SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 Heber Avenue, Suite 204
P.O. Box 8000
Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(435) 655-3617
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The Registrant has
two classes of stock issued and outstanding, Common Stock with $.0001 par value,
of which 13,989,982 shares were issued and outstanding and Series A Convertible
Preferred Stock with a stated value of $10,000 per share, of which 360 shares
were issued and outstanding as of April 30, 1999.
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,139,339 $ 3,211,724
Trade accounts receivable 142,175 16,459
Receivable from Focus Direct, Inc. 700,000 --
Receivable from Gannaway, Inc. 200,000 --
Prepaid advertising 1,146,922 675,000
Prepaid software lease 628,861 --
Inventory -- 21,046
Current portion of AOL anchor tenant placement costs 87,004 3,237,281
Other current assets 506,801 118,721
------------ ------------
Total current assets 5,551,102 7,280,231
------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,196,136 6,225,817
Furniture, fixtures and leasehold improvements 989,972 777,419
------------ ------------
7,186,108 7,003,236
Less accumulated depreciation and amortization (3,225,223) (2,109,736)
------------ ------------
Net property and equipment 3,960,885 4,893,500
------------ ------------
GOODWILL, net of accumulated amortization of $1,686,824 and $76,699,
respectively 11,746,382 1,441,459
------------ ------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of current portion -- 8,136,841
------------ ------------
RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL, INC -- 810,215
------------ ------------
OTHER ASSETS 784,900 1,458,500
------------ ------------
$ 22,043,269 $ 24,020,746
============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 1,090,487 $ 1,006,906
Notes payable 1,121,828 100,000
Accounts payable 256,950 1,458,598
Accrued rental payments for vacated facilities 267,483 544,014
Other accrued liabilities 508,912 531,400
------------ ------------
Total current liabilities 3,245,660 3,640,918
------------ ------------
CAPITAL LEASE OBLIGATIONS, net of current portion 720,715 1,384,132
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares authorized, 360 shares of Series A
convertible issued and outstanding 3,600,000 --
Common stock, $.0001 par value; 50,000,000 shares authorized, 13,989,211
and 8,268,489 shares outstanding, respectively 1,399 827
Additional paid-in capital 45,982,483 31,196,354
Warrants outstanding 923,100 2,519,106
Receivable to be settled through the repurchase of
common shares by the Company -- (148,576)
Stock subscription receivable (12,000) --
Accumulated deficit (32,418,088) (14,572,015)
------------ ------------
Total stockholders' equity 18,076,894 18,995,696
------------ ------------
$ 22,043,269 $ 24,020,746
============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------- -----------
NET SALES $ 464,300 $ 385,671
COST OF SALES 255,771 258,144
----------- -----------
Gross margin 208,529 127,527
----------- -----------
OPERATING EXPENSES:
Depreciation and amortization 1,109,614 372,971
General and administrative 1,043,002 753,208
Research and development 496,578 454,218
Selling 463,289 188,861
AOL interactive marketing contract costs 52,202 --
----------- -----------
Total operating expenses 3,164,685 1,769,258
----------- -----------
OPERATING LOSS (2,956,156) (1,641,731)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 19,583 27,140
Loss on dispositions of equipment (58,109) --
Interest expense (128,163) (53,537)
----------- -----------
Other expense, net (166,689) (26,397)
----------- -----------
LOSS BEFORE INCOME TAXES (3,122,845) (1,668,128)
INCOME TAX BENEFIT -- 2,733,829
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,122,845) 1,065,701
----------- -----------
See accompanying notes to condensed consolidated
financial statements.
4
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
--------------- -----------
<S> <C> <C>
DISCONTINUED OPERATIONS:
Loss from operations of discontinued direct mail advertising operations,
net of income tax benefit of $30,329 $ -- $ (50,548)
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 $12,419 -- (20,698)
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 -- 232,911
--------------- -----------
INCOME FROM DISCONTINUED OPERATIONS -- 4,556,382
--------------- -----------
NET INCOME (LOSS) $ (3,122,845) $ 5,622,083
=============== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations:
Basic $ (0.22) $ 0.12
Diluted $ (0.22) $ 0.12
=============== ===========
Income from discontinued operations:
Basic $ -- $ 0.52
Diluted $ -- $ 0.52
=============== ===========
Net income (loss):
Basic $ (0.22) $ 0.64
Diluted $ (0.22) $ 0.64
=============== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 14,166,766 8,763,505
Diluted 14,166,766 8,832,086
=============== ===========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
5
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
NET SALES $ 1,218,234 $ 405,158
COST OF SALES 727,582 323,201
------------ ------------
Gross margin 490,652 81,957
------------ ------------
OPERATING EXPENSES:
AOL interactive marketing contract costs 5,208,337 --
Acquired in-process research and development 3,700,000 --
Depreciation and amortization 2,932,179 1,157,692
General and administrative 2,566,998 1,727,350
Selling 2,503,883 1,167,222
Research and development 1,379,244 1,301,285
------------ ------------
Total operating expenses 18,290,641 5,353,549
------------ ------------
OPERATING LOSS (17,799,989) (5,271,592)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 45,979 115,823
Gain on sale of WorldNow assets 308,245 --
Loss on dispositions of equipment (136,660) --
Interest expense (263,648) (108,746)
------------ ------------
Other income (expense), net (46,084) 7,077
------------ ------------
LOSS BEFORE INCOME TAXES (17,846,073) (5,264,515)
INCOME TAX BENEFIT -- 2,684,000
------------ ------------
LOSS FROM CONTINUING OPERATIONS (17,846,073) (2,580,515)
------------ ------------
See accompanying notes to condensed consolidated
financial statements.
6
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
--------------- -----------
<S> <C> <C>
DISCONTINUED OPERATIONS:
Income from operations of discontinued direct mail advertising
operations, net of income tax provision of $66,827 $ -- $ 111,377
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 -- (265,674)
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 -- 232,911
--------------- -----------
INCOME FROM DISCONTINUED OPERATIONS -- 4,473,331
--------------- -----------
NET INCOME (LOSS) $ (17,846,073) $ 1,892,816
=============== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Loss from continuing operations:
Basic $ (1.44) $ (0.30)
Diluted $ (1.44) $ (0.29)
=============== ===========
Income from discontinued operations:
Basic $ -- $ 0.52
Diluted $ -- $ 0.50
=============== ===========
Net income (loss):
Basic $ (1.44) $ 0.22
Diluted $ (1.44) $ 0.21
=============== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,354,627 8,660,717
Diluted 12,354,627 8,862,132
=============== ===========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
7
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
Increase (Decrease) in Cash
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(17,846,073) $ 1,892,816
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Amortization and write-off of AOL anchor tenant placement
costs 5,208,337 --
Gain on sale of direct mail marketing and Internet service
operations -- (7,404,205)
Acquired in-process research and development 3,700,000 --
Depreciation and amortization 2,932,179 1,157,692
Issuance of common stock and warrants in connection with
@Home agreement 1,110,307 --
Issuance of common stock for settlement with former
shareholders of Books Now, Inc. 1,051,558 --
Gain on sale of WorldNow assets (308,245) --
Loss on dispositions of equipment 136,660 11,196
Stock issued in lieu of compensation -- 61,250
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (125,716) 98,563
Receivable from Gannaway, Inc. (178,172) --
Inventory 21,046 193,886
Prepaid advertising (471,922) --
Prepaid software leases (628,861) --
Other assets (456,438) (307,023)
Accounts payable (1,370,143) (805,328)
Accrued liabilities (73,488) (170,570)
Accrued rental payments for vacated facilities (276,531) --
------------ ------------
Net cash used in operating activities (7,575,502) (5,271,723)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Digital Courier International, Inc. (849,203) --
Purchase of property and equipment (745,190) (802,414)
Net cash proceeds from sale of WorldNow assets 286,418 --
Increase in investments -- (750,000)
Proceeds from sale of equipment 76,225 20,938
------------ ------------
Net cash used in investing activities (1,231,750) (1,531,476)
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
8
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
Increase (Decrease) in Cash
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common and convertible
preferred stock $ 6,524,000 $ --
Net proceeds from sale of direct mail marketing and Internet services
operations -- 6,857,300
Net proceeds from borrowings 1,000,000 86,000
Net proceeds from issuance of common stock upon exercise of
stock options 943,750 22,418
Net proceeds from sale and lease back of equipment -- 2,750,000
Principal payments on capital lease obligations (579,836) (429,346)
Principal payments on borrowings (153,047) (288,812)
Acquisition of common stock -- (200,000)
----------- -----------
Net cash provided by financing activities 7,734,867 8,797,560
----------- -----------
NET DECREASE IN CASH (1,072,385) 1,994,361
CASH AT BEGINNING OF PERIOD 3,211,724 4,952,274
----------- -----------
CASH AT END OF PERIOD $ 2,139,339 $ 6,946,635
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 259,969 $ 108,746
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
9
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of March 31,
1999 and for the three and nine months ended March 31, 1999 and 1998 are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation have been
included. The financial statements are condensed and, therefore, do not include
all disclosures normally required by generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998. The results of operations for the three
and nine months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire fiscal year ending June 30, 1999. Certain
previously reported amounts have been reclassified to conform to the current
period presentation. These reclassifications had no affect on the previously
reported net income (loss).
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
Books Now, Inc.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. ("Books Now"), a seller of books through advertisements in
magazines and over the Internet. The shareholders of Books Now received 100,000
shares of the Company's common stock valued at $312,500 and an earn-out of up to
262,500 additional common shares. The issuance of the common shares was recorded
at the quoted market price on the date of acquisition.
The acquisition was accounted for as a purchase and the results of
operations of Books Now are included in the accompanying condensed consolidated
financial statements since the date of acquisition. The tangible assets acquired
included $261 of cash, $21,882 of inventory and $50,000 of equipment.
Liabilities assumed included $112,335 of notes payable, $24,404 of capital lease
obligations and $239,668 of accounts payable and accrued liabilities. The excess
of the purchase price over the estimated fair market value of the acquired
assets of $616,764 was recorded as goodwill and is being amortized over a period
of five years.
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
10
<PAGE>
$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, Inc.
On March 17, 1998, the Company entered into a Stock Exchange Agreement
to acquire all of the outstanding stock of WeatherLabs, Inc. ("WeatherLabs"),
one of the leading providers of weather and weather-related information on the
Internet. The acquisition was closed in May 1998. At closing, the shareholders
of WeatherLabs were issued 253,260 shares of the Company's common stock valued
at $762,503. The issuance of the common shares was recorded at the quoted market
price on the date of acquisition. These shareholders are entitled to receive a
total of 523,940 additional shares over the next three years subject to changes
in the stock price of the Company's common stock, as defined, at the end of each
of the Company's next three fiscal years.
The acquisition was accounted for as a purchase and the results of
operations of WeatherLabs are included in the accompanying condensed
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $3,716 of cash, $19,694 of accounts receivable,
$115,745 of equipment and $13,300 of deposits. Liabilities assumed included
$100,000 of notes payable, $56,902 of capital lease obligations and $134,444 of
accounts payable and accrued liabilities. The excess of the purchase price over
the estimated fair market value of the acquired assets of $901,394 was recorded
as goodwill and is being amortized over a period of five years.
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange
Agreement (the "Exchange Agreement") with Digital Courier International, Inc., a
Nevada corporation ("DCII"). Pursuant to the Exchange Agreement, the Company
agreed to issue 4,659,080 shares of its common stock 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 condensed
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
11
<PAGE>
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 performance requirements. Management estimates that
approximately $4,000,000 will be required over the next 12 to 18 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
12
<PAGE>
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.
Unaudited Pro Forma Data for Acquisitions of Continuing Operations
The unaudited pro forma results of operations of the Company for the
nine months ended March 31, 1999 and the three and nine months ended March 31,
1998 (assuming the acquisitions of Books Now, WeatherLabs and DCII had occurred
as of July 1, 1997 and excluding the write off of acquired in-process research
and development of $3,700,000 in connection with the DCII acquisition) are as
follows:
<TABLE>
<CAPTION>
1999 1998 1998
---- ---- ----
Nine Months Ended Three Months Ended Nine Months Ended
----------------- ------------------ -----------------
<S> <C> <C> <C>
Net sales $ 1,218,234 $ 452,271 $ 818,346
Loss from continuing
operations (15,023,988) (2,589,878) (6,683,895)
Loss per share from
continuing operations (1.10) (0.19) (0.49)
</TABLE>
13
<PAGE>
Access Services, Inc.
On April 1, 1999, the Company entered into an Agreement to acquire all
of the outstanding stock of Access Services, Inc. ("Access Services"), a credit
card processing company. The acquisition was closed in April 1999. At closing,
the shareholders of Access Services were issued 300,000 shares of the Company's
common stock valued at $1,631,400, $75,000 in cash and warrants to purchase
100,000 shares of the Company's common stock at $5.50 per share.The acquisition
will be accounted for as a purchase.
Sisna, Inc.
On January 8, 1997, the Company completed the acquisition of Sisna,
Inc. ("Sisna") pursuant to an Amended and Restated Agreement and Plan of
Reorganization (the "Agreement"). Pursuant to the Agreement, the Company issued
325,000 shares of its common stock 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 three-year
employment agreements with four of Sisna's key employees and shareholders. The
four employment agreements provided for aggregate base annual compensation of
$280,000. The employment agreements also provided for aggregate bonuses of
$500,000, which were paid as of the date of the acquisition. These bonuses were
earned and expensed as the employees completed certain computer installations.
The employment agreements also included noncompetition provisions for periods
extending three years after the termination of employment with the Company.
In March 1998, the Company sold the operations of Sisna to Mr. 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 Henry Smith abstaining.
The operations of Sisna have been reflected in the accompanying
condensed consolidated financial statements for the period July 1, 1997 through
March 31, 1998 as discontinued operations. The Sisna revenues were $143,982 and
14
<PAGE>
$555,685 and the loss from operations was $33,117 and $425,078 during the three
and nine months ended March 31, 1998, respectively.
Sale of Direct Mail Advertising Operations
In March 1998, the Company sold its direct mail advertising operations
to Focus Direct, an unrelated Texas corporation. Pursuant to the asset purchase
agreement, Focus Direct purchased all assets, properties, rights, claims and
goodwill, of every kind, character and description, tangible and intangible,
real and personal wherever located of the Company used in the Company's direct
mail operations. Focus Direct also agreed to assume certain liabilities of the
Company related to the direct mail advertising operations. Pursuant to the
agreement, Focus Direct agreed to pay the Company $7,700,000 for the above
described net assets. Focus Direct paid the Company $6,900,000 at closing and
will pay 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. This sale resulted in
a pretax gain of $7,031,548. The purchaser acquired tangible assets consisting
of approximately $495,000 of accounts receivable, $180,000 of inventory,
$575,000 of furniture and equipment, and $10,000 of other assets, and assumed
liabilities of approximately $590,000 of accounts payable and $320,000 of other
accrued liabilities.
The direct mail advertising operations have been reflected as
discontinued operations in the accompanying condensed consolidated financial
statements for the three and nine month periods ended March 31, 1998. The direct
mail advertising revenues were $2,028,430 and $7,508,212 and the pretax income
(loss) from operations was $(80,877) and $178,204 during the three and nine
months ended March 31, 1998, 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.
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NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share ("Diluted EPS")
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net loss per common share.
Options to purchase 679,793 and 1,340,000 shares of common stock at
weighted average exercise prices of $4.36 and $5.70 per share as of March 31,
1999 and 1998, respectively, warrants to purchase 1,935,000 shares of common
stock at a weighted average exercise price of $7.21 per share as of March 31,
1999 and 360 shares of Series A preferred stock convertible to 800,000 shares of
common stock at $4.50 per share as of March 31, 1999 were not included in the
computation of Diluted EPS. The inclusion of the options, warrants and preferred
stock would have been antidilutive, thereby decreasing net loss per common
share. As of March 31, 1999, the Company has agreed to issue up to an additional
523,940 shares of common stock in connection with the acquisition of WeatherLabs
(see Note 2), contingent on the future price of the Company's common stock.
These contingent shares have also been excluded from the computation of diluted
EPS.
NOTE 4 - CONTENT LICENSE AND DISTRIBUTION AGREEMENT WITH AT
HOME CORPORATION
On July 10, 1998, the Company entered into a Content License and
Distribution Agreement with At Home Corporation ("@Home") for an initial term of
36 months. Under this agreement, the Company has agreed to: (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 $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.
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The Company made a cash payment to @Home of $266,000 upon execution of
the ag reement 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, $1,146,922 has been recorded as prepaid advertising expense
as of March 31, 1999 and will be expensed as advertising services are provided.
NOTE 5 - EQUITY AND DEBT FINANCING
On October 22, 1998, the Company borrowed $1,200,000 from a group of
individual lenders (the "Loan"). The annual interest rate on the Loan is 24% and
the Loan is secured by receivables owed to the Company. The maturity date of the
Loan is October 22, 1999. It may be prepaid without penalty any time after
February 22, 1999. In connection with the Loan, the Company paid a finders fee
of $27,750 and issued two-year warrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share. The finders fee and the
fair market value of the two-year warrants have been capitalized and are being
amortized over the life of the loan.
On November 24, 1998, the Company raised $1.8 million by selling its
common stock and warrants to purchase common stock to The Brown Simpson
Strategic Growth Funds (the "Purchasers") pursuant to a Securities Purchase
Agreement between the Company and the Purchasers (the "Purchase Agreement"). On
December 2, 1998, the Company sold an additional $1.8 million of common stock to
the Purchasers and amended the Purchase Agreement and related documents (the
"Amended Agreements").
Pursuant to the Purchase Agreement and Amended Agreements, the
Purchasers acquired 800,000 shares of the Company's common stock and five-year
warrants to purchase 800,000 additional shares ("Tranche A"). The exercise price
for 400,000 of the warrants is $5.53 per share and the exercise price of the
remaining 400,000 warrants is $9.49 per share. The exercise price of the
warrants is subject to adjustment on the six month anniversary of each
respective closing to the lesser of the initial exercise price and the average
price of the Company's common stock during any five consecutive business days
during the 22 business days ending on such anniversary of the closing. The
warrants are callable by the Company if for 15 consecutive trading days, the
closing bid price of the Company's stock is at least two times the then-current
exercise price. Because the shares acquired by the purchasers were priced at a
10% discount from the quoted market price no value has been allocated to the
warrants.
The Amended Agreements also required the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
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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. The
commitment to purchase the Tranche B Units was subsequently terminated (see
discussion below).
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 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 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 disclosed.
The Company filed an S-3 registration statement on December 11, 1998,
which was amended on February 12, 1999 and May 5, 1999, with the Securities and
Exchange Commission covering all of the shares of common stock sold to the
Purchasers as well as the shares of common stock underlying the related warrants
and preferred stock. The registration statement has yet to become effective.
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NOTE 6 - MODIFICATION TO AMERICA ONLINE CONTRACT
Effective June 1, 1998, the Company entered into a marketing agreement
with America Online ("AOL"), which gave the Company "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 the 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
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 will 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 will
cease immediately, but the Company will continue 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.
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 value of the permanent location
of the Shopping channel for 8 months, was written off as of December 31, 1998. A
portion of the write-off was offset by recording the return of the 601,610
shares of common stock, which had a fair market value of $4,549,676 as of the
date the agreement was terminated, and by recording the cancellation of the
warrants which had a recorded value of $2,519,106 as of December 31, 1998. This
resulted in a net write-off of $52,202 during the three months ended March 31,
1999 and $5,208,337 during the nine months ended March 31, 1999.
NOTE 7 - 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.
Under the agreement the Company has agreed to pay ACI approximately $5,979,000
during the life of the contract. The Company made a payment of approximately
$629,000 upon signing the contract and is 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.
The payments made under the agreement will be expensed ratably over the term of
the agreement. The initial payment of approximately $629,000 was recorded as
prepaid software lease in the accompanying March 31, 1999 balance sheet.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and
referred to herein as "DCTI" or the "Company") is developing and marketing
proprietary electronic commerce software and technologies and online information
services for a variety of computer platforms and hand-held computing devices
connected to the Internet. The core technology is organized into three product
groups which include: a suite of electronic commerce tools for building Internet
storefronts designed for retailing a wide variety of consumer and business
products; a distributed content publishing software suite that allows businesses
to creatively deliver information services across the Internet as well as
wireless networks; and a transaction software suite that incorporates a complete
Internet payment processing system to streamline credit card transactions over
the Internet. The Company utilizes its software suites to host and deliver
information services and e-commerce tools to major businesses, Internet portals,
and financial institutions on the Internet. The Company also licenses the
software. The Company's sophisticated software and technology is currently used
by major portals such as Excite, Netscape and America Online, as well as by the
Company's own prominent group of Web-sites including www.weatherlabs.com and
www.videosnow.com.
The Company began operations in 1987 to provide highly targeted
business to consumer advertising through direct mail. Since the Company's
founding, the direct mail marketing business had provided substantially all of
the Company's revenues. The direct mail marketing business was sold in March
1998 and its results of operations for the applicable periods in fiscal 1998 are
classified as discontinued operations in the accompanying condensed consolidated
financial statements.
In fiscal 1994, the Company began developing its own proprietary
websites. Since fiscal 1994, the Company has devoted significant resources
towards the development and launch of these websites.
The Company's four operating divisions include netClearing(TM),
WeatherLabs(TM), Videos Now(TM), and Books Now(TM). The netClearing division
utilizes both the e-commerce tools and the transaction software suite to provide
a complete electronic commerce package for conducting business and facilitating
credit card payment processing over the Internet. The WeatherLabs division
supplies proprietary real-time weather information to online businesses
throughout the world, and hosts its own web site for consumers and business
customers. Videos Now and Books Now utilize the Company's software suites to
operate e-commerce web sites that sell media products such as videos, movies,
LaserDiscs, DVDs, and books to consumers and online businesses. The Company sold
its WorldNow Online Network television affiliate website and certain related
assets in July 1998.
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The Company's content and commerce software is designed to be
co-branded or private labeled by its customers. This approach enables the
Company's customers and partners to brand their own sites and products and build
additional value into their online presence with the use of the Company's
technology. The Company believes that significant revenue opportunities exist
for all of its divisions in the rapidly expanding e-commerce sector of the
Internet industry.
In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an
Internet service provider headquartered in Salt Lake City, Utah, for an
acquisition price of $2,232,961. In December 1997, the Board of Directors
reviewed the performance of Sisna in conjunction with a review of the strategic
opportunities available to the Company. Among the conclusions of the Board were
the following: (a) The Internet service provider 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.
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 for the applicable periods in fiscal 1998 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
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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 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.
Results of Operations
Three months ended March 31, 1999 compared with three months ended March 31,
1998, and nine months ended March 31, 1999 compared with nine months ended March
31, 1998.
Net Sales
Net sales for the three months ended March 31, 1999 were $464,300 as
compared to $385,671 for the three months ended March 31, 1998. Books Now's
operations, which were acquired in January 1998, and WeatherLabs' operations,
which were acquired in May 1998, accounted for $230,426 and $143,731 of total
net sales for the three months ended March 31, 1999, respectively. Net sales of
videos from the Company's Videos Now site, which was launched in November 1998
accounted for $64,643 of total net sales for the three months ended March 31,
1999. Net sales for the three months ended March 31, 1999 also included $25,500
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of technical support services revenue. Net sales for the three months ended
March 31, 1998 were $385,671. During the three months ended March 31, 1998,
Books Now accounted for $141,160 of the net sales and a one time sale of a
turn-key Internet computer system accounted for $240,854. Net sales from
WorldNow Online during the three months ended March 31, 1998 were $3,657.
Net sales for the nine months ended March 31, 1999 were $1,218,234 as
compared to $405,158 for the nine months ended March 31, 1998. Books Now's
operations, which were acquired in January 1998, and WeatherLabs' operations,
which were acquired in May 1998, accounted for $782,033 and $284,438 of total
net sales for the nine months ended March 31, 1999, respectively. Net sales of
videos from the Company's Videos Now site, which was launched in November 1998,
accounted for $111,161 of total net sales for the nine months ended March 31,
1999. Net sales for the nine months ended March 31, 1999 also included $40,468
of technical support services revenue. WorldNow advertiser and subscriber sales
accounted for $134 of net sales for the nine months ended March 31, 1999. During
the nine months ended March 31, 1998, Books Now accounted for $141,160 of net
sales and a one time sale of a turn-key Internet computer system accounted for
$240,854. Net sales from WorldNow Online during the nine months ended March 31,
1998 were $23,144.
Cost of Sales
Cost of sales for the three months ended March 31, 1999 were $255,771
or 55.1% of net sales. Cost of sales for the three months ended March 31, 1998
were $258,144 or 66.9% of net sales. The change in cost of sales as a percent of
net sales is due to the change in products and services.
Cost of sales for the nine months ended March 31, 1999 were $727,582 or
59.7% of net sales. Cost of sales for the nine months ended March 31, 1998 were
$323,201 or 79.8% of net sales. The change in cost of sales as a percent of net
sales is due to the change in products and services.
Operating Expenses
During the three months ended March 31, 1999, the Company incurred
$52,202 of advertising expense associated with the permanent placement on the
AOL shopping channel. During the nine months ended March 31, 1999, the Company
incurred total expenses of $5,208,337 associated with the AOL contract, $52,202
of advertising expense associated with the permanent placement on the AOL
shopping channel and $5,156,135 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 Company "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
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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
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 will return 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 continues 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.
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 value of the permanent location
on the shopping channel for 8 months, should be written off as of December 31,
1998. A portion of the write-off has been offset by recording the return of the
601,610 shares of common stock, which had a quoted market price of $4,549,676 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 $5,156,135 during the nine months ended March 31, 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").
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 2 to the condensed consolidated financial
statements).
Depreciation and amortization expense increased 197.5% to $1,109,614
during the three months ended March 31, 1999 from $372,971 during the three
months ended March 31, 1998. The increase in depreciation and amortization
expense was due to: (1) the equipment acquired in connection with the
WeatherLabs and Books Now acquisitions, (2) the acquisition of new equipment to
support the Company's online operations and (3) the amortization of goodwill
related to the acquired companies.
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Depreciation and amortization expense increased 153.3% to $2,932,179
during the nine months ended March 31, 1999 from $1,157,692 during the nine
months ended March 31, 1998. The increase in depreciation and amortization
expense was due to: (1) the equipment acquired in connection with the
WeatherLabs and Books Now acquisitions, (2) the acquisition of new equipment to
support the Company's online operations and (3) the amortization of goodwill
related to the acquired companies.
General and administrative expense increased 38.5% to $1,043,002 during
the three months ended March 31, 1999 from $753,208 during the three months
ended March 31, 1998. The increase in general and administrative expense was due
to the addition of administrative and support staff and facilities costs
associated with the DCII acquisition offset by the reduction of administrative
and support staff associated with WorldNow Online.
General and administrative expense increased 48.6% to $2,566,998 during
the nine months ended March 31, 1999 from $1,727,350 during the nine months
ended March 31, 1998. The increase in general and administrative expense was due
to the addition of administrative and support staff and facilities costs
associated with the DCII acquisition offset by the reduction of administrative
and support staff associated with WorldNow Online.
Selling expense increased 145.3% to $463,289 during the three months
ended March 31, 1999 from $188,861 during the three months ended March 31, 1998.
The increase in selling expense is attributable to selling expense related to
Books Now, WeatherLabs, and Videos Now, and $114,693 of advertising expense
associated with the @ Home contract, offset by the decreased emphasis on
WorldNow Online activities.
Selling expense increased 114.5% to $2,503,883 during the nine months
ended March 31, 1999 from $1,167,222 during the nine months ended March 31,
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 2 to the
condensed consolidated financial statements) and $229,385 of advertising expense
associated with the @ Home contract, offset by the decreased emphasis on
WorldNow Online activities.
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
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site. The Company is to receive 40 percent of the net advertising revenue
generated from Weather@Home on the @Home Network. The Company will retain all of
the advertising revenue generated on the co-branded Weather@Home site. Included
in selling expense for the three and nine months ended March 31, 1999 is
$114,693 and $229,385, respectively, related to the @Home agreement.
Research and development expense increased 9.3% to $496,578 during the
three months ended March 31, 1999 from $454,218 during the three months ended
March 31, 1998. Research and development expense increased because of the
acquisition of DCII which is performing significant research and development
activities in the areas of Videos Now, netClearing, and WeatherLabs. Research
and development expense during the three months ended March 31, 1998 was
principally for the WorldNow Online operations.
Research and development expense increased 6.0% to $1,379,244 during
the nine months ended March 31, 1999 from $1,301,285 during the nine months
ended March 31, 1998. Research and development expense increased because of the
acquisition DCII which is performing significant research and development
activities in the areas of Videos Now, netClearing, and WeatherLabs. Research
and development expense during the nine months ended March 31, 1998 was
principally for the WorldNow Online operations.
Discontinued Operations
During the fiscal year ended June 30, 1998, the Company sold its direct
mail advertising and Internet service provider operations. The results from both
of these operations are presented as discontinued operations. During the three
months ended March 31, 1998, pretax loss from the direct mail advertising
operations was $80,877. During the three months ended March 31, 1998, the
Internet service provider operations incurred a pretax loss of $33,117. During
the three months ended March 31, 1998, the Company sold its direct mail
advertising operations and its Internet service provider operations for pretax
gains of $7,031,548 and $372,657, respectively.
During the nine months ended March 31, 1998, pretax income from the
direct mail advertising operations was $178,204. During the nine months ended
March 31, 1998, the Internet service provider operations incurred a pretax loss
of $425,078. During the nine months ended March 31, 1998, the Company sold its
direct mail advertising operations and its Internet service provider operations
for pretax gains of $7,031,548 and $372,657, respectively.
26
<PAGE>
Liquidity and Capital Resources
In order to fund the costs of developing and launching WorldNow Online,
in March 1996, the Company began a private placement to major institutions and
other accredited investors (the "March 96 Placement"). The Company completed the
March 96 Placement for net proceeds of $16,408,605 during fiscal year 1997,
including the exercise of warrants.
In October 1997, the Company entered into a sale and three-year capital
leaseback agreement related to $3,000,000 of the Company's computer equipment.
The agreement provided that $250,000 of the proceeds be placed in escrow upon
signing the agreement. The Company sold its equipment at book value resulting in
no deferred gain or loss on the transaction.
In March 1998, the Company sold the net assets of DataMark Systems,
Inc., its direct mail marketing subsidiary. To date, the Company has received
$6,857,300 from the sale of these net assets and is scheduled to receive an
additional $700,000 in June 1999.
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.
On June 1, 1998, the Company entered into a 39 month Interactive
Marketing Agreement with AOL, wherein the Company agreed to pay AOL $12,000,000
in cash. The Company made a cash payment to AOL of $1,200,000 in July 1998,
failed to make the scheduled payment to AOL of $4,000,000 prior to January 1,
1999, and was scheduled to make payments to AOL of $4,000,000 prior to July 1,
1999 and $2,800,000 prior to January 1, 2000. On February 1, 1999, the Company
entered into a Termination, Release and Transition Agreement with AOL, under
which the future cash payments have been terminated and AOL will return 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. The Company has have no further financial obligations to AOL (see
Note 6 to the condensed consolidated financial statements).
On July 10, 1998, the Company entered into a 36 month content license
and distribution agreement with @Home, wherein the Company has agreed to pay
@Home $800,000 in cash. The Company made a cash payment to @Home of $266,000 in
July 1998, and is scheduled to make payments to @Home of $267,000 in July 1999
and $267,000 in July 2000.
On October 22, 1998, the Company 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 certain receivables of 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 warrrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share.
27
<PAGE>
On November 24, 1998, the Company raised $1,800,000 by selling 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 for 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 or 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 common stock is at least two times the
then-current exercise price.
The Amended Agreements also required the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 800,000 units, each unit consisting of one share of the Company's
common stock and a warrant to purchase one share of common stock (the "Tranche B
Units"), if certain conditions are met. A condition to the sale of the Tranche B
Units, among others, is that the closing bid price of the Company's common stock
be more than $7 per share for 15 consecutive trading days. The price for a
Tranche B Unit is $7 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
common 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 $3.6 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 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 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 or the average price of the Company's
common stock during any five consecutive business days during the 22 business
28
<PAGE>
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 one share 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.
The Company filed an S-3 registration statement on December 11, 1998,
which was amended on February 12, 1999 and May 5, 1999, with the Securities and
Exchange Commission covering all of the shares of common stock sold to the
Purchasers as well as the shares of common stock underlying the related warrants
and preferred stock. The registration statement has yet to become effective.
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.
Under the agreement the Company has agreed to pay ACI approximately $5,979,000
during the life of the contract. The Company made a payment of approximately
$629,000 upon signing the contract and is 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.
Operating activities used $7,575,502 during the nine months ended March
31, 1999 compared to $5,271,723 during the nine months ended March 31, 1998. The
net cash used for operating activities during the nine months ended March 31,
1999 was principally attributable to the payments made to AOL of $1,200,000 and
@Home of $266,000 and $6,109,502 for other operating expenses.
Cash used in investing activities was $1,231,750 and $1,531,476 during
the nine months ended March 31, 1999 and 1998, respectively. During the nine
months ended March 31, 1999, the Company's investing activities included cash
advances for operating activities to DCII of $849,203 and the acquisition of
equipment for $745,190 offset by the receipt of cash proceeds from the sale of
WorldNow assets of $286,418 and the net proceeds from the sale of equipment of
$76,225. During the nine months ended March 31, 1998, the Company's investing
activities included the acquisition of equipment for $802,414, an investment in
CommTouch, Ltd of $750,000, offset by proceeds of $20,938 from the sale of
equipment.
29
<PAGE>
Cash provided from financing activities was $7,734,867 during the nine
months ended March 31, 1999 as compared to $8,797,560 during the nine months
ended March 31, 1998. The cash provided during the nine months ended March 31,
1999 was attributable to the receipt of net proceeds from the issuance of common
shares and convertible preferred shares of $6,524,000, borrowings of $1,000,000
and proceeds from the issuance of common stock upon the exercise of stock
options of $943,750, offset by principal repayments on capital lease obligations
of $579,836 and repayments against borrowings of $153,047. The cash received
during the nine months ended March 31, 1998 was attributable to the net proceeds
from the sale of the direct mail marketing and Internet services operations of
$6,857,300, the receipt of $2,750,000 from the sale and lease back of equipment,
borrowings of $86,000 and $22,418 from the issuance of common stock upon the
exercise of options, offset by repayments on capital lease obligations of
$429,346, principal repayments on borrowings of $288,812 and the acquisition of
the Company's common stock for $200,000.
Although the Company has recently completed several private placements
of equity securities, the full amount committed will only become available to
the Company upon the occurrence of certain conditions over which the Company may
have little or no control, such as the price of the Company's common stock. If
the Company does not receive the full amount committed, it may not have
sufficient cash flows from operating activities during the next 12 months to
provide the necessary capital to fully implement its marketing strategy or to
sustain operations at current levels. The Company is actively seeking additional
debt or equity funding. If adequate funding is not available, it may be required
to revise its plans and reduce future expenditures. As of March 31, 1999, the
Company had $2,139,339 of cash. The Company has incurred losses from continuing
operations of $5,597,967, $7,158,851 and $3,586,413 and the Company's operating
activities have used $6,377,970, $6,334,660 and $1,385,567 of cash during the
years ended June 30, 1998, 1997 and 1996, respectively. None of the Company's
continuing operations are generating positive cash flows. Additional funding
will be required before the Company's continuing operations will achieve and
sustain profitability, if at all. There can be no assurance that additional
funding will be available or, if available, that it will be available on
acceptable terms or in required amounts.
Year 2000 Issue
Computer systems, software applications, and microprocessor dependent
equipment may cease to function properly or generate erroneous data when the
year 2000 arrives. The problem affects those systems or products that are
programmed to accept a two-digit code in date code fields. To correctly identify
the year 2000, a four-digit date code field will be required to be what is
commonly termed "year 2000 compliant."
To date, the Company has invested approximately $60,000 in an effort to
certify all aspects of its business are year 2000 compliant. The areas of its
business which have been targeted for compliance testing are operations and
30
<PAGE>
software products and services. The Company conducted the certification process
over a three-month period in which all software products and service components
under direct control certified year 2000 compliant. For the operational
components and remaining software and services that are under the control of
third party organizations, the Company has sought their efforts to provide
written confirmation and evidence of compliance. The Company may realize
operational exposure and risk if the systems for which it is dependent upon to
conduct day-to-day operations are not year 2000 compliant. The potential areas
of software exposure include:
o electronic data exchange systems operated by third parties with whom
the Company transacts business,
o server software which the Company uses to present content and
advertising to its customers and partners, and
o computers, software, telephone systems and other equipment used
internally.
In October 1997, the Company initiated the review and assessment of all
of its computerized hardware and internal-use software systems to ensure that
such systems will function properly in the year 2000 and beyond. During the last
two years, its computerized information systems have been substantially upgraded
to be year 2000 compliant.
The Company has not yet developed a contingency plan in the event that
any non-compliant critical systems are not remedied by the year 2000, nor has it
formulated a timetable to create such a contingency plan. It is possible that
costs associated with year 2000 compliance efforts may exceed current
projections of an additional $40,000 to reach total compliance. In such a case,
these costs could have a material impact on the Company's financial position and
results of operations. It is also possible that if systems material to the
Company's operations have not been made year 2000 compliant, or if third parties
fail to make their systems compliant in a timely manner, the year 2000 issue
could have a material adverse effect on its business, financial condition, and
results of operations. This would result in an inability to provide functioning
software and services to the Company's clients in a timely manner, and could
then result in lost revenues from these clients, until such problems are
resolved by the Company or the responsible third parties.
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 sales, users or advertisers
anticipated, and (2) the costs to market the Company's Internet services.
31
<PAGE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Date: May 5, 1999 By /s/ Mitchell L. Edwards
-------------------------------------
Mitchell L. Edwards
Chief Financial Officer
32
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