these controls were developed specifically for e-commerce businesses.
Merchants can select the filters that are most appropriate for their business.
Since we acquired Secure-Bank in June of 1999, we have integrated their risk
management software into the netClearing platform. The software protects the
processing banks and merchants by scrubbing all transactions through various
transaction screens and/or databases to ensure that much of the fraud and
potential credit card charge backs are spotted and eliminated prior to
authorization. This risk management technology service has also been made
available to other third party processors on a per transaction basis, to allow
them to increase their own risk management capabilities. Currently, we offer
risk management in two packages, one for the merchant, and one for the merchant
bank. These packages include the following services:
Risk Management for Merchants
Checksum (Luhn check)
A basic check of how many digits are in a credit card number to ensure
the customer's credit card is valid.
Address Verification System (AVS)
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Merchants can require customers to submit the billing address of their
credit card. The address supplied by the customer is compared to the
address on file with the issuing bank. Merchants may choose the degree
of match (between credit card number and address) at which the
transaction should fail.
Difference between name and card number
A credit card number can be matched to a card holders name for an
existing client. A mismatch may indicate that a card has been
compromised.
Unusual frequency of purchases
A merchant may record information about how frequently their product or
service is typically purchased with a particular card number
(indicating an individual). The information is matched to actual
activity so merchants are notified of significant variation from that
mean.
Unusual time of day for purchases
A merchant may record typical transaction volume for a particular time
of day. The information is matched to actual activity so merchants are
notified of significant variation from that mean.
Geographic mismatch
Matching a card's geographic origin (indicated by BIN) against where
the purchase originates (indicated by ISP) may detect when a stolen
card is in use.
Compromised BIN and card database
All transactions can be checked against a database of BINs (Bank
Identification Numbers) or card numbers that may have been compromised.
These options include:
BIN Screening
A BIN corresponds to a whole set of cards that a card issuing bank has
released. When the security of a BIN is compromised, chances for fraud
increase for that BIN. netClearing BIN screens help to flag numbers
that may be compromised.
Card Screening
Transactions may be checked against a database of invalid, compromised
and otherwise questionable credit card numbers.
Declined card screening
All transactions may be checked against a database of credit card
numbers that have declined charges recently. This service saves clients
transaction fees by declining the charge before it is submitted to the
banking network.
Risk Management for Merchant Banks
netClearing merchant banks using Bank Access to audit transaction and
settlement activity are processing up to $25 million per month with
almost no loss due to fraud. These robust tools and fraud screening
software include:
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Summary activity
Banks can monitor activity of a single merchant or all merchants to
track sales, credits and single transactions. Even the flow of money
across credit cards can be reviewed to reveal customer histories,
purchasing habits, and money flow into or out of a card on a daily or
historical timeline.
Fraud reporting
Banks can survey and analyze activity by BIN, card number, AVS and
velocity of purchases. Stolen credit cards and questionable
transactions present themselves on demand.
BIN check
Entire BINs can be reviewed for questionable activity and transactions.
Customer data associated with credit cards can be compared to locate
unreported, stolen or generated card usage. Related merchants are a
click away from review with any transaction under suspicion.
Unusual activity
netClearing also provides the ability to generate 90-day baseline data
for any merchant in a Bank's portfolio. Side reports offer the ability
to locate transactions exceeding the baseline by whatever range a Bank
determines is valid for that merchant. Excessive tickets, unusual daily
deposits and more can be located quickly and reviewed 24 hours a day.
Review merchant and portfolio activity in real-time
A bank's entire merchant portfolio or a single merchant can be viewed
with netClearing's online charting tools. The ability to graphically
review a merchant's dollar and transaction count can be a simple
indicator of merchant or consumer fraud. Peak hours can be located as
hourly summaries appear in easy to understand bar charts.
Credit Card Clearing Process
To understand our service better, the following explanation and diagram
describes how the credit card clearing process works, and how netClearing
simplifies the process. netClearing generates real-time reporting and
transaction management services through a secure Web server. Information such as
authorization notices and settlement data from the credit card companies are
stored in the netClearing database, which generates reports on the netClearing
Web site. This means merchants and merchant banks can view real-time transaction
information any time of day via a Web browser.
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[GRAPHIC OMITTED]
1. Authorization
Before the credit card clearing process begins, merchants must first
have a Web site in which they plan to accept credit cards as payment
for goods or services (1a). Merchants also need a merchant bank account
with a financial institution. Merchants then subscribe to an online
payment service such as netClearing and install payment-processing
technology on their Web server. With netClearing, this is a single
program called the Payment Plug-in.
Once the customer submits a credit card number on the merchant's Web
site, the Payment Plug-in contacts the netClearing Internet Payment
Gateway (1b) to request authorization, final sale or credit. The
Gateway filters the information for fraud and may reject the
transaction.
If the transaction is not rejected for potential fraud, the transaction
information is then sent to the credit card network (1c) for
authorization or declination of the charge by the Issuing Bank. Unlike
most of our competitors, this process is completed in-hoouse; we do not
use third party acquiring processors. If the transaction is approved,
an authorization code is returned to the merchant's Web site and the
authorization is complete. With netClearing's system, the real-time
authorization and capture process occurs within 3-5 seconds. Batch
requests are completed within 1 hour.
2. Settlement - Once the product the customer ordered is shipped (or
downloaded), the authorization code is used to settle the amount of the
transaction. netClearing's Internet Payment Gateway and the credit card
network exchange information with the Settlement Authority (2) to
confirm the transaction.
3. Funds transfer - Finally, the Settlement Authority requests a funds
transfer from the Issuing Bank (3a), which moves money through the
Settlement Authority into the merchant's bank (3b). The payment process
is now complete.
Sales and Marketing
We recently entered into a two-year distribution agreement with ACI
Worldwide, a leading international provider of electronic funds transfer
processing systems. ACI will exclusively, with certain geographic exceptions,
market our proprietary electronic commerce technologies through its global sales
force. ACI has integrated our software with its BASE 24(R), WINPAY24(TM) and
related products, as part of its i24(R)-payments strategy. The final product
includes all aspects of handling payments over the web, including value-added
features in areas like customer service, merchant reporting and management, and
web-centric fraud detection and management. The agreement enables our e-commerce
products to be distributed on a global scale through ACI's vast and experienced
sales staff in a shorter time frame than we likely would have been able to
achieve on our own.
Marketing
We have entered into a two-year distribution agreement with ACI
Worldwide, a leading international provider of electronic funds transfer
processing systems. ACI will exclusively, with certain geographic exceptions,
market our proprietary electronic commerce technologies through its global sales
force. ACI has integrated our software with its BASE 24(R), WINPAY24(TM) and
related products, as part of its i24(R)-payments strategy. The marketed product
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includes all aspects of handling payments over the web, including value-added
features in areas like customer service, merchant reporting and management, and
web-centric fraud detection and management. The agreement enables our e-commerce
products to be distributed on a global scale through ACI's vast and experienced
sales staff in a shorter time frame than we likely would have been able to
achieve on our own.
Acquired Technology
We recently licensed ACI Worldwide's BASE24(R)and Trans24 software. The
software enhances our existing Internet-based platforms that offer secure
payments processing for business-to-consumer electronic commerce.
BASE24(R)offers fault-tolerant, around-the-clock processing power to acquire,
route and authorize secure electronic payment transactions for our
Internet-based merchant network. Trans24 allows DCTI to manage the Merchant and
Issuing accounting. It also provides an interface into BASE I settlement and ACH
systems. Information from Trans24 can easily be made available to Web based
reporting system for real-time settlement and account information.
Significant Customers
The Company does not depend on any single customer.
Competition
The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
Our primary source of competition comes from developers of other systems for
e-commerce transaction processing such as Clear Commerce, CyberCash,
CyberSource, Digital River, HNC Software, FDMS and Hewlett-Packard (VeriFone).
We also face competition from online merchants who develop custom systems. These
online merchants who have made large initial investments to develop custom
systems may be less likely to adopt an outsourced transaction processing
strategy. In addition, other companies may enter the market for our services. In
the future, we may compete with large Internet-centric companies that derive a
significant portion of their revenues from e-commerce and may offer, or provide
a means for others to offer, e-commerce transaction service. Many of our
competitors have longer operating histories, substantially greater financial,
technical, marketing or other resources, or greater name recognition than we do.
Our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Competition could
seriously impede our ability to sell additional services on terms favorable to
us. Our current and potential competitors may develop and market new
technologies that render our existing or future services obsolete, unmarketable
or less competitive. Our current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
other e-commerce transaction service providers, thereby increasing the ability
of their services to address the needs of our prospective customers. Competitive
pressures could reduce our market share or require the reduction of the prices
of our services, either of which could materially and adversely affect our
business, results of operations or financial condition.
We compete on the basis of certain factors, including:
o system reliability;
o product performance;
o breadth of service offering;
o ease of implementation;
o time to market;
o customer support; and
o price.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is still rapidly evolving,
and we may not be able to compete successfully against current and potential
competitors.
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The Technology
Our computer facility is located in Salt Lake City and supports all of
our products and services. The data center has redundant systems in place for
power, telecommunications, environmental, and fire suppression thus assuring
consistently optimal performance through state-of-the-art system scalability and
reliability. Features of the facility include:
o A redundant OC-3 (upgradable to OC-12) 655Mbps fiber optic data
connection into the technology center providing extremely high bandwith
throughput for e-commerce and other Internet applications and
customers.
o Switched 155 Mbps asynchronous transfer mode (ATM) telecommunications
backbones to several primary data servers providing the bandwidth
necessary to handle thousands of simultaneous transactions.
o A range of current technology multiprocessor servers from various
manufacturers including Hewlett- Pachard, Sun Microsystems and Tandem
Computers supporting our business operations. The super-scalar
processing architecture of these systems manages our service components
including simultaneous payment processing, real-time report generation,
merchant accounting, and proprietary content creation, management, and
distribution for its web sites.
o An expandable 1-Terabyte fully redundant data storage system ensures
high performance and fault tolerant access to critical transactional
data.
o Modern fire retardant systems, security systems, quad-power
conditioners, and industrial battery backup arrays as well as an 8-day
backup diesel generator all guarantee continuous power and
environmental control to insure seamless, around-the-clock systems
uptime and availability.
Research and Development
The Company has invested significant resources in research and
development over the last three years. During the fiscal years ended June 30,
1999, 1998 and 1997, we have spent $1,906,893, $1,432,006, and $3,966,185,
respectively, on research and development.
Seasonality
To date the Company has not experienced any significant seasonal
pattern to its business.
Development of Company
The Company was incorporated under the laws of the State of Delaware on
May 16, 1985. It was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
We 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, we acquired an Internet access business and entered into
strategic alliances with companies in the electronic mail ("e-mail") business.
We formed a division to create a network of interconnected Web communities to be
promoted by local television station affiliates. We divested our direct
marketing, and internet access businesses in fiscal 1998. We divested our
television website hosting businesses, Books Now operations and Videos Now
operations in fiscal 1999. In March 1998, we signed an agreement to acquire
Digital Courier International, Inc., a private Internet software development
company. The acquisition was consummated in September, 1998, and we formally
changed our name to Digital Courier Technologies, Inc. We also acquired Access
Services, Inc. and SB.com, Inc., both credit card processors, during the fourth
quarter of fiscal 1999. In August 1999 we signed an agreement to purchase
DataBank International, Ltd. ("DataBank") for shares of our common stock subject
to shareholder approval at a Special Meeting of Shareholders to be held on
October 5, 1999.
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COMPETITION
The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
Our primary source of competition comes from developers of other systems for
e-commerce transaction processing such as Clear Commerce, CyberCash,
CyberSource, Digital River, HNC Software, FDMS and Hewlett-Packard (VeriFone).
We also face competition from online merchants who develop custom systems. These
online merchants who have made large initial investments to develop custom
systems may be less likely to adopt an outsourced transaction processing
strategy. In addition, other companies may enter the market for our services. In
the future, we may compete with large Internet-centric companies that derive a
significant portion of their revenues from e-commerce and may offer, or provide
a means for others to offer, e-commerce transaction service. In addition, our
WeatherLabs, Inc. subsidiary competes with The Weather Channel, Accu-Weather and
other major providers of weather information on the Internet.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional services on
terms favorable to us. Our current and potential competitors may develop and
market new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other e-commerce transaction service providers, thereby increasing the
ability of their services to address the needs of our prospective customers.
Competitive pressures could reduce our market share or require the reduction of
the prices of our services, either of which could materially and adversely
affect our business, results of operations or financial condition.
We compete on the basis of certain factors, including:
o system reliability;
o product performance;
o breadth of service offering;
o ease of implementation;
o time to market;
o customer support; and
o price.
We believe that we presently compete favorably with respect to each of these
factors. However, the market for our services is still rapidly evolving, and we
may not be able to compete successfully against current and potential
competitors.
PROPRIETARY RIGHTS
The Company regards its patents, copyrights, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success, and
the Company relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights.
EMPLOYEES
As of September 1, 1999 the Company had 46 full-time employees. The
Company's future success is substantially dependent on the performance of its
management, sales force, key technical personnel, and its continuing ability to
attract and retain highly qualified technical, sales and managerial personnel.
RISK FACTORS
We Have Incurred Substantial Losses
We incurred a losses of $21,564,713, $5,597,967 and $7,158,851 from
continuing operations during the years ended June 30, 1999, 1998 and 1997,
respectively. Our operating activities used $7,783,024, $6,377,970 and
$6,334,660 of cash during the years ended June 30, 1999, 1998 and 1997,
respectively.
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Only Two Years of Internet Based Revenues
We have a limited history of generating revenue on the Internet. Prior
to fiscal 1998, most of our revenues came from non-Internet businesses. In
fiscal years 1998 and 1999, we generated a small amount of revenue from
WeatherLab's Internet-only weather service, and from our previously owned Books
Now and VideosNow divisions. Since we did not acquire SB.com until June 1999,
only one month of revenues from fees derived from internet payment processing
are reflected in our operating results.
Going Concern Opinion by our Auditors
The Report of Independent Public Accountants on our financial
statements as of and for the year ended June 30, 1999 includes the following,
"The Company has suffered recurring losses from continuing operations of
$21,364,713 $5,597,967, and $7,158,851 during the years ended June 30, 1999,
1998 and 1997, respectively. The Company has a tangible working capital deficit
of $1,285,266 as of June 30, 1999. Only the recent acquired operations of Access
Services and SB.Com are generating positive cash flows. Additional funding will
be required before the Company's continuing operations will achieve and sustain
profitability, if at all. These matter raise substantial doubt about the
Company's ability to continue as a going conern."
The Expected Fluctuations of Our Quarterly Results Could Cause Our Stock Price
to Fluctuate or Decline
We expect that our quarterly operating results could fluctuate
significantly in the future based upon a number of factors, many of which are
not within our control. We base our operating expenses on anticipated market
growth and our operating expenses are relatively fixed in the short term. As a
result, if our revenues are lower than we expect, our quarterly operating
results may not meet the expectations of public market analysts or investors,
which could cause the market price of our common stock to decline.
Our quarterly results may fluctuate in the future as a result of many
factors, including the following:
o changes in the number and size of transactions effected by our
merchants, especially as a result of seasonality or general economic
conditions;
o our ability to attract and retain financial institutions as clients;
o our ability to attract new merchants and to retain our existing
merchants;
o merchant and financial institution acceptance of our pricing model; and
o our success in expanding our sales and marketing programs.
Other factors that may affect our quarterly results are set forth
elsewhere in this section. As a result of these factors, our revenues are not
predictable with any significant degree of certainty.
Due to the uncertainty surrounding our revenues and expenses, we
believe that quarter-to-quarter comparisons of our historical operating results
should not be relied upon as an indicator of our future performance.
We May Need Additional Funding in the Future
We require substantial working capital to fund our business. We have
had significant operating losses and negative cash flow from operations in the
recent past. We believe that if the acquisition of DataBank is completed in
October 1999 as anticipated, our existing revenues, including the revenues
generated by our newly acquired subsidiaries and DataBank, will be sufficient to
meet our operating and capital requirements for the next twelve months. However,
our capital requirements depend on several factors, including the rate of market
acceptance of our services, the ability to expand our customer base, the growth
of sales and marketing and other factors. If capital requirements vary
materially from those currently planned, we may require additional financing
sooner than anticipated. Additional financing may not be available when needed
on terms favorable to us or at all. If adequate funds are not available or are
not available on acceptable terms, we may be unable to develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures.
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Integration of DataBank, SB.com and Access Services
There are risks in attempting to integrate the operations of previously
separate companies. We acquired Access Services, Inc. in April 1999 and SB.com
in June 1999. We are putting forth a significant effort to successfully
integrate the two companies with us. Our efforts include coordinating
development of new products, commercializing in-process development, integrating
product offerings, and coordinating sales and marketing efforts and business
development efforts. In addition, we will need to also integrate the operations
of DataBank.
In order to build a successful company, we will need to integrate and
streamline overlapping functions successfully. Among the risks we face are:
o We must incur the costs generally associated with this type of
integration including the costs to:
o integrate product lines,
o cross-train the sales force, and
o position products in the market;
o We do not yet know what the ultimate cost of integration will be and
how significant the impact will be; the cost may have an adverse effect
on our operating results;
o Our integration of Access Services and Secure-Bank will require
management resources that may distract attention from normal
operations. Employee uncertainty and lack of focus may disrupt our
business; and
o Our failure to quickly and effectively accomplish the integration could
harm us. Uncertainty in the marketplace or customer concern regarding
the impact of our acquisitions could also have a material adverse
effect on our consolidated business, financial condition and results of
operations.
The Demand for Our Services Could Be Negatively Affected by a Reduced Growth of
E-commerce or Delays in the Development of the Internet Infrastructure
Sales of goods and services over the Internet do not currently
represent a significant portion of overall sales of goods and services. We
depend on the growing use and acceptance of the Internet as an effective medium
of commerce by merchants and customers. Rapid growth in the use of and interest
in the Internet is a relatively recent development. We cannot be certain that
acceptance and use of the Internet will continue to develop or that a
sufficiently broad base of merchants and consumers will adopt, and continue to
use, the Internet as a medium of commerce.
The emergence of the Internet as a commercial marketplace may occur
more slowly than anticipated for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the number
of Internet users or their use of Internet resources continues to grow, it may
overwhelm the existing Internet infrastructure. Delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity could also have a detrimental effect. These factors could
result in slower response times or adversely affect usage of the Internet,
resulting in lower numbers of e-commerce transactions and lower demand for our
services.
Proprietary Technology is Important to our Business
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and use our technology without authorization, or
develop similar technology independently. Effective protection of intellectual
property rights may be unavailable or limited in foreign countries. We cannot be
certain that the protection of our proprietary rights will be adequate or that
our competitors will not independently develop similar technology, duplicate our
services or design around any patents or other intellectual property rights we
hold.
12
<PAGE>
We also cannot be certain that third parties will not claim that our
current or future services infringe upon their rights. We have not conducted any
search to determine whether any of our services or technologies may be
infringing upon patent rights of third parties. As the number of services in our
market increases and functionalities increasingly overlap, companies such as
ours may become increasingly subject to infringement claims. In addition, these
claims also might require us to enter into royalty or license agreements. Any
infringement claims, with or without merit, could cause costly litigation that
could absorb significant management time. If required to do so, we may not be
able to obtain royalty or license agreements, or obtain them on terms acceptable
to us.
We Depend Upon Third Parties
We depend substantially upon third parties for several critical elements
of our business, including:
o Sprint, for telecommunications services;
o Hewlett Packard, for maintenance and upgrades of the HP-9000 computers
in our data center;
o Sun Microsystems, for maintenance and upgrades of the Sun Enterprise
500 servers in our data center;
o Cisco, for maintenance and upgrades of our routers which are used to
connect our computer network to the Internet; and
o Other vendors of software and hardware for maintenance and upgrades of
software, systems, and hardware used to deliver our products on the
Internet.
Although we believe that there are other third party providers who can
provide the same services as those providers we currently use, loss or
interruption of service by such providers would have an adverse effect on our
business and prospects.
We Depend on our Existing Technology and Infrastructure
Our ability to deliver services to our merchants depends on the
uninterrupted operation of our Internet payments processing systems. Our systems
and operations are vulnerable to damage or interruption from:
o earthquake, fire, flood and other natural disasters;
o power loss, telecommunications or data network failure;
o operator negligence, improper operation by employees, physical and
o electronic break-ins and similar events; and
o computer viruses.
Despite the fact that we have implemented redundant servers in our data
center, we may still experience service interruptions for the reasons listed
above and a variety of other reasons. If our redundant servers are not
available, we may suffer substantial losses as well as loss of business. In
addition, any interruption in our systems that impairs our ability to provide
services could damage our reputation and reduce demand for our services.
Our success also depends on our ability to grow, or scale, our payments
processing systems to accommodate increases in the volume of traffic on our
system, especially during peak periods of demand. We may not be able to
anticipate increases in the use of our systems and successfully expand the
capacity of our network infrastructure. Our inability to expand our systems to
handle increased traffic could result in system disruptions, slower response
times and other difficulties in providing services to our merchant banks and
customers, which could materially harm our business.
A Breach of Security Measures Could Reduce Demand for Our Services
A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. We rely on SSL,
Secure Socket Layer Protocol, to provide the security and authentication
necessary for secure transmissions of confidential information. In addition, we
rely on private key cryptography, an encryption method that utilizes two keys
for encoding and decoding data, for ensuring the integrity of our computer
13
<PAGE>
networks. Regulatory and export restrictions may prohibit us from using the
strongest and most secure cryptographic protection available and thereby expose
us to a risk of data interception. A party who is able to circumvent our
security measures could misappropriate proprietary information or interrupt our
operations. Any compromise or elimination of our security could reduce demand
for our services.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problems they may cause.
Concerns over the security of the Internet and other online transactions and the
privacy of users may also inhibit the growth of the Internet and other online
services generally, and the Web in particular, especially as a means of
conducting commercial transactions. Because our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent security breaches may disrupt our
operations.
The Intense Competition in Our Industry Could Reduce or Eliminate the Demand for
Our Services
The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
Our primary source of competition comes from developers of other systems for
Internet payments processing such as Clear Commerce, CyberCash, Cyber Source,
Digital River, HNC Software, Open Market and Hewlett-Packard (VeriFone). In
addition, other companies may enter the market for our services. In the future,
we may also compete with large financial institutions that develop custom
systems for their use and their merchants' use.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in financial institution and
merchant requirements. Competition could seriously impede our ability to sell
additional services on terms favorable to us. Our current and potential
competitors may develop and market new technologies that render our existing or
future services obsolete, unmarketable or less competitive. Our current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with other solution providers, thereby
increasing the ability of their services to address the needs of our prospective
customers. Competitive pressures could reduce our market share or require the
reduction of the prices of our services, either of which could materially and
adversely affect our business, results of operations or financial condition.
We Must Continually Enhance our Systems To Remain Competitive
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. The Internet and the e-commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading technologies
to enhance our existing services and develop new services. We must continue to
address the increasingly sophisticated and varied needs of our financial
institutions and merchants, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of proprietary technology involves significant technical and
business risks. We may fail to develop new technologies effectively or to adapt
our proprietary technology and systems to merchant and financial institution
requirements or emerging industry standards. If we are unable to adapt to
changing market conditions, customer requirements or emerging industry
standards, our business would be materially harmed.
Management of Internal Growth
As we grow, we may not be able to effectively manage the expansion of
our operations and our systems, procedures or controls may not be adequate to
support our operations. Additionally, when market opportunities arise, we may
not have sufficient personnel or procedures in place to be able to take
advantage of those opportunities.
14
<PAGE>
Our Management Team Must Work Together Effectively
Our performance is substantially dependent on the effectiveness of our
senior management and key technical personnel. In particular, our success
depends substantially on the continued efforts of our senior management team,
many of whom only recently joined the Company through acquisitions. Because
these members of our management team are new, there is an increased risk that
management will not be able to work together effectively as a team, especially
in the short term, to address the challenges to our business. We do not carry
key person life insurance on any of our senior management personnel. The loss of
the services of any of our executive officers or other key employees could
detrimentally affect us.
Attracting and Retaining Qualified Employees
Our future success and our ability to expand our operations depends on
our continuing ability to attract and retain highly qualified technical and
managerial employees. Competition for people experienced in the technical areas
in which we operate is intense due to the limited number of qualified
professionals and, as a small company, we may not be able to attract them.
Failure to attract and retain personnel, particularly marketing and technical
personnel, could make it difficult for us to manage our business and meet our
objectives.
We May Become Subject to Government Regulation and Legal Uncertainties
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, export control laws and laws or regulations directly applicable to
e-commerce. However, due to the increasing usage of the Internet, it is possible
that a number of laws and regulations may be applicable or may be adopted in the
future with respect to conducting business over the Internet covering issues
such as:
o taxes;
o user privacy;
o pricing;
o content;
o right to access personal data;
o copyrights;
o distribution; and
o characteristics and quality of services.
For example, we believe that some of our services may require us to
comply with the Federal Credit Reporting Act. Complying with this statute would
require us to provide information about personal data stored by us or our
merchants. Failure to comply with this act could result in claims being made
against us.
Furthermore, the growth and development of the market for e-commerce
may prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for our services and
increase our cost of doing business.
The applicability of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, export or import matters and personal privacy to the Internet
is uncertain. The vast majority of laws were adopted prior to the broad
commercial use of the Internet and related technologies. As a result, they do
not contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes in the United States regarding taxation and
encryption and in the European Union regarding contract formation and privacy,
could create uncertainty in the Internet marketplace and impose additional costs
and other burdens. This uncertainty, costs and burden could reduce demand for
our services or increase the cost of doing business due to increased costs of
litigation or increased service delivery costs.
Concentration of Stock Ownership
Our present directors, executive officers, greater than 5% stockholders
and their respective affiliates beneficially own approximately 44.0% of our
15
<PAGE>
outstanding common stock, and will own 34.5% of our outstanding common stock
after the DataBank Acquisition. As a result of their ownership, the directors,
executive officers, greater than 5% stockholders and their respective affiliates
collectively are able to control or significantly influence all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of DCTI.
Volatility of Stock Price
Broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our operating performance. The trading
price of our common stock has been and may continue to be subject to wide
fluctuations. In the last twelve months our stock has traded as low as $1.875
and as high as $14. The wide swings in the price of our stock have not always
been in response to any factors that we can identify.
Future Issuance of Preferred Stock Could Hurt Common Stockholders
Rights of preferred stockholders take priority over common
stockholders. The only preferred stock currently outstanding consists of 360
shares of Series A Convertible Preferred Stock. Our Board of Directors has the
authority to issue up to 2,500,000 shares of preferred stock. They can determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
Although the Series A Preferred Stock does not have voting rights, future
preferred stockholders could delay, defer or prevent a change of control of
which our common stockholders may have been in favor.
Some of Our Equipment May Fail in Year 2000
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
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.
16
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding (i) the current directors of
the Company, who will serve until the next annual meeting of stockholders or
until their successors are elected or appointed and qualified, and (ii) the
current executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors.
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C> <C>
James A. Egide* 65 Director, Chairman and Chief Executive Officer
Don Marshall 40 President
Mitchell L. Edwards 41 Director, Executive Vice President and Chief
Financial Officer
Allan Grosh 58 Director, Chief Operating Officer
Raymond J. Pittman 30 Director, Senior Vice President - Public Relations
Glen Hartman* 42 Director
Kenneth M. Woolley* 53 Director
</TABLE>
*Serves on compensation and audit committees.
James A. Egide: Director, Chairman and Chief Executive Officer
Mr. Egide was appointed as a Director of the Company in January 1995 ,
Chairman in September 1997. and Chief Executive Officer in March 1999. Since
1990, Mr. Egide has primarily been involved in managing his personal
investments, including multiple international and national business enterprises.
In 1978 he co-founded Carme, a public company, and served as CEO and Chairman of
the Board until 1989 when it was sold. From 1976 until 1980, Mr. Egide's primary
occupation was President and Director of Five Star Industries, Inc., a
California corporation which was a general contractor and real estate developer.
His principal responsibilities were land acquisition, lease negotiations and
financing.
Don Marshall: President.
For the past five years Mr. Don Marshall has been developing software
and business solutions for DataBank International, the company he created in
St.Kitts. He is a professional engineer with a doctoral education in the field
of instrumentation and control. Mr. Marshall is also one of the owners of Caribe
Yachts, a privately owned yacht construction company in St.Kitts. He is managing
director of DataBank as well as sitting on the Board of Directors of Caribe
Yachts Ltd.
Mitchell L. Edwards: Director, Executive Vice President and Chief Financial
Officer
Mr. Edwards has been Executive Vice President and Chief Financial
Officer of the Company since June 1997. From 1995 until joining the Company, Mr.
Edwards was Managing Director of Law and Business Counsellors, a mergers and
acquisitions and corporate finance consulting firm with offices in California
and Utah, and prior to that was a Partner in the law firm of Brobeck, Phleger &
Harrison in Los Angeles. Mr. Edwards' has specialized, for 15 years, in mergers
and acquisitions, corporate finance, public offerings, venture capital and other
transactions for emerging and high technology companies throughout the country.
Mr. Edwards received a J.D. from Stanford Law School, a B.A/M.A. in
International Business Law from Oxford University (Marshall Scholar), and a B.A.
in Economics from Brigham Young University (Valedictorian). He has also worked
at the White House and at the United States Supreme Court.
17
<PAGE>
Allan Grosh: Director, Chief Operating Officer
Mr. Grosh was appointed as a Director of the Company in March 1999 and
Chief Operating Officer in June 1999. Mr. Grosh has over thirty years of
management experience, most recently as a Principal at Dion Durrell &
Associates, a risk management consulting firm. From 1968 to 1996, Mr. Grosh was
with The Wyatt Company, a benefits and compensation consulting firm. Mr. Grosh
holds a Master's Degree in Mathematics and Actuarial Science, University of
Manitoba.
Raymond J. Pittman: Director and Senior Vice President - Public Relations
Mr. Pittman has been Senior Vice President - Public Relations for the
Company since June 1999. Mr. Pittman served as Chief Executive Officer of the
Company from March 1998 to June 1999. Mr. Pittman was the founder and Chief
Executive Officer of Digital Courier International, Inc. from 1996 until Digital
Courier International was acquired by the Company in September 1998. Prior to
forming Digital Courier International, Inc., Mr. Pittman was the Chief Executive
Officer of Broadway Technologies Group, a technology development and consulting
group. Mr. Pittman received a Masters degree in Engineering-Economic Systems
from Stanford University and Bachelors degree in Computer Engineering from the
University of Michigan
Glen Hartman: Director
Mr. Hartman has been a director of the Company since July 1998. Mr.
Hartman is the founder. principal and a member of the board of directors of
Cosine Communications, Inc. since 1996. Mr. Hartman is also the founding general
partner of Falcon Capital, LLC, a private equity investment company,
specializing in technology companies since 1995. From 1992 to 1995 Mr. Hartman
served as CEO and Chairman of Apex Data, a computer peripherals manufacturing
company. Mr. Hartman holds a B.A. in Economics from UCLA..
Kenneth M. Woolley: Director
Mr. Woolley has been a founder and director of several companies and
has been a director of the Company since March 1996. Mr. Woolley served on the
Board of Directors of Megahertz Holding Corporation, the leading manufacturer of
fax/modems for laptop and notebook computers until February 1995. Prior to the
merger of Megahertz and VyStar Group, Inc. in June 1993, Mr. Woolley had served
as President of the parent company. Since 1979, Mr. Woolley has been a principal
in Extra Space Management, Inc. and Extra Space Storage, privately held
companies engaged in the ownership and management of mini-storage facilities.
Since 1989, Mr. Woolley has been a partner in D.K.S. Associates, and since 1990
a director and executive officer of Realty Management, Inc., privately held
companies engaged in the ownership and management of apartments, primarily in
Las Vegas, Nevada. Mr. Woolley is a director of Cirque Corporation. Mr. Woolley
also serves as an associate professor of business management at Brigham Young
University. Mr. Woolley holds a B.A. in Physics from Brigham Young University,
an M.B.A. and Ph.D. in Business Administration from the Stanford University
Graduate School of Business.
Significant Employees
Michael D. Bard: Controller
Mr. Bard joined the Company in September 1996. Prior to joining the
Company, Mr. Bard was the Controller for ARD, Inc., a professional services
corporation located in Burlington, Vermont from 1991 to 1996. Prior to joining
ARD, Inc., Mr. Bard was Senior Vice President, Controller for CACI, Inc.
International, an information technology company located in Fairfax, Virginia
from 1976 to 1991. Mr. Bard is a certified public accountant and holds a
bachelors degree in accounting.
Tom Tesmer - President, Access Services
Mr. Tesmer is the President of Access Services, a company that he
founded in August, 1997, and which Digital Courier acquired in April, 1999. Mr.
Tesmer has over 25 years of senior management experience in the electronic funds
transfer data processing business, all within the on-line and batch processing
services environments. From 1993-1997 he worked for Southeast Switch, Inc. as
Vice President and Director, POS Technologies Division.
18
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met.
ITEM 2. PROPERTIES
- ------- ----------
The Company is leasing a total of 35,513 square feet of modern office
space in Alpharetta, Georgia; Clearwater, Florida; San Francisco, California;
Park City, Utah and Salt Lake City, Utah. These offices include a computer data
center in Salt Lake City and general offices. All facilities are leased from
third parties. The offices are being leased under three to five year
arrangements. Some leases contain options to renew. These facilities are
believed adequate for the Company's current needs. The current total monthly
rental for all facilities is $48,682. Some of the leases are subject to annual
increases for inflation adjustments.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not a party to any legal proceedings which, in its
opinion, after consultation with legal counsel, could have a material adverse
effect on the Company. However, the Company is involved in ordinary routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1999.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------
Price Range of Common Stock
- ---------------------------
On February 5, 1997, the Company's Common Stock began trading on The
Nasdaq National Market System. Commencing in January 1995 and until the stock
was listed on The Nasdaq National Market, the Company's Common Stock was quoted
on the OTC Bulletin Board. During 1993 and 1994, there was no public market for
the securities of the Company's predecessor, and the Company is not aware of any
quotations for its securities during this period. In prior years, securities of
the Company's predecessor, Exchequer, were traded in the over-the-counter
market.
The Company's common stock trades on The Nasdaq Stock Exchange under
the symbol "DCTI". The following table reflects the high and low bid sales price
reported by The Nasdaq National Market or by the OTC Bulletin Board, as
appropriate, for the periods indicated. The quotes represent interdealer
quotations, do not include mark-up, mark-down or commissions and may not reflect
actual transactions.
19
<PAGE>
High Low
Fiscal Year Ended June 30, 1999 ------- -------
- -------------------------------
April 1 to June 30, 1999 $ 8.75 $ 4.81
January 1 to March 31, 1999 $ 8.19 $ 4.13
October 1 to December 31, 1998 $ 13.94 $ 1.81
July 1 to September 30, 1998 $ 17.00 $ 3.13
Fiscal Year Ended June 30, 1998
- -------------------------------
April 1 to June 30, 1998 $ 10.50 $ 3.25
January 1 to March 31, 1998 $ 5.13 $ 1.88
October 1 to December 31, 1997 $ 5.25 $ 1.69
July 1 to September 30, 1997 $ 5.75 $ 2.75
On September 24, 1999, the Common Stock was quoted on the NASDAQ
National Market at a closing price of $5.563.
As of September 24, 1999, there were approximately 695 holders of
record of the Company's Common Stock.
Dividend Policy
The Company has not paid any cash dividends since its inception. The
Company currently intends to retain future earnings in the operation and
expansion of its business and does not expect to pay any cash dividends in the
foreseeable future.
Changes in Securities
Since June 30, 1998, the Company sold the following securities without
registration under the Securities Act of 1933 (the "Act"):
In July 1998, the Company issued 20,534 shares of Common Stock to At
Home Corporation in connection with a Content License and Distribution
Agreement.
In September 1998, the Company issued 4,659,080 shares of its Common
Stock, in a private placement, in exchange for all the issued and outstanding
shares of Digital Courier International, Inc.
In November 1998, the Company issued 205,182 shares to the former
president of its Books Now, Inc subsidiary as part of a severance agreement.
In November 1998, the Company sold 400,000 shares of Common Stock and
warrants to purchase an additional 400,000 shares of Common Stock to two
institutional investors in a private placement.
In December 1998, the Company sold 400,000 shares of Common Stock and
warrants to purchase an additional 400,000 shares of Common Stock to the same
institutional investors in a private placement.
In March 1999, the Company sold 360 shares of its Series A Convertible
Preferred Stock and warrants to purchase 800,000 shares of the Company's Common
Stock to the same institutional investors in a private placement.
In April 1999, the Company issued 300,000 shares of its Common Stock,
in a private placement, in exchange for all the issued and outstanding shares of
Access Services, Inc.
In June 1999, the Company issued 2,840,000 shares of its Common Stock,
in a private placement, in exchange for all the issued and outstanding shares of
SB.com.
In June 1999, the Company sold 1,250,000 shares of its Common Stock and
warrants to purchase an additional 1,000,000 shares of Common Stock to
Transaction Systems Architects, Inc.
20
<PAGE>
During the twelve-month period ending June 30, 1999, the Company issued
747,696 shares of Common Stock pursuant to exercises of stock options issued
under the Company's Amended and Restated Incentive Plan.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following audited selected financial data should be read in
conjunction with the Company's consolidated financial statements appearing
elsewhere herein.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 3,970,641 $ 803,011 $ 8,812 $ -- $ --
Cost of sales 2,562,371 745,871 492 -- --
------------ ------------ ------------ ------------ ------------
Gross margin 1,408,270 57,140 8,320 -- --
------------ ------------ ------------ ------------ ------------
Operating expenses:
AOL interactive marketing contract costs 5,558,137 -- -- -- --
Depreciation and amortization 4,389,763 1,545,090 398,066 86,828 25,413
Acquired in-process research and development 3,700,000 -- -- -- --
General and administrative 3,273,641 4,092,737 1,400,916 685,528 56,199
Selling 3,248,092 1,290,012 1,897,665 -- --
Research and development 1,906,893 1,432,006 3,966,185 1,478,890 535,502
Compensation expense related to issuance of
options by principal stockholder -- -- -- 1,484,375 --
------------ ------------ ------------ ------------ ------------
22,076,526 8,359,845 7,662,832 3,735,621 617,114
------------ ------------ ------------ ------------ ------------
Other income (expense), net (696,457) 20,738 495,661 57,209 (973)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes and discontinued operations (21,364,713) (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 (21,364,713) (5,597,967) (7,158,851) $ (3,586,413) $ (485,406)
------------ ------------ ------------ ------------ ------------
Discontinued operations:
Income from discontinued direct
mail advertising operations, net of income taxes -- 111,377 300,438 153,332 221,136
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
------------ ------------ ------------ ------------ ------------
Net income (loss) $(21,364,713) $ (1,124,636) $ (9,899,056) (3,433,081) (264,270)
============ ============ ============ ============ =============
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (1.63) $ (0.66) $ (0.86) $ (0.61) $ (0.10)
Diluted (1.63) (0.66) (0.86) (0.61) (0.10)
Net income (loss):
Basic (1.63) (0.13) (1.19) (0.58) (0.06)
Diluted (1.63) (0.13) (1.19) (0..58) (0.06)
Weighted average common shares outstanding:
Basic 13,130,216 8,422,345 8,309,467 5,917,491 4,713,028
Diluted 13,130,216 8,422,345 8,309,467 5,917,491 4,713,028
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
--------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 76,962 $ 3,639,313 $ 3,624,308 $ 12,774,113 $ 794,156
Total assets 47,375,747 24,020,746 11,320,660 16,222,902 1,073,225
Long-term obligations 432,704 1,384,132 -- -- --
Stockholders' equity 41,575,667 18,995,696 9,826,083 15,541,624 1,073,225
</TABLE>
21
<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") 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 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.
The Company began operations in 1987 to provide highly targeted
business to consumer advertising through direct mail. Since the Company's
founding, the direct mail marketing business had provided substantially all of
the Company's revenues. The direct mail marketing business was sold in March
1998 and its results of operations are classified as discontinued operations in
the accompanying 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 sold its
WorldNow Online Network television affiliate website and certain related assets
in July 1998 and sold its VideosNow and Books Now operations in May 1999.
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 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 Internet service provider 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
the Board and Mr. Smith, the Company agreed to sell the operations of Sisna to
Mr. Smith.
22
<PAGE>
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 market price. 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
statements of operations as discontinued operations.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. ("Books Now") a book reseller, in exchange for a maximum of
362,500 shares of the Company's common stock. One hundred thousand 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. Books Now's results of operations
are included in the accompanying consolidated statements of operations since the
date of acquisition.
In May 1999, the Company sold the 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, 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 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 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.
23
<PAGE>
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.
Results of Operations
Year ended June 30, 1999 compared with year ended June 30, 1998
Net Sales
Net sales for the year ended June 30, 1999 were $3,970,641 as compared
to $803,011 for the year ended June 30, 1998. The Access Services operations
which were acquired in April 1999 accounted for $2,138,808, the Books Now
operations which were sold in May 1999 accounted for $940,811, the WeatherLabs
operations accounted for $369,368, the Secure Bank operations which were
acquired in June 1999 accounted for $336,021, the VideosNow operations which
were sold in May 1999 accounted for $128,406 and technical support services
accounted for $57,227 of net sales during fiscal year 1999. 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, 1999 were $2,562,371 or 64.5%
of net sales as compared to $745,871 or 92.9% of net sales for the year ended
June 30, 1998. Cost of sales as a percent of net sales primarily decreased due
to the increase in sales from credit card processing which have higher gross
margins.
Operating Expenses
During the year ended June 30, 1999, the Company incurred total
expenses of $5,558,137 associated with the AOL contract, including $87,002 of
advertising expense associated with the permanent placement on the AOL Shopping
channel and $5,471,135 associated with terminating the interactive marketing
agreement with AOL. Effective June 1, 1998, the Company entered into a marketing
agreement with AOL which gave the Compamy "permanent anchor tenancy" and
advertising for its 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 its Videos Now website on AOL, the
Company entered into discussions with AOL beginning in November 1998 to
restructure the terms of the marketing agreement with AOL. Effective January 1,
1999, the Company 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
which was made 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 returned to the Company (a) 636,942 warrants to purchase common shares
and (b) 601,610 of the 955,414 shares of its common stock previously issued to
AOL under the marketing agreement. All advertising ceased immediately, but the
Company continued to have a permanent location or "button" on AOL's shopping
channel until August 31, 1999. The Company has no further financial obligations
to AOL.
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 only received "button" placement on the AOL shopping
channel. "Button" placement is not predominant on the AOL channels, is smaller,
24
<PAGE>
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 representing the fair market value of the
permanent location on the shopping channel for 8 months, should be written off.
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 price of $4,234,676 as
of the termination date, 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 the
net write-off of $5,471,135 during the year ended June 30, 1999.
The interactive marketing agreement with AOL was for an initial term of
39 months (the "Agreement"), which could be extended for successive one-year
terms by AOL thereafter. Under the Agreement, the Company was 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 Performance Warrant was to vest over the term of the
agreement as certain promotion criteria were achieved by AOL. 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").
Depreciation and amortization expense increased 284.1% to $4,389,763
during the year ended June 30, 1999 from $1,545,090 during the year ended June
30, 1998. The increase was due to the amortization of goodwill associated with
the acquisitions of Digital Courier International, Inc., WeatherLabs, Inc,
Access Services, Inc, and SB.com, Inc.
The write off of acquired in-process research and development during
the nine months ended March 31, 1999 was $3,700,000, which was attributable to
the acquisition of DCII (see Note 3 to the consolidated financial statements).
General and administrative expense decreased 12.3% to $3,273,641 during
the year ended June 30, 1999 from $4,092,737 during the year ended June 30,
1998. The decrease in general and administrative expense was principally due to
the accrual of $544,014 for the cost of subleasing idle facilities and the
future costs of idle facilities during the year ended June 30, 1998 which did
not occur during the year ended June 30, 1999.
Selling expense increased 151.8% to $3,248,092 during the year ended
June 30, 1999 from $1,290,012 during the year ended June 30, 1998. The increase
in selling expense is attributable to selling expense related to Books Now,
WeatherLabs, and Videos Now, $1,132,558 for the severance agreement payments
made to the former owner of Books Now (see Note 3 to the consolidated financial
statements) and $344,078 of advertising expense associated with the @ Home
contract and increased sales expense associated with WeatherLabs, Books Now and
VideosNow.
Research and development expense increased 33.2% to $1,906,893 during
the year ended June 30, 1999 from $1,432,006 during the year ended June 30,
1998. Research and development expense increased due to decreased levels of
activity required for the development of VideosNow and netClearing.
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 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 year ended June 30, 1999 is $344,078 related to the
@Home agreement.
25
<PAGE>
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. During the
year ended June 30, 1998, the Internet service operations incurred a pretax loss
of $425,078. 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, 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.
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.
26
<PAGE>
Quarterly Results
The following tables set forth certain quarterly financial information
of the Company for each quarter of fiscal 1999 and fiscal 1998. 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, 1998 Dec. 31, 1998 Mar. 31, 1999 Jun 30, 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 319,352 $ 434,582 $ 464,300 $ 2,752,407
Cost of sales 179,881 291,930 255,771 1,834,789
------------------------------------------------------------------
Gross margin 139,471 142,652 208,529 917,618
------------------------------------------------------------------
Operating expenses:
AOL interactive marketing agreement costs -- 5,471,135 52,202 34,800
Write off of in-process research and
development 3,700,000 -- -- --
Depreciation and amortization 695,728 1,126,837 1,109,614 1,457,584
General and administrative 594,761 614,235 1,043,002 1,021,643
Selling 531,576 1,509,018 463,289 744,209
Research and development 38,670 843,996 496,578 527,649
------------------------------------------------------------------
5,560,735 9,565,221 3,164,685 3,785,885
------------------------------------------------------------------
Other income (expense), net 300,684 (180,079) (166,689) (650,373)
------------------------------------------------------------------
Net income (loss) $ (5,120,580) $ (9,602,648) $ (3,122,845) $ (3,518,640)
==================================================================
Net income (loss) per common share:
Basic and diluted (0.56) (0.70) (022) (0.23)
Weighted average common shares outstanding
Basic and diluted 9,191,351 13,745,159 14,166,766 15,466,464
</TABLE>
27
<PAGE>
<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 operations (10,873) (72,178) 4,556,382 --
----------- ----------- ----------- -----------
Net income (loss) $(1,987,643) $(1,741,624) $ 5,622,083 $(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>
(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.
28
<PAGE>
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 was scheduled to receive an
additional $700,000 in July 1999.
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 returned 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 ceased immediately, but we
continued 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. 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 $4,234,676 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 $5,471,135 during the year ended June 30, 1999.
In August and September 1997, the Company made an investment in
CommTouch Software Ltd. in the amount of $750,000.
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.
29
<PAGE>
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"),
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 to ACI 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 used $7,783,023 the year ended June 30, 1999
compared to $6,377,970 during the year ended June 30, 1998.
Cash used in investing activities was $8,054,484 during the year ended
June 30, 1999 and cash was provided from investing activities was $4,537,549
during the year ended June 30, 1998. During the year ended June 30, 1999, the
Company's investing activities included a $4,517,296 prepayment of a software
license, $2,000,000 in loans made in connection with the acquisition of Secure
Bank to the former stockholders' of Secure Bank, $849,203 of cash advances for
operating activities to Digital Courier International, Inc. prior to its
acquisition by the Company, the acquisition of equipment for $838,298, a
$300,000 loan to Clicksmart in connection with the sale of Books Now and
VideosNow, offset by the receipt of proceeds from the sale of assets of $362,642
and net cash acquired in acquisitions of $87,671. During the year ended June 30,
1998, the Company's investing activities included $810,215 of cash advances for
30
<PAGE>
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.
Cash provided by financing activities was $15,007,139 during the year
ended June 30, 1999 as compared to $113,741 during the year ended June 30, 1998.
During the year ended June 30, 1999 the cash provided was attributable to the
net proceeds of $13,024,000 from issuance of preferred and common stock,
$2,350,000 from loan proceeds and $943,750 from proceeds received from the
exercise of stock options offset by principal repayments on capital lease
obligations of $856,250 and principal repayments on loans of $454,361. During
the year ended June 30, 1998 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.
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 June 30, 1999, the Company had $2,381,356 of cash.
As reflected in the accompanying consolidated financial statements, 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. As of June 30, 1999, the Company has a tangible working
capital deficit of $1,285,266. Only the recently acquired Access Services and
Secure Bank operations are generating positive cash flows.
If the Company does not acquire DataBank International, Ltd in October
1999 as anticipated, additional funding will be required before the Company's
continuing operations will achieve and sustain profitability, if at all. In
which case, management will actively pursue other funding alternatives.
Management may also pursue sources of additional funding to meet marketing and
expansion objectives. 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
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.
31
<PAGE>
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.
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-37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- -----------------------------------------------------------------------
FINANCIAL STATEMENT DISCLOSURE.
-------------------------------
On June 28, 1996, the Registrant engaged Arthur Andersen LLP
("Andersen") to perform its audits and provide accounting services thereafter.
The Registrant did not consult with Andersen prior to such date regarding any
reportable matter.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Located in Part I as permitted by Instruction 3 to Item 401(b) of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Incorporated by reference to the Registrant's Proxy Statement for its
1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth information regarding Common Stock of
the Company beneficially owned as of September 8, 1999 by: (i) each person known
by the Company to beneficially own 5% or more of the outstanding Common Stock,
(ii) each director and director nominee, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all officers and directors as a group.
As of September 8, 1999, there were 18,557,390 shares of Common Stock
outstanding and 360 shares of Preferred Stock outstanding.
Amount of Percentage
Names and Addresses of Common of Voting
Principal Stockholders Shares* Securities
---------------------- --------- ----------
L. H. Trust 995,296 5.4%
Castletown, Isle of Man
Brown Simpson Strategic Growth Fund, Ltd. 1,183,657 (1) 6.2%
152 West 57th Street
New York, New York 10019
Brown Simpson Strategic Growth Fund, L.P. 515,902 (2) 2.7%
152 West 57th Street
New York, New York 10019
Transaction Systems Architects, Inc. 2,250,000 (3) 11.5%
224 South 108th Avenue
Omaha, Nebraska 68154
Officers and Directors
----------------------
James A. Egide 1,510,632 8.1%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Raymond J. Pittman 1,930,127 10.4%
187 Fremont Street
San Francisco, California 94105
33
<PAGE>
Kenneth M. Woolley 199,500 (4) 1.1%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Mitchell L. Edwards 285,971 (5) 1.5%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Glen Hartman 66,667 0.4%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Donald Marshall -- 0.0%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Allan Grosh 186,667 (6) 1.0%
136 Heber Avenue, Suite 204
Park City, Utah 84060
All Directors and Executive Officers 4,181,564 22.1%
(7 persons)
* Assumes exercise of all exercisable options and warrants held by listed
security holders which can be exercised within 60 days from September 8, 1999.
(1) Includes 520,000 shares which Brown Simpson Ltd. may acquire upon exercise
of warrants. Does not include Series A Convertible Preferred Stock which is
convertible into 444,444 shares of common stock which are not currently
convertible.
(2) Includes 280,000 shares which Brown Simpson L.P. may acquire upon exercise
of warrants. Does not include Series A Convertible Preferred Stock which is
convertible into 355,556 shares of common stock which are not currently
convertible.
(3) Includes 1,000,000 shares which Transactions Systems Architects, Inc. may
acquire upon exercise of warrants.
(4) Includes 37,500 shares which Mr. Woolley may acquire on exercise of
options. Does not include 75,000 shares which may be acquired on exercise
of options which are not currently exercisable.
(5) Includes 166,971 shares which Mr. Edwards may acquire on exercise of
options. Does not include 100,000 shares which may be acquired on exercise
of options which are not currently exercisable.
(6) Includes 186,667 shares which Mr. Grosh may acquire on exercise of options.
Does not include 373,333 shares which may be acquired on exercise of
options which are not currently exercisable.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
During the year ended June 30, 1994, the Company made cash loans to two
officers totaling $46,000, which were settled during the year ended June 30,
1995, except for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1994, the Company had borrowed money from certain
officers. Additional borrowings of $50,000 and $129,500 were made during the
years ended June 30, 1996 and 1995, respectively. Principal payments on these
notes were $1,666, $199,500, and $2,152 during the years ended June 30, 1997,
1996 and 1995, respectively. The amounts due on these loans at June 30, 1998,
1997 and 1996 were $0, $0 and $1,666, respectively.
During the year ended June 30, 1997, the Company negotiated services
and equipment purchase agreements with CasinoWorld Holdings, Ltd., Cybergames,
Inc., Online Investments, Inc. and Barrons Online, Inc., companies in which Mr.
Egide, one of the Company's directors and stockholders has an ownership
interest. Under the agreements, the Company provided software development
services, and configured hardware and other computer equipment.
During the year ended June 30, 1999, the Company made a cash loan to an
officer in the amount of $56,000, which was settled in full in July 1999.
In connection with the acquisition of SB.com in June 1999, the Company
made cash loans of $500,000 to each of four officers of SB.com. in exchange for
promissory notes. The notes accrue interest at a rate of six percent per annum
and are due in full June 30, 2001 or sooner if the makers receive proceeds from
the sale of Company stock.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) INDEX TO FINANCIAL STATEMENTS
Title of Documents Page No.
- ------------------ --------
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the Years
Ended June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997 F-11
Notes to Consolidated Financial Statements F-13
(b) Reports on Form 8-K
-----------------------
The Company filed a Current Report on Form 8-K on June 21, 1999
reporting the Stock Purchase Agreement with SB.Com, Inc. and the Securities
Purchase agreement with Transaction Systems Architects, Inc.
35
<PAGE>
(c) Exhibits
------------
<TABLE>
<CAPTION>
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
- -------- -------------------------------------------------------- -----------------
<S> <C> <C>
3.1 Amended and restated certificate of incorporation x
3.2 By-laws x
10.1 Lease Agreement +
10.2 Amended and restated DataMark Holding, Inc Incentive #
Plan
10.3 Content license and distribution agreement with At Home x
Corporation
10.4 Stock Exchange Agreement with Digital Courier *
International, Inc.
10.5 Asset Purchase Agreement with Focus Direct, Inc. *
10.6 Loan Agreement dated as of October 22, 1999 (1)
10.7 Securities Purchase Agreement with Brown Simpson dated
November 23, 1998 as amended December 2, 1998 (1)
10.8 Securities Purchase Agreement with Brown Simpson dated
March 3, 1999 (2)
10.9 Stock Purchase Agreement with SB.Com, Inc. (3)
10.10 Securities Purchase Agreement with Transaction Systems
Architects, Inc. (3)
21.1 Subsidiaries of the Registrant attached herewith
22.0 Consent of Independent Public Accountants attached herewith
27.0 Financial Data Schedule attached herewith
</TABLE>
* Incorporated by reference to the Company's Proxy statement filed on
September 1, 1998 for Special Stockholders meeting to be held on
September 16, 1998.
# Incorporated by reference to the Company's Form S-8 filed on April 28,
1998.
+ Incorporated by reference to the Company's Annual Report for the year
ended June 30, 1995.
x Incorporated by reference to the Company's Annual Report for the year
ended June 30, 1998.
(1) Incorporated by reference to the Company's Form 8-K filed on December
11, 1998.
(2) Incorporated by reference to the Company's Form 8-K filed on March 10,
1999
(3) Incorporated by reference to the Company's Form 8-K filed on June 21,
1999
36
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND 1998 AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 30, 1999
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Courier Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Digital Courier
Technologies, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999 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 $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. The
Company has a tangible working capital deficit of $1,285,266 as of June 30,
1999. Only the recent acquired operations of Access Services and Sb.com are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 10, 1999
F-1
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
ASSETS
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,381,356 $ 3,211,724
Trade accounts receivable, net of allowance for doubtful
accounts of $32,900 and $0, respectively 650,096 16,459
Other receivables 800,000 --
Prepaid software license 903,456 --
Prepaid advertising 458,772 --
Prepaid expenses and other current assets 194,658 814,767
Receivable from an officer 56,000 --
Current portion of AOL anchor tenant placement costs -- 3,237,281
------------ ------------
Total current assets 5,444,338 7,280,231
------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,314,571 6,225,817
Furniture, fixtures and leasehold improvements 998,199 777,419
------------ ------------
7,312,770 7,003,236
Less accumulated depreciation and amortization (3,604,888) (2,109,736)
------------ ------------
Net property and equipment 3,707,882 4,893,500
------------ ------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of
current portion -- 8,136,841
------------ ------------
GOODWILL, net of accumulated amortization of
$2,596,675 and $76,699, respectively 30,927,702 1,441,459
------------ ------------
PREPAID SOFTWARE LICENSE, net of current portion 3,387,960 --
------------ ------------
RECEIVABLE FROM DIGITAL COURIER
INTERNATIONAL, INC. -- 810,215
------------ ------------
OTHER ASSETS 3,907,865 1,458,500
------------ ------------
$ 47,375,747 $ 24,020,746
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998 (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 2,210,614 $ 100,000
Current portion of capital lease obligations 1,102,084 1,006,906
Accounts payable 330,510 1,458,598
Accrued rental payments for vacated facilities 34,200 544,014
Other accrued liabilities 1,689,968 531,400
------------- -------------
Total current liabilities 5,367,376 3,640,918
------------- -------------
CAPITAL LEASE OBLIGATIONS, net of current portion 432,704 1,384,132
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 7, 8 and 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $10,000 par value; 2,500,000 shares
authorized, 360 shares outstanding 3,600,000 --
Common stock, $.0001 par value; 50,000,000 shares
authorized, 18,557,390 and 8,268,489 shares outstanding,
respectively 1,856 827
Additional paid-in capital 72,759,439 31,196,354
Warrants outstanding 1,363,100 2,519,106
Receivable settled through the repurchase of common shares
by the Company -- (148,576)
Stock subscription (12,000) --
Accumulated deficit (36,136,728) (14,572,015)
------------- -------------
Total stockholders' equity 41,575,667 18,995,696
------------- -------------
$ 47,375,747 $ 24,020,746
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 3,970,641 $ 803,011 $ 8,812
COST OF SALES 2,562,371 745,871 492
------------------------------------------------
Gross margin 1,408,270 57,140 8,320
------------------------------------------------
OPERATING EXPENSES:
General and administrative 3,273,641 4,092,737 1,400,916
Depreciation and amortization 4,389,763 1,545,090 398,066
Acquired in process research and development 3,700,000 -- --
Research and development 1,906,893 1,432,006 3,966,185
Selling 3,248,092 1,290,012 1,897,665
AOL agreement 5,558,137 -- --
------------------------------------------------
Total operating expenses 22,076,526 8,359,845 7,662,832
------------------------------------------------
OPERATING LOSS (20,668,256) (8,302,705) (7,654,512)
------------------------------------------------
OTHER INCOME (EXPENSE):
Interest and other income 63,846 178,354 496,365
Net loss on sale of assets (379,822) -- --
Interest expense (371,203) (157,616) (704)
Other expense (9,278) -- --
------------------------------------------------
Net other income (expense) (696,457) 20,738 495,661
------------------------------------------------
LOSS BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS (21,364,713) (8,281,967) (7,158,851)
INCOME TAX BENEFIT -- 2,684,000 --
------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (21,364,713) (5,597,967) (7,158,851)
------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Continued)
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
DISCONTINUED OPERATIONS:
Income from operations of discontinued direct
mail advertising operations, net of income tax
provision of $66,827 and $180,263, respectively $ -- $ 111,377 $ 300,438
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)
-------------------------------------------------
NET LOSS (21,364,713) (1,124,636) (9,899,056)
PERFERRED STOCK DIVIDEND (200,000) -- --
-------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (21,564,713) $(1,124,636) $(9,899,056)
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (1.63) $ (0.66) $ (0.86)
=================================================
Income (loss) from discontinued operations:
Basic and diluted $ -- $ 0.53 $ (0.33)
=================================================
Net loss:
Basic and diluted $ (1.64) $ (0.13) $ (1.19)
=================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 13,130,216 8,422,345 8,309,467
=================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<CAPTION>
Receivable
Settled in
Additional Repurchased Stock
Preferred Stock Common Stock Paid-in Warrants Common Subscriptions Accumulated
Shares Amount Shares Amount Capital Outstanding Stock Receivable Deficit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 -- $ -- 8,085,407 $ 808 $ 20,585,276 $ -- $ -- $ (1,496,137) $ (3,548,323)
Exercise of stock options -- -- 102,400 10 78,405 -- -- -- --
Collection of stock
subscriptions receivable -- -- -- -- -- -- -- 1,496,137 --
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 -- -- -- -- -- -- -- -- (9,899,056)
---------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 -- -- 8,560,932 856 23,272,606 -- -- -- (13,447,379)
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 -- -- 100,000 10 312,490 -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
acquire WeatherLabs -- $ -- 253,260 $ 26 $ 762,478
Issuance of common stock and
warrants in connection with
AOL agreement -- -- 955,414 96 8,329,920
Purchase of common stock
from officers for cash -- -- (1,866,110) (187) (1,699,813)
Reacquisition and retirement
of common stock in
connection with sale of Sisna -- -- (35,000) (4) (141,090)
Reacquisition of common stock
issued to purchase
computer software -- -- (12,000) (1) (95,999)
Receivable settled through the
repurchase of common
shares by the Company -- -- -- -- --
Net loss -- -- -- -- --
-------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 -- -- 8,268,489 827 31,196,354
Issuance of common stock for
cash -- -- 2,050,000 205 9,797,795
Issuance of Series A preferred
stock for cash 360 3,600,000 -- -- (174,000)
Exercise of stock options -- -- 1,083,529 108 3,132,722
Acquisition of shares in
cashless exercise of stock
options -- -- (335,833) (33) (2,174,655)
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<CAPTION>
Receivable
Settled in Stock Sub-
Warrants Repurchased Subscriptions Accumulated
Outstanding Common Stock Receivable Deficit
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock to
acquire WeatherLabs $ -- $ -- $ -- $ --
Issuance of common stock and
warrants in connection with
AOL agreement 2,519,106 -- -- --
Purchase of common stock
from officers for cash -- -- -- --
Reacquisition and retirement
of common stock in
connection with sale of Sisna -- -- -- --
Reacquisition of common stock
issued to purchase
computer software -- -- -- --
Receivable settled through the
repurchase of common
shares by the Company -- (148,576) -- --
Net loss -- -- -- (1,124,636)
------------------------------------------------------------------------
BALANCE, June 30, 1998 2,519,106 (148,576) -- (14,572,015)
Issuance of common stock for
cash -- -- -- --
Issuance of Series A preferred
stock for cash -- -- -- (200,000)
Exercise of stock options -- -- -- --
Acquisition of shares in
cashless exercise of stock
options -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Continued)
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
acquire Digital Courier
International -- -- 4,659,080 466 14,026,872
Issuance of common stock to
acquire SecureBank -- -- 2,840,000 284 17,837,756
Issuance of common stock and
warrants to acquire Access
Services -- -- 300,000 30 1,631,370
Issuance of common stock in
settlement with former
owner of Books Now -- -- 205,182 20 1,051,538
Issuance of contingent shares
of common stock related to
acquisition of WeatherLabs -- -- 101,035 10 593,570
Issuance of common stock and
warrants in connection with
@Home agreement -- -- 20,534 2 223,305
Reacquisition and retirement
of common stock and
warrants in connection with
termination of AOL
agreement -- -- (601,610) (60) (4,234,615)
Repurchase of common shares
as settlement of receivable -- -- (33,016) (3) (148,573)
Issuance of warrants in
connection with loan
agreement -- -- -- -- --
Net loss -- -- -- -- --
-----------------------------------------------------------------------------------------
BALANCE, June 30, 1999 360 $3,600,0000 18,557,390 $ 1,856 $ 72,759,439
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Continued)
<CAPTION>
Receivable
Settled in Stock
Warrants Repurchased Subscriptions Accumulated
Outstanding Common Stock Receivable Deficit
- ----------------------------------------------------------------------------------------------------
Issuance of common stock to
acquire Digital Courier
<S> <C> <C> <C> <C>
International -- -- (12,000) --
Issuance of common stock to
acquire SecureBank -- -- -- --
Issuance of common stock and
warrants to acquire Access
Services 440,000 -- -- --
Issuance of common stock in
settlement with former
owner of Books Now -- -- -- --
Issuance of contingent shares
of common stock related to
acquisition of WeatherLabs -- -- -- --
Issuance of common stock and
warrants in connection with
@Home agreement 887,000 -- -- --
Reacquisition and retirement
of common stock and
warrants in connection with
termination of AOL
agreement (2,519,106) -- -- --
Repurchase of common shares
as settlement of receivable -- 148,576 -- --
Issuance of warrants in
connection with loan
agreement 36,100 -- -- --
Net loss -- -- -- (21,364,713)
- ----------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 $ 1,363,100 $ -- $ (12,000) $(36,136,728)
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-10
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Increase (Decrease) in Cash
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(21,364,713) $ (1,124,636) $ (9,899,056)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,389,763 1,545,090 398,066
Amortization and write-off of AOL anchor tenant placement
costs 5,558,137 -- --
Acquired in-process research and development 3,700,000 -- 2,232,961
Issuance of common stock and warrants in connection with
@Home agreement 1,110,307 -- --
Issuance of common stock in settlement with former
shareholders of Books Now, Inc. 1,051,558 -- --
Loss on sale of assets 379,821 11,196 --
Gain on sale of direct mail marketing and Internet service
operations -- (7,404,205) --
Provision for reserve against CommTouch Ltd. investment -- 375,000 --
Compensation expense related to issuance of stock options -- 343,750 --
Issuance of common stock as compensation -- 61,250 --
Compensation expense related to cashless exercise of stock
options 14,391 18,375 --
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (523,168) 101,653 8,206
Other receivables (278,172) -- --
Prepaid advertising 216,228 -- --
Prepaid software license 225,880 -- --
AOL anchor tenant placement costs -- (525,000) --
Other current assets 24,545 (519,901) (74,742)
Net current assets of discontinued operations -- -- 182,041
Other assets (974,845) (13,360) (38,636)
Accounts payable (1,296,583) 446,168 588,899
Accrued liabilities (16,172) 306,650 267,601
-------------------------------------------------
Net cash used in operating activities (7,783,023) (6,377,970) (6,334,660)
-------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-11
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Continued)
Increase (Decrease) in Cash
<CAPTION>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made in connection with SB.com acquisition and sale of
Books Now and Videos Now assets $ (2,300,000) $ -- $ --
Prepayment of software license (4,517,296) -- --
Increase in receivable from Digital Courier International, Inc. (849,203) (810,215) --
Purchase of property and equipment (838,298) (794,344) (3,188,360)
Investment in CommTouch, Ltd. -- (750,000) --
Net proceeds from the sale of direct mail advertising operations -- 6,857,300 --
Net proceeds from sale of assets 362,642 20,938 --
Net cash acquired in acquisitions 87,671 -- --
Increase in net long-term assets of discontinued operations -- -- (509,334)
Cash of discontinued operations -- 13,870 --
---------------------------------------------------
Net cash (used in) provided by investing activities (8,054,484) 4,537,549 (3,697,694)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common and preferred stock 13,024,000 32,417 358,418
Net proceeds from sale and lease back of equipment -- 2,650,000 --
Collection of receivables from sale of common stock -- -- 1,496,137
Net proceeds from exercise of stock options 943,750 -- --
Proceeds from borrowings 2,350,000 86,000 --
Purchase of common stock from officers -- (1,700,000) --
Principal payments on capital lease obligations (856,250) (690,183) --
Principal payments on borrowings (454,361) (264,493) (43,201)
---------------------------------------------------
Net cash provided by financing activities 15,007,139 113,741 1,811,354
---------------------------------------------------
NET DECREASE IN CASH (830,368) (1,726,680) (8,221,000)
CASH AT BEGINNING OF YEAR 3,211,724 4,938,404 13,159,404
---------------------------------------------------
CASH AT END OF YEAR $ 2,381,356 $ 3,211,724 $ 4,938,404
===================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 347,139 $ 157,616 $ 9,495
</TABLE>
See accompanying notes to consolidated financial statements
F-12
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Organization and Principles of Consolidation
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc.), a Delaware
corporation, was incorporated May 16, 1985. Effective March 17, 1998, DataMark
Holding, Inc. ("Holding") entered into a Stock Exchange Agreement (the "Exchange
Agreement") with Digital Courier International, Inc., a Nevada corporation
("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 has been accounted for as a purchase
in the accompanying consolidated financial statements (see Note 3).
On January 8, 1997, the Company acquired the stock of Sisna, Inc. ("Sisna"). In
January 1998, the Company acquired the stock of Books Now, Inc. ("Books Now"),
in May 1998 acquired the stock of WeatherLabs Technologies, Inc.
("WeatherLabs"), in April 1999 acquired the stock of Access Services, Inc.
("Access Services"), and in June 1999 acquired the common stock of SB.com, Inc.
("SB.com"). These acquisitions 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. In March 1998, the Company sold its direct mail advertising
operations to Focus Direct, Inc. ("Focus Direct") and sold the stock of Sisna
acquired in January 1997 back to Sisna's former major shareholder. 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 sold 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. Additionally, in May 1999 the Company sold certain assets of Books Now
and the Company's Videos Now operations to ClickSmart.com (see Note 3).
DCTI, DCII, WeatherLabs, Books Now, Access Services, SB.com and Sisna are
collectively referred to herein as the "Company". All significant intercompany
accounts and transactions have been eliminated in consolidation.
Nature of Operations and Related Risks
The Company's historical operations through March 1998 primarily consisted of
providing highly targeted business to consumer advertising for its clients.
During fiscal years 1998 and 1997, the medium for such targeted advertising was
direct mail and was being expanded to include an online network. The direct mail
advertising operations were sold in March 1998.
In January 1997, the Company acquired Sisna, which operated as an Internet
service provider allowing its customers access to the Internet. Through a
F-13
<PAGE>
network of franchisees, Sisna offered 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 3).
As discussed above, in fiscal year 1998 the Company acquired Books Now and
WeatherLabs and in fiscal year 1999 acquired DCII, Access Services and SB.com.
Certain assets and operations of Books Now and the Company's Videos Now
operations were sold in fiscal year 1999. The Company's strategy is to develop
and market proprietary electronic commerce software and technologies and online
information services for the Internet. The Company is developing e-commerce,
content publishing, and payment processing software suites that are marketed and
licensed to online businesses including Internet portals, web sites and
financial institutions.
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 $21,364,713, $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. As of June 30, 1999, the Company has a tangible working
capital deficit of $1,285,266. Only the recently acquired operations of Access
Services and SB.com are generating positive cash flows. Additional funding will
be required before the Company's continuing operations will achieve and sustain
profitability, if at all. These matters raise substantial doubt about the
F-14
<PAGE>
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. During fiscal year 1999, the Company was successful in
obtaining $13,024,000 of equity funding through the sale of common and preferred
stock for cash and $2,350,000 of debt funding. As discussed in Note 14, the
Company has entered into an agreement to acquire DataBank International, Ltd
("DataBank"). Management believes that with the acquisition of DataBank, there
will be sufficient cash flows from operations during fiscal year 2000 to sustain
its operations. However, there can be no assurance that the acquisition of
DataBank will be consummated, that its operations will continue to generate
positive cash flow or 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.
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:
Computer and office equipment 5 - 7 years
Furniture, fixtures and leasehold
improvements 5 - 10 years
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net loss.
F-15
<PAGE>
Other Assets
As of June 30, 1999 and 1998, other assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Notes receivable from prior shareholders of Access
Services, face value of $2,000,000 discounted at 10
percent $1,851,240 $ --
Noncurrent receivable from Focus Direct -- 700,000
Investment in CommTouch preferred stock 750,000 375,000
Noncurrent prepaid advertising 573,457 --
Security deposit under capital lease arrangement (see
Note 8) 350,000 250,000
Note receivable from ClickSmart.com 300,000 --
Deposits and other 83,168 133,500
--------------------------
$3,907,865 $1,458,500
==========================
</TABLE>
As discussed in Note 3, in connection with the acquisition of Access Services,
the Company made loans of $500,000 each to four of Access Services' prior
shareholders. The notes receivable bear interest at 6 percent, are unsecured,
and are due at the earlier of June 30, 2001 or from the proceeds from the sale
of DCTI common stock held by the individuals. Since the stated interest rate on
the notes of 6 percent is less than the current market interest rate, the notes
have been discounted using a 10 percent interest rate. Additionally, during
fiscal year 1999 in connection with the sale of certain assets of Books Now and
the Company's Videos Now operations, the Company loaned $300,000 to
ClickSmart.com. The $300,000 note receivable bears interest at 8 percent due
quarterly with the principal due on May 25, 2000.
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. CommTouch is engaged in the development, manufacture and
marketing of PC-based Internetworking software. As of June 30, 1999, management
of the Company determined that the investment in CommTouch was partially
impaired and recorded a reserve of $375,000 against the investment. Subsequent
to June 30, 1999, CommTouch successfully completed an initial public offering of
its common stock which has provided additional capital and the Company
determined that the reserve recorded in fiscal year 1998 is no longer required.
Accounting for Impairment of Long-Lived Assets
The Company accounts for its property and equipment, AOL anchor tenant placement
costs, goodwill 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
F-16
<PAGE>
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 of June 30, 1999,
management determined that the Company's investment in ClickSmart.com of
$551,407 was impaired and recorded this investment at $0 due to the
uncertainties related to future profitability of ClickSmart.
Fair Value of Financial Instruments
The carrying amounts reported n the accompanying consolidated balance sheets for
cash, accounts receivable, and accounts payable approximate fair values because
of the immediate or short-term maturities of these financial instruments. The
carrying amounts of the Company's notes payable and capital lease obligations
also approximate fair value based on current rates for similar debt. The
$700,000 noncurrent receivable as of June 30, 1998 related to the sale of the
direct mail advertising business is noninterest bearing and was not due until
June 30, 1999. The estimated fair value of the receivable as of June 30, 1998
was approximately $640,500. The carrying amounts of the noncurrent receivables
as of June 30, 1999 approximate fair value.
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 1,778,971, 1,445,000 and 1,424,815 shares of common stock at
weighted average exercise prices of $5.50, $3.82 and $5.36 per share as of June
30, 1999, 1998, and 1997, respectively, warrants to purchase 3,015,000, 656,942
and 20,000 shares of common stock at weighted average exercise prices of $6.50,
$9.37 and $7.75 per share as of June 30, 1999, 1998 and 1997, respectively, and
360 shares of Series A preferred stock convertible to 800,000 shares of common
stock at $4.50 per share at June 30, 1999 were not included in the computation
F-17
<PAGE>
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 June
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 (see Note 3). The
issuance of the shares is contingent on the future stock price of the Company's
common stock. These contingent shares have also been excluded from the
computation of Diluted EPS.
Supplemental Cash Flow Information
Noncash investing and financing activities consist of the following:
During the year ended June 30, 1999, the Company issued 4,659,080 shares of
common stock to acquire DCII, 2,840,000 shares of common stock to acquire
SB.com, and 300,000 shares of common stock (and warrants to purchase 100,000
shares of common stock) to acquire Access Services (see Note 3). Additionally,
the Company issued 101,035 shares of common stock pursuant to the contingency
provisions of the WeatherLabs acquisition. The common shares and warrants issued
were recorded at their fair values.
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).
During the year ended June 30, 1999, 601,610 shares of common stock and the
warrants to purchase 318,471 shares of common stock were returned to the Company
by AOL in connection with termination of the Interactive Marketing Agreement. In
addition, during the year ended June 30, 1998 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, 1999, 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.
Recent Accounting Pronouncements
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, 2000; accordingly, the Company will adopt
SFAS No. 133 in its fiscal year 2001 consolidated financial statements.
Management believes the adoption of SFAS No. 133 will not have a material impact
on the Company's consolidated financial statements.
F-18
<PAGE>
Reclassifications
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal year 1999 presentation.
(3) ACQUISITIONS AND DISPOSITIONS
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange Agreement
(the "Exchange Agreement") with 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
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
F-19
<PAGE>
performance requirements. Management estimates that approximately $2,000,000
will be required over the next 6 to 9 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
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.
F-20
<PAGE>
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. As discussed in Note 2, in connection with the acquisition of Access
Services, the Company made loans of $500,000 each to four of Access Services'
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.
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
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.
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.
F-21
<PAGE>
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
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.
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, 1999, 1998 and 1997 (assuming the acquisitions of DCII, Access Services
F-22
<PAGE>
and SB.com had occurred as of July 1, 1997 and the acquisitions of Books Now and
WeatherLabs had occurred as of July 1, 1996) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 4,838,938 $ 1,594,768 $ 368,802
Loss from continuing operations (18,727,081) (6,537,201) (7,574,632)
Loss from continuing operations per share (0.94) (0.55) (0.87)
</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. Pursuant to the
agreement, the Company issued 325,000 shares of its common stock valued at
$2,232,961 in exchange for all of the issued and outstanding shares of Sisna.
The issuance of the common shares was recorded at the quoted market price on the
date of the acquisition. The excess of the purchase price over the estimated
fair market value of the acquired assets less liabilities assumed was
$2,232,961, which was allocated to acquired in-process research and development
and expensed at the date of the acquisition. Sisna had 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 3-year employment
agreements with 4 of Sisna's key employees and shareholders. The 4 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 3 years after the termination of employment with the Company.
In March 1998, the Company sold the operations of Sisna to Henry Smith, Sisna's
former owner (and a director of the Company at the time of the sale) and certain
other buyers in exchange for 35,000 shares of the Company's common stock at a
value of $141,904. 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. The sale resulted 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.
The operations of Sisna have been reflected in the accompanying condensed
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 loss from operations
was $(425,078) and $(2,662,666) during the years ended June 30, 1998 and 1997,
respectively.
F-23
<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. Pursuant to the agreement, Focus Direct
agreed to pay the Company $7,700,000 for the above described net assets. Focus
Direct paid the Company $6,900,000 at closing and agreed to pay an additional
$700,000 by June 30, 1999. The total purchase price was adjusted for the
difference between the assets acquired and liabilities assumed at November 30,
1997 and those as of the date of closing. The remaining receivable of $700,000
was not paid on the due date of June 30, 1999 and the Company is considering its
collection options.
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 and 1997 amounted to
$7,493,061 and $6,448,156, respectively.
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
F-24
<PAGE>
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.
As discussed in Note 2, 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.
(4) Marketing Agreements
Interactive Marketing Agreement with America Online, Inc.
On June 1, 1998, the Company entered into an interactive marketing agreement
with America Online, Inc. ("AOL") for an initial term of 39 months (the
"Marketing Agreement"). Under the Marketing 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 initial term of the Marketing Agreement, AOL agreed to
deliver 500 million impressions to the Company's Videos Now site. The
Performance Warrant would vest quarterly over the term of the Marketing
Agreement as the specified quarterly impressions were delivered by AOL. During
the second through fifth quarters of the Marketing Agreement, AOL was to deliver
at least 25 million impressions each quarter and during the sixth through
thirteenth quarters AOL was to deliver at least 50 million impressions each
quarter.
The Marketing 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, were to 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, would 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
would be treated as advertising costs and would be expensed as the advertising
services were received. The estimated fair market value 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.
F-25
<PAGE>
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 would 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 Marketing Agreement. As
of June 30, 1999, 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 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, the Company entered into a second amendment with AOL, under
which AOL agreed to return to the Company (a) 636,942 warrants to purchase
common stock and (b) 601,610 of the 955,414 shares of its common stock
previously issued to AOL under the Marketing Agreement. All advertising was
ceased immediately; however, the Company continued to have a permanent location
or "button" on AOL's shopping channel until August 31, 1999. The Company has no
further financial obligations to AOL.
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 received "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 amendment to the Marketing Agreement with
AOL, the Company determined that the remaining balance of the AOL anchor tenant
placement costs of $12,364,123, less $139,206 representing the fair market value
of the permanent location on the shopping channel for 8 months, should be
written off. 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 $4,234,675
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. This resulted in a net
write-off of $5,471,135 during the year ended June 30, 1999.
Content License and Distribution Agreement with At Home Corporation
On July 10, 1998, the Company entered into a Content License and Distribution
Agreement with At Home Corporation ("@Home") for an initial term of 36 months.
Under this agreement, the Company agreed to: (1) pay @Home $800,000 in
non-refundable guaranteed cash payments, (2) issue 20,534 shares of the
Company's common stock, (3) issue seven-year warrants to purchase 100,000 shares
of the Company's common stock at $9.74 per share (the "Warrant Shares"), and (4)
issue warrants to purchase 100,000 shares of the Company's common stock at
F-26
<PAGE>
$19.48 per share (the "Performance Warrants"); in exchange for @Home providing
the Company with advertising, marketing and distribution for the Company's
WeatherLabs services site on the @Home Network and promotion of the Weather@Home
site. The Company is to receive 40 percent of the net advertising revenue
generated from Weather@Home on the @Home Network. The Company will retain all of
the advertising revenue generated from the co-branded Weather@Home site which is
located within WeatherLabs.
The Company made a cash payment to @Home of $266,000 upon execution of the
agreement in July 1998, and is scheduled to make additional payments of $267,000
on July 10, 1999 and $267,000 on July 10, 2000. The Company issued 20,534 shares
of its common stock on the effective date of the agreement. The Warrant Shares
vested on the effective date of the agreement. The Performance Warrants vest
over the term of the agreement as certain promotion criteria are achieved by
@Home. The costs related to the agreement are advertising costs and will be
expensed as the advertising services are received. Of the initial cash payment
to @Home of $266,000, the fair market value of the 20,534 shares of common stock
of $223,307 and the estimated fair market value of the Warrant Shares of
$887,000, $1,032,229 has been recorded as prepaid advertising expense as of June
30, 1999 and will be expensed as advertising services are provided.
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 9, 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.
F-27
<PAGE>
(6) NOTES PAYABLE
<TABLE>
Notes payable consist of the following as of June 30, 1999 and 1998:
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
Note payable to a partnership; interest at 10 percent, principal
and accrued interest due on demand, unsecured $1,150,000 $ --
Note payable to a group of individual lenders; interest at 24
percent payable monthly, principal due in October 1999,
secured by certain receivables 921,828 --
Note payable to an individual (assumed in acquisition of
WeatherLabs); interest at 8 percent, due on demand,
unsecured 100,000 100,000
Note payable to the former shareholders of SB.com (assumed in
acquisition of SB.com); paid in full subsequent in July 1999 28,686 --
Other 10,100 --
-------------------------
Notes payable, net of current portion $2,210,614 $ 100,000
=========================
</TABLE>
(7) INCOME TAXES
The components of the net deferred income tax asset as of June 30, 1999 and 1998
are as follows:
1999 1998
-----------------------------
Net operating loss carryforwards $ 8,934,000 $ 3,341,000
Accrued liabilities 180,000 271,400
Receivable reserves and other 108,000 162,000
-----------------------------
Total deferred income tax assets 9,222,000 3,774,400
Valuation allowance (9,222,000) (3,774,400)
-----------------------------
Net deferred income tax asset $ -- $ --
=============================
As of June 30, 1999, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $24,820,000. 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 begin expiring in 2009.
No benefit for income taxes was recorded during the years ended June 30, 1999
and 1997. The income tax benefit recorded for the year ended June 30, 1998 of
$2,684,000 was 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, management has
recorded a valuation allowance against the entire net deferred income tax asset.
F-28
<PAGE>
(8) 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, 1999 are as follows, net of sublease
rentals:
Minimum Minimum
Capital Operating
Lease Lease
Year Ending June 30, Payments Rentals
------------------------------------------------------------------------
2000 $ 1,200,772 $ 400,231
2001 360,956 352,760
2002 55,157 292,431
2003 49,222 96,250
2004 5,188 --
-------------------------------
Total minimum lease payments 1,671,295 $ 1,141,672
===============================
Less amount representing interest (136,507)
-------------
Present value of net minimum lease
payments, including current portion
of $1,102,084 $ 1,534,788
-------------
The Company incurred rent expense of $412,240, $552,264 and $472,572 in
connection with its operating leases for the years ended June 30, 1999, 1998 and
1997, 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 $544,000 of future rental payments for vacated facilities that
would 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
F-29
<PAGE>
services. This agreement was terminated and superceded by an agreement effective
July 15, 1997. The Company committed to minimum annual usage of at least
$500,000 over a three-year period.
Legal Matters
The Company is the subject of certain 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.
(9) CAPITAL TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $10,000 par
value preferred stock. 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.
As of June 30, 1999, 360 shares have been designated as Series A convertible
preferred stock and 720 shares have been designated as Series B convertible
preferred stock. The Company issued the 360 shares of Series A during the year
ended June 30, 1999. The Series A and Series B preferred shares are identical
and rank pari passu with regard to liquidation, and other preferential rights,
except that the conversion price for the Series A is $4.50 per share of common
stock and the conversion price for the Series B is $7.00 per share of common
stock. The Series A and B preferred shares are senior in right of payment,
whether upon liquidation, dissolution or otherwise, to any other class of equity
securities of the Company.
Common Stock Issuances and Other Transactions
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.
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, 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 stock for $199,813 from the
president of the direct mail advertising operations that were sold during the
year.
F-30
<PAGE>
During the year ended June 30, 1999 the Company issued 4,659,080, 2,840,000, and
300,000 shares of common stock to acquire DCII, Access Services, and SB.com,
respectively. The Company issued 101,035 shares of common stock in connection
with the acquisition of WeatherLabs and issued 205,182 shares of common stock in
settlement with the former owners of Books Now.
During the year ended June 30, 1999 the Company issued 20,534 shares of common
stock in connection with the @Home agreement and received back 601,610 shares of
common stock in connection with the termination of the AOL Interactive Marketing
Agreement.
Stock Purchase Agreements with the Brown Simpson Strategic Growth Funds
On November 24, 1998, the Company raised $1,800,000 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 $1,800,000 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 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 15 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. The commitment to
purchase the Tranche B Units was subsequently terminated (see discussion below).
On March 3, 1999, the Company raised an additional $3,600,000 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
Series A 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
F-31
<PAGE>
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 quota Market price of the Company's common stock on March 31, 1999 was $4.75
per share, which is less than the $4.50 per share conversion price. The
intrinsic value of the beneficial conversion feature of $200,000 has been
reflected in the accompanying consolidated financial statements as a preferred
stock diviend.
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 disclosed.
Issuance of Common Stock to Transaction Systems Architects, Inc.
On June 14, 1999, TSAI purchased 1,250,000 shares of the Company common stock
and five- year warrants to purchase an additional 1,000,000 shares of the
Company's common stock in exchange for $6,500,000. The exercise price of the
warrants is the lower of $5.20 per share or the average per share market value
for the five consecutive trading days with the lowest per share market value
during the 22 trading days prior to December 14, 1999.
(10) 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, 1999, 1998 and 1997.
F-32
<PAGE>
Options Outstanding
-----------------------------------------------
Weighted
Number of Average Exercise
Shares Price Range Price
-----------------------------------------------
Balance at June 30, 1996 620,592 $ 0.25-9.00 $ 5.54
Granted 65,000 3.25 3.25
Expired or cancelled (100,000) 5.00 9.00
-----------------------------------------------
Balance at June 30, 1997 585,592 0.25-9.00 5.38
Granted 365,000 2.75-5.00 3.06
Expired or cancelled (305,000) 3.25-7.75 6.43
Exercised (150,592) 0.25 0.25
-----------------------------------------------
Balance at June 30, 1998 495,000 2.75-9.00 4.58
Granted 210,000 5.75-5.85 5.79
Expired or cancelled (125,000) 9.00 9.00
Exercised (345,000) 2.75-5.00 2.95
-----------------------------------------------
Balance at June 30, 1999 235,000 $ 5.00-5.85 $ 5.71
===============================================
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 and accordingly no compensation expense has been recorded. 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, 1999, 66,667 of the above options are
exercisable and the above options expire, if not exercised, from July 1, 2000
through June 29, 2004.
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, 1999, 1998 and 1997 under the
Option Plan.
F-33
<PAGE>
Options Outstanding
------------------------------------------------
Weighted
Number of Average Exercise
Shares Price Range Price
------------------------------------------------
Balance at June 30, 1996 451,623 $ 0.50-7.75 $ 3.75
Granted 510,000 3.25-9.00 5.72
Expired or canceled (20,000) 0.50-5.00 2.75
Exercised (102,400) 0.50-1.00 0.62
------------------------------------------------
Balance at June 30, 1997 839,223 0.50-9.00 5.35
Granted 1,215,000 2.75-7.75 3.50
Expired or canceled (830,000) 0.50-7.75 6.02
Exercised (274,223) 0.50-3.38 1.83
------------------------------------------------
Balance at June 30, 1998 950,000 2.75-9.00 2.42
Granted 1,462,500 4.00-7.38 5.42
Expired or canceled (130,000) 4.00-6.63 4.37
Exercised (738,529) 2.75-4.00 2.87
------------------------------------------------
Balance at June 30, 1999 1,543,971 $ 2.75-7.75 $ 5.47
------------------------------------------------
The weighted average fair value of options granted during the years ended June
30, 1999, 1998 and 1997 was $3.65, $1.66 and $3.42, respectively. A summary of
the options outstanding and options exercisable at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- ---------------------------
Weighted
Average Weighted
Range of Remaining Weighted Average
Exercise Options Contractatual Average Options Exercise
Prices Outstanding Life Exercise Price Exercisable Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.75 - 3.99 126,971 4.6 years $ 2.81 116,971 $ 2.75
4.00 - 5.24 245,000 4.0 years 4.13 70,836 4.38
5.25 - 6.49 1,260,000 4.8 years 5.80 280,000 5.78
6.50 - 7.75 147,000 9.8 years 7.50 105,667 7.69
- ------------------------------------------------------------------------------------------------------
2.75 - 7.75 1,778,971 4.8 years $ 5.50 573,474 $ 5.34
======================================================================================================
</TABLE>
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,
F-34
<PAGE>
"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, 5.50 and
6.47 percent in fiscal years 1999, 1998 and 1997, respectively, a dividend yield
of 0 percent, volatility factors of the expected common stock price of 187.91,
88.91 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, 1999, 1998 and 1997:
1999 1998 1997
--------------------------------------------
Net loss:
As reported $ (21,564,713) $ (1,124,636) $ (9,899,056)
Pro forma (22,817,835) (4,229,002) (10,936,543)
Net loss per share (basic
and diluted):
As report (1.64) (0.13) (1.19)
Pro form (1.74) (0.50) (1.32)
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.
(11) 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.
(12) RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1999, the Company loaned $56,000 to an officer.
The $56,000 has been repaid to the Company subsequent to June 30, 1999.
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 was reflected as contra equity in the
accompanying June 30, 1998 consolidated balance sheet and was settled as of June
30, 1999.
F-35
<PAGE>
(13) SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Operating segments are components of the
Company for which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
The Company has two reportable segments: netClearing and WeatherLabs. The
netClearing segment utilizes both e-commerce tools and transaction software
suite software to provide an electronic package for conducting business and
facilitating credit card payment processing over the internet. The WeatherLabs
segment supplies proprietary real-time weather information to online business
throughout the world, and hosts its own web site for consumers and business
customers.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Sales and transfers
between the segments are eliminated in consolidation. The Company evaluates
performance of the operating segments based on profit or loss before income
taxes, not including nonrecurring gains or losses. The reportable segments are
managed separately because each segment has differing products, customer
requirements, technology and marketing strategies.
Segment profit and loss and segment assets as of and for the years ended June
30, 1999 and 1998 are presented in the following table. The WeatherLabs
operating segment was acquired during fiscal year 1998 (See Note 3.), according
all the Company's continuing operations during fiscal year 1997 related to
netClearing.
<TABLE>
<CAPTION>
netClearing WeatherLabs Admin Total
1999
<S> <C> <C> <C> <C>
Revenues $ 3,601,273 $ 369,368 -- $ 3,970,641
Interest income -- -- 57,164 57,164
Interest expense 8,005 363,198 371,203
Depreciation and amortization 4,157,201 232,562 -- 4,389,763
Segment operating loss 16,007,958 1,019,761 4,336,994 21,364,713
Other significant noncash items:
Acquired in-process R&D 3,700,000 -- -- 3,700,000
Write-off of AOL anchor tenant
placement costs 3,728,137 -- -- 3,728,137
Segment assets 44,827,505 2,548,242 -- 47,375,747
Capital expenditures 794,026 44,272 -- 838,298
1998
Revenues 433,643 369,368 -- 803,011
Interest income -- -- 169,397 169,397
Interest expense -- -- 157,616 157,616
Depreciation and amortization 1,534,777 10,313 -- 1,545,090
Segment operating loss 3,190,207 1,019,761 4,071,999 8,281,967
Other significant noncash items -- -- -- --
Segment assets 23,702,171 318,575 -- 24,020,746
Capital expenditures 794,344 -- -- 794,344
</TABLE>
F-36
<PAGE>
(14) 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 ("DataBand"), 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 has 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. At the closing (expected to be October,
1999), the Company will exchange 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.
Consummation of the acquisition is conditioned upon the occurrence of certain
events, including, among other things the approval of the Exchange Agreement by
the Company's shareholders.
F-37
<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: September 27, 1999 By /s/ James A. Egide
-----------------------------------------------
James A. Egide, Chairman of the Board and Chief
Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James A. Egide Director and Chairman September 27, 1999
- -------------------------------- of the Board and Chief Operating
James A. Egide Officer
/s/ Raymond J. Pittman Director and Senior Vice President - September 27, 1999
- -------------------------------- Public Relations
Raymond J. Pittman
/s/ Mitchell L. Edwards Director, Executive Vice President, September 27, 1999
- -------------------------------- and Chief Financial Officer
Mitchell L. Edwards
- -------------------------------- President September 27, 1999
Don Marshall
/s/ Allan Grosh Director and Chief Operating Officer, September 27, 1999
- --------------------------------
Allan Grosh
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Glen Hartman Director September 27, 1999
- --------------------------------
Glen Hartman
Director September 27, 1999
- --------------------------------
Kenneth Woolley
/s/ Michael D. Bard Controller September 27, 1999
- --------------------------------
Michael D. Bard
</TABLE>
Exhibit 21.1
DIGITAL COURIER TECHNOLOGIES, INC.
Subsidiaries of the Registrant
The Company has three wholly owned operating subsidiaries; namely,
Access Services, Inc., SB.com, Inc. and WeatherLabs, Inc. Access
Services, Inc. is a Georgia corporation. SB.com, Inc. is a Florida
corporation. WeatherLabs, Inc is an Illinois corporation.
Exhibit 22.0
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated September 10, 1998 included in
Company's Form 10-K for the year ended June 30, 1999, into the
Company's previously filed Registration Statement File No. 333-51183.
Arthur Andersen LLP
Salt Lake City, Utah
October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2381356
<SECURITIES> 0
<RECEIVABLES> 682996
<ALLOWANCES> 32900
<INVENTORY> 0
<CURRENT-ASSETS> 5444338
<PP&E> 7312770
<DEPRECIATION> 3604888
<TOTAL-ASSETS> 47375747
<CURRENT-LIABILITIES> 5367376
<BONDS> 432704
0
3600000
<COMMON> 1856
<OTHER-SE> 37973811
<TOTAL-LIABILITY-AND-EQUITY> 47375747
<SALES> 3970641
<TOTAL-REVENUES> 3970641
<CGS> 2562371
<TOTAL-COSTS> 2562371
<OTHER-EXPENSES> 9278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371703
<INCOME-PRETAX> (21364713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21364713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21364713)
<EPS-BASIC> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
