SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
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(exact name of registrant as specified in its charter)
Delaware 87-0461856
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(801) 266-5390
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 No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The Registrant has
two classes of stock issued and outstanding, Common Stock with $.0001 par value,
of which 40,044,444 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 November 15, 2000.
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<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, June 30,
2000 2000
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 17,847,461 $ 7,382,773
Restricted cash 6,400,000 6,400,000
Trade accounts receivable 2,636,057 2,693,663
Deposit with payment processor 2,538,888 2,500,000
Receivable from payment processors 817,610 5,314,655
Current portion of prepaid software license 2,153,856 2,153,856
Prepaid expenses and other current assets 796,886 325,478
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Total current assets 33,190,758 26,770,425
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PROPERTY AND EQUIPMENT:
Computer and office equipment 9,160,332 8,519,923
Furniture, fixtures and leasehold improvements 1,253,827 1,204,231
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10,414,159 9,724,154
Less accumulated depreciation and amortization (5,618,605) (4,957,120)
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Net property and equipment 4,795,554 4,767,034
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GOODWILL AND OTHER INTANGIBLE ASSETS, net
of accumulated amortization of
$46,240,968 and $34,135,690, respectively
188,752,783 200,858,061
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PREPAID SOFTWARE LICENSE, net of current portion 5,384,640 5,923,104
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OTHER ASSETS 2,442,833 2,849,139
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$ 234,566,568 $ 241,167,763
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
<CAPTION>
DIGITIAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, June 30,
2000 2000
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(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable $ 1,150,000 $ 1,150,000
Current portion of capital lease obligations 59,064 347,156
Accounts payable 2,698,536 4,368,653
Settlements due to merchants 5,271,444 1,497,024
Merchant reserves 15,719,004 14,317,435
Software license payable -- 2,500,000
Accrued merchant payable 1,341,598 2,122,265
Accrued chargebacks 2,285,663 1,835,124
Deferred revenue 1,116,776 231,776
Other accrued liabilities 1,220,969 1,119,977
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Total current liabilities 30,863,054 29,489,410
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CAPITAL LEASE OBLIGATIONS, net of current portion 80,651 93,181
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STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares
authorized; 360 shares of Series A
convertible issued and outstanding 3,600,000 3,600,000
Common stock, $.0001 par value; 75,000,000
shares authorized, 48,682,066
and 47,682,066 shares
outstanding, respectively
4,868 4,768
Additional paid-in capital 281,568,740 277,018,140
Warrants outstanding 1,363,100 1,363,100
Subscriptions receivable (12,000) (12,000)
Accumulated deficit (82,901,845) (70,388,836)
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Total stockholders' equity 203,622,863 211,585,172
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$ 234,566,568 $ 241,167,763
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
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<S> <C> <C>
REVENUES $ 9,495,909 $ 2,832,929
COST OF REVENUES 6,153,625 1,346,794
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Gross margin 3,342,284 1,486,135
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OPERATING EXPENSES:
Depreciation and amortization 12,941,662 1,971,512
General and administrative 2,369,138 876,473
Selling 780,104 602,717
Research and development 444,948 576,219
Non-cash (income) expense related to the issuance
of stock and stock options (649,300) 7,293
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Total operating expenses 15,886,552 4,034,214
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OPERATING LOSS (12,544,268) (2,548,079)
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OTHER INCOME (EXPENSE):
Interest and other income 83,016 75,834
Interest and other expense (51,757) (139,174)
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Other income (expense), net 31,259 (63,340)
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LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (12,513,009) (2,611,419)
INCOME TAX BENEFIT -- --
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LOSS FROM CONTINUING OPERATIONS (12,513,009) (2,611,419)
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Continued)
(Unaudited)
2000 1999
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<S> <C> <C>
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
WeatherLabs operations $ -- $ (305,711)
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LOSS FROM DISCONTINUED OPERATIONS -- (305,711)
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NET LOSS $(12,513,009) $ (2,917,130)
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BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.26) $ (0.14)
Loss from discontinued operations -- (0.02)
Net Loss $ (0.26) $ (0.16)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 48,399,457 18,557,499
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
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<S> <C> <C>
NET LOSS $(12,513,009) $ (2,917,130)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gains arising
during the period on available
for sale securities -- 2,341,620
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COMPREHENSIVE LOSS $(12,513,009) $ (575,510)
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</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
Increase (Decrease) in Cash
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,513,009) $ (2,917,130)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,941,662 1,971,512
Non-cash (income) expense related to the
issuance of stock and stock options
(649,300) 7,292
Changes in operating assets and
liabilities, net of effect of
acquisitions and dispositions-
Receivable from payment processors 4,497,045 --
Trade accounts receivable 57,606 (666,348)
Deposit with payment processor (38,888) --
Prepaid expenses and other current assets (471,407) 41,502
Prepaid software license 538,464 225,864
Notes receivable (18,594) --
Net current assets of discontinued operations -- (55,788)
Other assets 231,406 49,663
Accounts payable (1,670,118) 163,931
Settlements due to merchants 3,774,420 --
Merchant reserves 1,401,569 --
Software license payable (2,500,000) --
Accrued merchant payable (780,667) --
Accrued chargebacks 450,539 --
Deferred revenue` 885,000 950,680
Other accrued liabilities 100,992 41,602
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Net cash provided by (used in) operating activities
6,255,314 (187,220)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (690,004) (62,397)
Decrease in net non-current
assets of discontinued operations -- 144,281
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Net cash (used in) provided by investing activities
(690,004) 81,884
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (300,622) (256,831)
Principal payments on borrowings -- (207,272)
Proceeds from issuance of common
stock from exercise of warrants 5,200,000 --
------------ ------------
Net cash provided by (used in) financing activities 4,899,378 (464,103)
------------ ------------
NET INCREASE (DECREASE) IN CASH 10,464,688 (569,439)
CASH AT BEGINNING OF PERIOD 7,382,773 2,381,356
------------ ------------
CASH AT END OF PERIOD $ 17,847,461 $ 1,811,917
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 13,341 $ 115,689
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of September 30, 2000
and for the three months ended September 30, 2000 and 1999 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, 2000. The results of operations for the three months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
entire fiscal year ending June 30, 2001. 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
DataBank International, Ltd.
As approved by the shareholders of the Company at a Special Shareholders Meeting
on October 5, 1999, the Company acquired all of the outstanding stock of
DataBank, a credit card processing company organized under the laws of St.
Kitts. On that date the shareholders of DataBank were issued 16,600,000 shares
of the Company's common stock valued at $88,195,800 (based on the quoted market
price of the Company's common stock on the date the Company and DataBank entered
into the merger agreement). If DataBank met certain performance criteria, as
defined in the acquisition documents, the Company would be required to issue up
to an additional 13,060,000 shares of common stock to the former shareholders of
DataBank. The acquisition of DataBank has been accounted for as a purchase and
the results of operations of DataBank are included in the accompanying condensed
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $515,674 of cash, $411,313 of receivables, and $185,000
of equipment. Expenses incurred in connection with the acquisition were $87,577.
Liabilities assumed consisted of $1,820,096 of accounts payable and accrued
liabilities.
The excess of the purchase price over the estimated fair market value of the
acquired net assets on October 5, 1999 of $88,991,486 has been recorded as
goodwill and is being amortized over a period of 5 years.
On January 13, 2000, the Board of Directors of the Company elected to issue the
13,060,000 contingent shares, in light of the achievement of performance
criteria, with an approximate 12.5% discount in the number of shares to the
former shareholders of DataBank. Therefore, the Company issued an additional
11,427,500 shares of the Company's common stock valued at $108,561,250 (based on
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the quoted market price of the Company's common stock on the date of the Board
of Directors meeting). This additional amount has been recorded as goodwill and
is being written off over 57 months beginning January 2000 (see Note 5).
Subsequent to the acquisition of DataBank, the Company became aware of an
additional $581,000 of liabilities related to DataBank's operations prior to the
acquisition (see Note 4). This additional amount has been recorded as an
adjustment to goodwill and is being amortized over the remainder of the five
year period.
MasterCoin
In April, 2000, the Company entered into agreements to purchase certain
software, a merchant portfolio, and certain equipment from various entities
referred to jointly as MasterCoin. The Company's Board of Directors approved a
total purchase price of $2.9 million for all of the assets to be acquired with
the assumption that Mr. James Egide, the then CEO and Chairman of the Company,
would negotiate the acquisition and allocate the total price among the assets
acquired.
The software, which will allow the Company to address the "Server Wallet" market
opportunity, was acquired through a Software Purchase and Sales Agreement with
MasterCoin, International, Inc. ("MCII") in exchange for $1,000,000 in cash. The
Company acquired all rights to MCII's e-commerce and e-cash software.
The owners of MCII included Don Marshall, President and Director of the Company.
Mr. Marshall did not accept any remuneration from the Company as a result of the
transaction.
Since the acquisition, the Company has invested an additional $165,000 to
complete the development of the software. Management believes the potential
market for the software is significant and intends to begin marketing the
software during fiscal 2001. The cost of the software and additional development
costs will be amortized over the life of the software which is estimated to be
three years.
The merchant portfolio was acquired through a Portfolio Purchase and Sale
Agreement with the Sellers who had developed and acquired the merchant portfolio
of MasterCoin of Nevis, Inc. and MasterCoin Inc. in exchange for $700,000 in
cash. The Company acquired all right, title and interest in and to the
portfolio. The Company paid $400,000 at closing with the remaining $300,000
payable subject to the performance of the portfolio. The $300,000 is included in
accrued liabilities in the accompanying June 30, 2000 balance sheet. The
portfolio is currently generating revenues for the Company.
The Sellers included Don Marshall, President and Director of the Company, and a
person who was hired by the Company in July, 2000. Mr. Marshall did not accept
any remuneration from the Company as a result of the transaction.
The cost of the portfolio is being amortized over twelve months, the estimated
average service period for the merchants acquired.
The equipment was acquired through an Asset Purchase and Sale Agreement with
MasterCoin, Inc., a Nevada corporation (MC) in exchange for $1,200,000 in cash.
The Company acquired title to equipment located in St. Kitts, British West
10
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Indies, consisting of computers, a satellite system, phone systems and leasehold
improvements which the Company anticipated would be useful in exploiting the
Server Wallet market opportunity referred to above. At the date of the
transaction, Mr. James Egide, the former CEO and Chairman of the Company, was a
shareholder in MC.
In the course of closing fiscal 2000 , the Company reviewed the value of the
equipment and determined that through age and non-use the book value of the
assets was impaired. Upon assessing a current realizable value of $300,000, the
Company wrote off the difference of $900,000 to expense. The remaining balance
is being depreciated over three years.
Carib Commerce, Ltd.
Effective January 1, 2000, the Company acquired all of the outstanding stock of
Carib Commerce, a sales and marketing organization. The shareholders of Carib
Commerce were issued 600,000 shares of the Company's common stock valued at
$4,837,800 (based on the quoted market price of the Company's common stock on
the date of the acquisition) and $150,000 in cash. The acquisition of Carib
Commerce has been accounted for as a purchase and the results of operations of
Carib Commerce are included in the accompanying condensed consolidated financial
statements since the date of acquisition. The Company did not receive any
tangible assets and assumed no liabilities. The Company has employed two former
shareholders of Carib Commerce without employment agreements. The Company was
assigned a service agreement with a bank as a result of the acquisition. The
term of the agreement is four years dating from August, 1999.
The purchase price of $4,987,800 has been recorded as an intangible asset and is
being amortized over a period of 44 months, the remaining term of the service
agreement. The service agreement will allow the Company to develop a processing
program with the bank. As of the date of this report, the Company continues to
pursue a business relationship with the bank. To date, no business has been
conducted between the Company and the bank, however, management believes the
amount paid for the agreement will be realized.
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 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
11
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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 had no alternative future use. The in-process
projects were focused on the continued development and evolution of internet
e-commerce solutions including: the Company's payment processing suite and two
virtual store projects (videos and books). The nature of these projects was 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 would 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.
During fiscal 2000, the Company incurred $2,078,184 of development expense. The
expense related to the completion of the development of the aforementioned
products as well as to the integration of these products with the software
acquired from SB.Com.
Management estimated that the projects were approximately 50% complete at the
date of the acquisition given the nature of the achievements to date. These
estimates were subject to change, given the uncertainties of the development
process, and no assurance could be given that deviations from these estimates
would not occur.
The net cash flows resulting from the projects underway at DCII, which were used
to value the purchased research and development, were 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
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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 were unknown at the time.
As evidenced by its continued support for these projects, management believes
the Company is well positioned to successfully complete the research and
development projects. However, there is risk associated with the completion of
the projects, and there is no steadfast assurance that each will meet with
either technological or commercial success. The substantial delay or outright
failure of these e-commerce solutions would negatively impact the Company's
financial condition. If these projects are not successfully developed, the
Company's business, operating results, and financial condition may be negatively
affected in future periods. In addition, the value of other intangible assets
acquired may become impaired.
To date, DCII results have not differed significantly from the forecast
assumptions. The Company's research and development expenditures since the DCII
acquisition have not differed materially from expectations. Revenue contribution
from the acquired technology falls within an acceptable range of plans in its
role in the Company's suite of internet and e-commerce solutions.
Access Services, Inc.
Effective April 1, 1999, the Company acquired all of the outstanding stock of
Access Services, a credit card processing company. The shareholders of Access
Services were issued 300,000 shares of the Company's common stock valued at
$1,631,400 (based on the quoted market price of the Company's common stock on
the date of the acquisition), $75,000 in cash and warrants to purchase 100,000
shares of the Company's common stock at $5.50 per share valued at $440,000. The
acquisition of Access Services has been accounted for as a purchase and the
results of operations of Access Services are included in the accompanying
condensed consolidated financial statements since the date of acquisition. The
tangible assets acquired included $97,999 of cash, $110,469 of accounts
receivable, $25,939 of equipment and $2,780 of deposits. Liabilities assumed
consisted of $264,794 of accounts payable and accrued liabilities and $10,100 of
notes payable.
The excess of the purchase price over the estimated fair market value of the
acquired net assets of $2,327,866 has been recorded as goodwill and is being
amortized over a period of 5 years.
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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
condensed consolidated financial statements since the date of acquisition. The
former shareholders of SB.com retained all tangible assets and liabilities
existing at the date of acquisition. Accordingly, the purchase price of
$17,838,040 has been recorded as goodwill and is being amortized over a period
of 5 years. In connection with the acquisition of SB.com, the Company made loans
of $500,000 each to four of SB.com's prior shareholders. The notes receivable
bear interest at 6 percent, which was 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 $1,851,240 and the $2,000,000 face
value of the notes amounting to $148,760 has been recorded as additional
purchase price.
Books Now, Inc.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
a seller of books through advertisements in magazines and over the Internet. The
shareholders of Books Now received 100,000 shares of the Company's common stock
valued at $312,500 and an earn-out of up to 262,500 additional common shares.
The issuance of the common shares was recorded at the quoted market price on the
date of acquisition.
The acquisition was accounted for as a purchase and the results of operations of
Books Now are included in the accompanying 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 was being amortized over a period of 5 years.
During fiscal 1999, the Company sold certain assets of Books Now to
ClickSmart.com (see additional discussion below).
In November 1998, the Company and Books Now's former owner reached a severance
agreement, wherein, the former owner was 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 set forth in the acquisition documents, both
the $81,000 of cash and the $1,051,558 of common stock were 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, one of the leading
providers of weather and weather-related information on the Internet. The
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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. As of June 30, 2000 no additional shares were issuable. Based on the
stock price of the Company's common stock, as defined, at the end of fiscal year
2001, the shareholders may be entitled to receive up to a total of 187,600
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 condensed consolidated financial
statements since the date of acquisition. The tangible assets acquired included
$3,716 of cash, $19,694 of accounts receivable, $115,745 of equipment and
$13,300 of deposits. Liabilities assumed included $100,000 of notes payable,
$56,902 of capital lease obligations and $134,444 of accounts payable and
accrued liabilities. The excess of the purchase price over the estimated fair
value of the acquired assets of $1,441,599 has been recorded as goodwill and is
being amortized over a period of 5 years.
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
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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 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 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.
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 settled in full for $500,000.
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.
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
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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 purchased 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. Subsequent to the sale through September 30, 2000,
the Company has not received any earn-out payments.
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, 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 %
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 equipment, $52,204 of prepaid advertising and certain intangibles
represented by goodwill of $442,020. ClickSmart did not assume any existing
liabilities related to Books Now and Videos Now. The operations of Books Now and
Videos Now were not generating positive cash flows prior to the exchange and the
operations of Video Direct did not have any history of profitability. Due to
these uncertainties with respect to the future cash flows and profitability of
ClickSmart.com, at the time of the exchange management determined that the
Company's investment in ClickSmart.com of $551,407 should be written off. Prior
to the exchange, management was considering the termination of the Books Now and
Videos Now operations.
In connection with the exchange the Company loaned ClickSmart.com $300,000 under
a promissory note bearing interest at 8 percent and due in May of 2000.
In May 2000, Clicksmart.com was sold to Ubrandit.com ("UBI") for 300,000 shares
of UBI, of which the Company received 100,000 shares. The UBI shares will be
available for resale in May 2001. The Company has not recorded an asset relative
to the shares as their value remains uncertain.
Sale of WeatherLabs Operations
Effective October 31, 1999, the Company entered into an Asset Purchase Agreement
with WL Acquisition Corporation, a wholly owned subsidiary of Landmark
Communications, Inc., formed for the purpose of acquiring assets from the
Company. Pursuant to the agreement, the Company exchanged certain
WeatherLabs-related assets for $3,383,000 in cash. The assets sold by the
Company consisted of $192,950 of accounts receivable, $879,305 of prepaid
advertising, $126,290 of equipment, and certain intangibles represented by
goodwill of $1,189,057. Liabilities including $132,556 of deferred income and
$100,000 of notes payable were assumed by the purchaser. The Company recorded
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the resulting gain of $1,415,047 from this sale as discontinued operations
during the year ended June 30, 2000. The WeatherLabs operations have been
reclassified as discontinued operations for all periods presented in the
accompanying financial statements.
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 4,047,691 and 1,646,305 shares of common stock at weighted
average exercise prices of $5.75 and $5.56 per share as of September 30, 2000
and 1999, respectively, warrants to purchase 1,990,000 and 3,015,000 shares of
common stock at weighted average exercise prices of $7.20 and $6.50 per share as
of September 30, 2000 and 1999, respectively, and 360 shares of Series A
preferred stock convertible to 800,000 shares of common stock at $4.50 per share
at September 30, 2000 and 1999 were not included in the computation of Diluted
EPS. The inclusion of the options, warrants and preferred stock would have been
antidilutive, thereby decreasing net loss per common share. As of September 30,
2000, the Company has agreed to issue up to an additional 187,600 shares of
common stock in connection with the acquisition of WeatherLabs, contingent on
the future price of the Company's common stock. These contingent shares have
also been excluded from the computation of diluted EPS.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Purchase Commitment
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services. This agreement was terminated and superceded by an agreement effective
July 15, 1997. This agreement was amended further on February 28, 2000, reducing
the commitment for the first two years of the agreement to actual expenditures
and establishing the Company's commitment for the third and final year to a
minimum usage of at least $240,000.
Bank Commitment
On June 6, 2000, the Company agreed to process not less than $20,000,000 per
month of gross credit card transactions through the St. Kitts Nevis Anguilla
National Bank Limited ("SKNANB") and to make a minimum deposit with the bank in
the amount of $6,400,000, maintain a 6 month rolling reserve of five percent on
the gross amount of credit card transactions processed through SKNANB and pay
SKNANB 50 basis points for all credit card settlements processed through SKNANB
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for the Company's merchants. This payment for basis points shall not be less
than $50,000 per month for the six month period ending November 30, 2000 and not
less than $100,000 per month thereafter. In exchange, SKNANB permits the
Company's merchants to process their credit card transactions through SKNANB
using their VISA and Mastercard facilities.
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 independent legal counsel, that the ultimate disposition of
these legal matters will not individually or in the aggregate have a material
adverse effect on the consolidated financial position, liquidity or results of
operations of the Company. The following claims, if determined adversely to the
Company, could have a material adverse effect on the Company's financial
position, liquidity and results of operations.
ePayment Solutions ("EPS") was a processing client of DataBank. Unbeknownst to
present management of the Company, various non-EPS owned merchants were sending
credit card payments to EPS, who in turn processed the transactions with the
Company under the EPS name. EPS in turn was supposed to take its settlement
funds and disburse them to its various merchants. The Company began seeing large
chargebacks in EPS's account and therefore larger reserves were withheld in the
EPS account to cover expected chargebacks. As of November 27, 2000, reserves
held for EPS totaled approximately $5 million. The Company believes that
adequate reserves are being held for all remaining chargebacks.
On November 15, 2000, the Company received a letter from an attorney
representing EPS demanding payment of approximately $11 million which he claimed
is the amount withheld from EPS. The Company does not believe that there is any
validity to EPS's claim because all funds held are being held in reserve for
chargebacks and the amounts are reasonable based upon the chargebacks that have
been experienced to date.
Two additional merchants have made claims of approximately $600,000 to the
Company regarding amounts they believe are owed them due to processing errors.
The Company is working with these merchants to reconcile activity and resolve
differences. Management believes that any amount ultimately owed these merchants
will not be materially different than amounts currently recorded.
The Company processed a limited number of transactions through the Bank of
Nevis, located in the British West Indies ("the Bank") during fiscal 2000.
DataBank, acquired by the Company in October 1999, processed through the Bank
prior to the acquisition. In February 2000, the Bank informed the Company that
unspecified amounts were due the Bank for periods before and after the DataBank
acquisition due to processing errors. The Company responded that, in fact, it
believes the Bank owes the Company certain amounts that were never settled after
the Company ceased processing. The Bank engaged an audit firm to analyze the
matter and that audit continues today. The Bank claims the Company owes it
$581,000 for the period prior to the DataBank acquisition and $500,000 for the
period after the acquisition. The Company believes that the $581,000 was
incorrectly overpaid by the Bank to various merchants and that it is the
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obligation of the Bank to recover these amounts from those merchants. The
Company is liable for any unrecovered overpayments as DataBank's liabilities
were assumed by the Company in the acquisition. During fiscal 2000 the Company
increased the liabilities assumed in the DataBank transaction by $581,000 and
increased acquired goodwill by the same amount. The Company believes that the
Bank's claim regarding the $500,000 amount is erroneous as it includes one
merchant that was never a client of DataBank or the Company and another merchant
whose payments to the Bank have not been considered in the audit. The Company
wrote off a receivable due from the Bank of $255,531 in fiscal 2000. Management
will continue to work with the Bank and their auditors and believes the issues
with the Bank will be settled during fiscal 2001 and that no material adverse
impact will result.
The Company has been advised by the United States Securities and Exchange
Commission that it is conducting an informal review of the facts underlying the
Internal Investigation discussed in Note 5. The Company is cooperating in that
inquiry which, to the best of the Company's knowledge, is continuing.
NOTE 5 - SUBSEQUENT EVENT - INTERNAL INVESTIGATION
During fiscal 2000, the Company received information indicating that its Chief
Executive Officer and Chairman at the time, Mr. James Egide, may have had a
conflicting, undisclosed, interest in DataBank at the time the Company acquired
it. Specifically, there were two general allegations. First, it was alleged that
he had been a part of a group that had acquired 75% of the stock of DataBank
(the "Group DataBank Transaction") approximately 2 months before the Company
entered into a letter of intent to acquire it. That earlier purchase was for 75%
of DataBank at a purchase price of $6.2 million, while the Company's subsequent
acquisition deemed fair and equitable at the time, was priced at 28,027,500
shares of the Company's common stock. Second, it was alleged that Mr. Egide did
not adequately disclose to the Company his ownership position in DataBank at or
prior to the time of the Company's acquisition of DataBank. The Company's Board
of Directors formed a special committee of directors, each of whom had no
involvement in the transaction themselves, to investigate these allegations; as
finally constituted, that committee consisted of Mr. Ken Woolley and Mr. Greg
Duman (the "Special Committee"). The Special Committee, in turn, retained
Munger, Tolles & Olson LLP, as outside counsel to conduct an investigation into
this matter (the "Internal Investigation").
During this period, Mr. Egide resigned first as Chief Executive Officer and,
later, as a director and as Chairman of the Board of Directors. Additionally,
some DataBank shareholders who had received shares of the Company pursuant to
the DataBank acquisition returned some or all of the DCTI shares they had
received, although they did not present the Company with any signed agreement or
otherwise document any right of the Company to take action with respect to the
returned shares. (Approximately 7.7 million DCTI shares were received by the
Company in this fashion.) All of these facts were promptly disclosed by the
Company in press releases as they occurred.
The investigation was conducted between August and October of 2000. In the
process of conducting its investigation, the Special Committee's counsel
retained private investigators, reviewed all relevant documents in the Company's
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possession and conducted interviews of some 11 individuals. On October 25, 2000,
they released the "Summary and Conclusions" of their final report. (The Summary
and Conclusions were released while the remainder of the report was in technical
preparation and review in order to facilitate certain corporate plans, including
consummation of settlement negotiations with certain individuals, and to permit
the preparation of annual financial statements for submission to the Company's
independent auditors, both of which were dependent to some degree upon the
results of the report.)
The results of the investigation were inconclusive. Conflicting testimony was
received as to the ownership of certain offshore entities, and dispositive
evidence was not found. As to certain other factual questions, more subtle
differences of interpretation were identified that could have had legal
significance. For example, there were conflicting views as to whether the
initial purchase of DataBank shares was made available to the Company. Moreover,
there were significant uncertainties as to the legal effect of the different
possible factual interpretations. In the view of counsel to the Special
Committee, it was not fairly predictable what version of the facts a court would
find credible. Also, it was not clear what legal conclusions a court would
reach, or what remedies it would find to be available and appropriate, even if
the factual questions were not in dispute.
At approximately the time that the investigation was being completed, Mr.
Woolley entered into discussions with certain of the stockholders who received
DCTI shares in the DataBank acquisition. Ultimately, 7 stockholders agreed to
return to the Company 8,637,622 DCTI shares in settlement of any claims by the
Company of impropriety against them in connection with the transaction. These
shares included the DCTI shares that had earlier been returned to the Company,
but this time the Company's right to accept and cancel the shares was made
clear. Also included in the returned shares were 1,120,000 shares returned by
Mr. Don Marshall, the Company's President, and a former controlling shareholder
of DataBank (before the Group DataBank Transaction). The Special Committee
agreed that Mr. Marshall had no responsibility or liability with respect to any
of the alleged improprieties, but he also agreed that, as the Company's
President, and a former DataBank stockholder, he should not benefit through an
increased percentage ownership in the Company from the return of stock by others
from the DataBank transaction. Accordingly, his return of shares was designed to
preserve, after the return of all the shares involved, his percentage interest
in the Company at a level equal to what it was immediately before any such share
returns. In the view of counsel to the Special Committee who had conducted the
investigation, the settlement of claims in exchange for the return of shares was
a favorable settlement for the Company in comparison to the certain expenses,
and uncertain recoveries, that would have attended any litigation of the matter.
After careful consideration of the final report of the Special Committee's
counsel, the Company's Board of Directors continues to believe that the Company
paid a fair price for DataBank.
The shares returned to the Company will be accounted for as a settlement of
claims and credited to income at the time of settlement. Accordingly, during the
second quarter of fiscal 2001, the Company will record a gain from settlement of
approximately $ 25 million.
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Additionally, as a result of the settlement and other factors, during the second
quarter of fiscal 2001 (one year from the date of acquisition), the Company will
assess the realizability of the goodwill recorded in connection with the
DataBank acquisition. The potential impairment will be evaluated by analyzing
the future net cash flows to be generated by the acquired operations as compared
to the net book value of the assets. Management currently expects that a
significant impairment loss will be recorded in the second quarter of fiscal
2001.
NOTE 6 - 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. On July 7, 2000 TSAI
exercised their warrants and purchased 1,000,000 shares of the Company's common
stock for $5.20 per share.
NOTE 7 - 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. Historically, the
Company's stock options have been accounted for using fixed plan accounting. The
option grants permit various exercise alternatives, including certain cashless
exercise provisions. Through fiscal 1999, the Company's experience indicated
that substantially all cashless exercises could have been effected through the
use of mature shares and therefore fixed plan accounting was appropriate. Due to
the Company's recent acquisitions and growth, options have been granted to more
employees who do not hold mature shares of the Company's common stock and
therefore during fiscal 2000, the Company determined that these options should
be accounted for using variable plan accounting. Under variable plan accounting,
changes, either increases or decreases, in the market price of the Company's
common stock results in a change in the measurement of compensation.
Compensation is measured as the difference between the market price and the
option exercise price and is amortized to expense over the vesting period.
During the three months ended September 30, 2000, the Company recorded $649,300
of non-cash income related to these variable awards as a result of a decrease in
the price of the Company's common stock since June 30, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading provider of advanced e-payment services for businesses,
merchants, and financial institutions. The Company's services have introduced to
the marketplace a secure and cost-effective system for credit card processing
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and merchant account management. By integrating services under one roof, DCTI
can offer to customers an outsource solution for merchant account set-up, an
Internet Payment Gateway, payment processing, fraud control technology, and
Web-based reporting.
The Company was incorporated under the laws of the State of Delaware on May 16,
1985 as DataMark Holding, Inc. 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.
Sisna Acquisition and Divestiture. 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, while 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.
Books Now Acquisition and Divestiture. 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 shares of the Company's common stock valued at $312,500 were
issued at closing and 262,500 shares of the Company's common stock 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
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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
prior to its divestiture are included in the accompanying condensed consolidated
statements of operations since the date of acquisition.
In May 1999, the Company sold certain assets related to Books Now and the
Company's VideosNow division to Clicksmart, Inc. in exchange for 19.9% of
Clicksmart's common stock and a right to receive $2,000,000 from Clicksmart
either by receiving 75% of Clicksmart's net cash flows until DCTI received 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 also 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. The operations of Books Now and
Videos Now were not generating positive cash flows prior to the exchange and
Clicksmart did not have any history of profitability. Due to these
uncertainties, the net investment of $551,407 was written off at the time of the
exchange. In May 2000, Clicksmart was sold to Ubrandit.com ("UBI") for 300,000
shares of UBI, of which the Company received 100,000 shares in exchange for all
of its interest in Clicksmart and cancellation of indebtedness. The UBI shares
will be available for resale in May 2001. The Company has not recorded an asset
relative to the shares as their value remains uncertain.
WeatherLabs Acquisition and Divestiture. 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 shares of the Company's common stock were issued valued at $762,503, and
an additional 523,960 shares of the Company's common stock were issuable based
upon the price of the Company's common stock over the next three years. The fair
market value of the shares of the Company's common stock 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 prior to
its divestiture are included in the accompanying condensed consolidated
financial statements from the date of acquisition.
Effective October 31, 1999, the Company entered into an Asset Purchase Agreement
with WL Acquisition Corporation, a wholly owned subsidiary of Landmark
Communications, Inc., formed for the purpose of acquiring and combining the
WeatherLabs assets acquired from the Company. Pursuant to the agreement, the
Company exchanged certain net WeatherLabs assets for $3,383,000 in cash. The
assets exchanged by the Company consisted of $192,950 of accounts receivable,
$879,305 of prepaid advertising, $126,290 of net equipment, and certain
intangibles represented by net goodwill of $1,189,057 and liabilities consisting
of $132,556 of deferred income and $100,000 of notes payable were assumed by the
purchaser. The Company recorded the resulting gain of $1,415,047 from this sale
as discontinued operations during fiscal 2000.
Digital Courier 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 "DCII Exchange Agreement"). The DCII Exchange
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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 DCII Exchange Agreement, the Company issued 4,659,080 shares of
its common stock valued at $14,027,338, the fair market value of the shares
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 condensed consolidated financial statements from September
16, 1998, the date of acquisition.
Access Services 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 100,000 shares of the Company's common stock
at $5.50 per share which were valued at $440,000 as of the close of the
transaction.
Secure Bank Acquisition. 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 by such
officers, 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.
DataBank Acquisition. In October 1999, the Company acquired all of the
outstanding stock of DataBank International, Ltd. ("DataBank"), a credit card
processing company, in exchange for 16,600,000 shares of the Company's common
stock valued at $88,195,800, the quoted market price of the common shares issued
on the date of acquisition and 13,060,000 contingent shares based on future
performance criteria. In January 2000, the Company issued an additional
11,427,500 shares of the Company's common stock valued at $108,561,250, the
quoted market price of the common shares issued on the date that the Board of
Directors elected to issue the contingent shares. The number of additional
shares issued was based on the original contingent shares discounted by 12.5%.
The Company recently completed an Internal Investigation related to the
Company's acquisition of DataBank. As a result of the investigation,
negotiations with certain individuals resulted in the return of 8,637,622 shares
of the Company's common stock (see Note 5).
CaribCommerce Acquisition. In January 2000, the Company acquired all of the
outstanding stock of CaribCommerce SKB, Ltd., a sales and marketing company
organized under the laws of St. Christopher and Nevis ("CaribCommerce"), in
exchange for 600,000 shares of the Company's common stock valued at $4,837,800,
the quoted market price of the common shares issued on the date of acquisition,
and $150,000 in cash.
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MasterCoin Acquisition. In April 2000, the Company acquired software, a merchant
portfolio, and equipment from various entities referred to jointly as MasterCoin
for $2.9 million in cash.
Results of Operations
Three months ended September 30, 2000 compared with three months ended September
30, 1999.
Revenue
Revenue for the three months ended September 30, 2000 was $9,495,909 as compared
to $2,832,929 for the three months ended September 30, 1999. During the three
months ended September 30, 2000, payment processing revenues were $9,180,909 and
revenues earned under a software distribution agreement were $315,000.
Additionally, during the quarter ended September 30, 2000, the Company recorded
$709,620 of revenues related to fees earned on the processing of chargebacks.
The Company does not expect the same volume of chargeback revenues in future
periods. During the three months ended September 30, 1999, payment processing
revenues were $2,788,631 and technical support revenues were $44,298. The
increase in revenues in the quarter ended September 30, 2000 was due to the
acquisitions discussed previously.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2000 were $6,153,625 or
64.8% of revenue. Cost of revenue for the three months ended September 30, 1999
were $1,346,794 or 47.5% of revenue. Cost of revenue was 63.9% of revenue for
the twelve months ended June 30, 2000. The comparison of cost of revenue as a
percentage of revenue should be considered in light of the acquisitions
discussed previously.
Operating Expenses
Depreciation and amortization expense increased 556.4% to $12,941,662 during the
three months ended September 30, 2000 from $1,971,512 during the three months
ended September 30, 1999. The increase in depreciation and amortization expense
was principally due to the amortization of goodwill related to the acquired
companies discussed earlier.
General and administrative expense increased 170.3% to $2,369,138 during the
three months ended September 30, 2000 from $876,473 during the three months
ended September 30, 1999. The increase in general and administrative expense was
due to the addition of administrative and support staff and facilities costs
associated with the acquisitions.
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Selling expense increased 29.4% to $780,104 during the three months ended
September 30, 2000 from $602,717 during the three months ended September 30,
1999. The increase in selling expense is attributable to selling expense related
to the Company's payment processing operations.
Research and development expense decreased to $444,948 during the three months
ended September 30, 2000 from $576,219 during the three months ended September
30, 1999. The decrease in research and development costs is due to the reduction
in levels of support required in the development of our payment processing
software.
During the three months ended September 30, 2000 the non-cash compensation
adjustment associated with the Company's variable option plan generated a credit
of $649,300 as all outstanding options had exercise prices greater than the
quoted stock price on September 30, 2000. During the three months ended
September 30, 1999 the Company incurred non-cash compensation costs of $7,293 in
connection with the cashless exercise of stock options.
Liquidity and Capital Resources
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. This capital lease obligation was
settled in full in July 2000.
In March 1998, the Company sold the net assets of DataMark Systems, Inc., its
direct mail marketing subsidiary. The Company received $7,557,300 from the sale
of these net assets.
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.
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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 was 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 fiscal 1999.
In August and September 1997, the Company made an investment in CommTouch
Software Ltd. in the amount of $750,000. During fiscal 2000 all of the CommTouch
Software, Ltd stock was sold and the Company received net proceeds of
$9,386,575.
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 was 24% and it was
secured by receivables owed to the Company. The original maturity date of the
Loan was October 22, 1999. It was prepayable 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 were capitalized and were amortized
over the life of the loan. On October 15, 1999, the Company extended the loan
for the current principal amount of $753,342 with a maturity date of October 20,
2000. On February 28, 2000, the Company paid off the note in full.
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 warrants are callable by the Company if
for 130 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 was allocated to the warrants.
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").
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Pursuant to the March Purchase Agreement, the Purchasers acquired 360 shares of
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 exercise price for the warrants is $5.23 per share. The warrants are
callable by the Company if for 130 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 130 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.
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 is
being used to enhance the Company's 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.
On June 14, 1999, Transactions Systems Architects, Inc. ("TSAI"), the parent of
ACI, purchased 1,250,000 shares of the Company's 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 immediately pay ACI the discounted future payments under the
original agreement, which amounted to $3,888,453. The amounts paid under the
agreement have been recorded as prepaid software license in the accompanying
condensed consolidated financial statements and are being expensed ratably over
the term of the agreement. In July, 2000, TSAI exercised all of its warrants for
a total exercise price of $5,200,000.
On March 31, 2000, the software license agreement was modified to grant the
Company a non-transferable and non-exclusive license to use ACI's Base24(R)
software in all international markets, as well as the United States, which was
granted in the original contract. In exchange for this agreement the Company
paid ACI $2,500,000 on April 15, 2000 and made a final payment of $2,500,000 on
September 30, 2000.
On June 3, 1999, the Company entered into a three year agreement with ACI to
distribute the Company's e-commerce products. As consideration for this
agreement, ACI paid the Company a non-refundable deposit of $700,000. ACI will
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pay the Company license fees of 40% of the fee paid ACI until the Company
receives $800,000, 35% of the fees paid ACI until; the Company receives
$1,500,000 and 30% of the fees paid ACI thereafter. On April 1, 2000 the
distribution agreement was amended extending the term to six years and providing
a guarantee to the Company of an additional $6,000,000 payable in installments
of $1,200,000 on September 1, 2000 through September 1, 2004. The Company is
recognizing revenue from this agreement ratably over its term. At June 30, 2000,
the Company had recognized $468,224 of revenue under these agreements.
On June 6, 2000, the Company agreed to process not less than $20,000,000 per
month of gross credit card transactions through the St. Kitts Nevis Anguilla
National Bank Limited ("SKNANB") and to make a minimum deposit with the bank in
the amount of $6,400,000, maintain a 6 month rolling reserve of five percent on
the gross amount of credit card transactions processed through SKNANB and pay
SKNANB 50 basis points for all credit card settlements processed through SKNANB
for DCTI merchants. This payment for basis points shall not be less than $50,000
per month for the six month period ending November 30, 2000 and not less than
$100,000 per month thereafter. In exchange, SKNANB permits the Company's
merchants to process their credit card transactions through SKNANB using their
VISA and Mastercard facilities.
Operating activities provided $6,255,314 of cash during the three months ended
September 30, 2000 compared to using $187,220 of cash during the three months
ended September 30, 1999.
During the three months ended September 30, 2000, the Company used $251,906 of
cash in its operations excluding non-cash expenses and credits and changes in
operating assets and liabilities. The Company converted a receivable from its
merchant processor to cash equal to $4,497,045 and increased its settlement
obligations due to merchants by $3,774,420. Net of changes in operating assets
and liabilities, the Company generated $6,255,314 of cash in its operating
activities in the three months ended September 30, 2000.
During the three months ended September 30, 1999, the Company used $187,220 of
cash in its operating activities.
Net cash used in investing activities was $690,004 as the Company upgraded and
built redundancy in its computer facilities in the three months ended September
30, 2000. In the three months ended September 30, 1999 the Company generated
$81,884 in investing activities from a decrease in net non-current assets of
discontinued operations
The Company generated $4,899,378 in cash from financing activities in the
quarter ended September 30, 2000, as TSAI exercised its option to purchase
1,000,000 shares of the Company's common stock at $5.20 and the Company paid
$300,422 under capital lease obligations. In the comparable period in 1999, the
Company used $464,103 in financing activities as it paid interest and principal
on leases and borrowings.
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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 risks
relating to the Company's continued ability to create or acquire products and
services that customers will find attractive and the potential for increased
competition which could affect pricing and profitability.
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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: December 8, 2000 By: /s/ Kenneth M. Woolley
----------------------
Kenneth M. Woolley
Chairman
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