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, 2000
[ ] 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 47,682,066 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 February 10, 2000.
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, June 30,
2000 1999
-------------------- --------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 18,062,002 $ 2,381,356
Receivable from payment services processor 7,518,737 -
Trade accounts receivable 564,203 548,046
Other receivables - 800,000
Available-for-sale security - CommTouch Software, Ltd. 470,630 -
Prepaid software license 2,153,456 903,456
Receivable from an officer - 56,000
Prepaid expenses and other current assets 796,832 193,167
Net current assets of discontinued operations - 288,752
-------------------- --------------------
Total current assets 29,565,860 5,170,777
-------------------- --------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,735,888 6,010,440
Furniture, fixtures and leasehold improvements 1,087,859 966,745
-------------------- --------------------
7,823,747 6,977,185
Less accumulated depreciation and amortization (4,557,644) (3,378,528)
-------------------- --------------------
Net property and equipment 3,266,103 3,598,657
-------------------- --------------------
GOODWILL, net of accumulated amortization of $22,058,803 and $2,392,938,
respectively 212,502,709 29,628,037
-------------------- --------------------
PREPAID SOFTWARE LICENSE, net of current portion 6,460,368 3,387,960
-------------------- --------------------
INVESTMENT IN COMMTOUCH SOFTWARE, LTD - 750,000
-------------------- --------------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS - 1,985,647
-------------------- --------------------
OTHER ASSETS 2,671,524 2,581,108
-------------------- --------------------
$254,466,564 $ 47,102,186
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2000 1999
------------------ ---------------------
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable $ 1,150,000 $ 2,110,614
Current portion of capital lease obligations 602,804 1,090,507
Accounts payable 1,215,952 311,431
Settlements due to merchants 5,486,188 -
Merchant reserves 8,562,672 -
Accrued chargebacks 159,236 -
Deferred revenue 658,810 198,430
Other accrued liabilities 7,085,250 1,382,833
------------------ ---------------------
Total current liabilities 24,920,912 5,093,815
------------------ ---------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 109,310 432,704
------------------ ---------------------
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares authorized; 360 shares of Series A
convertible issued and outstanding 3,600,000 3,600,000
Common stock, $.0001 par value; 50,000,000 shares authorized, 47,680,066
and 18,557,390 shares outstanding,
respectively 4,768 1,856
Additional paid-in capital 276,360,840 72,759,439
Accumulated other comprehensive income 434,545 -
Warrants outstanding 1,363,100 1,363,100
Stock subscription receivable (12,000) (12,000)
Accumulated deficit (52,314,911) (36,136,728)
------------------ ---------------------
Total stockholders' equity 229,436,342 41,575,667
------------------ ---------------------
$ 254,466,564 $ 47,102,186
================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
------------------ -------------------
<S> <C> <C>
NET REVENUES $ 8,799,382 $ 320,569
COST OF REVENUES 4,401,878 255,771
------------------ -------------------
Gross margin 4,397,504 64,798
------------------ -------------------
OPERATING EXPENSES:
Depreciation and amortization 12,402,103 1,052,070
General and administrative 2,034,013 1,043,002
Non-cash compensation for issuance of stock options and stock 1,158,301 -
Selling 757,959 190,069
Research and development 338,105 496,578
Credit card chargebacks 260,439 -
AOL interactive marketing contract costs - 52,202
------------------ -------------------
Total operating expenses 16,950,920 2,833,921
------------------ -------------------
OPERATING LOSS (12,553,416) (2,769,123)
------------------ -------------------
OTHER INCOME (EXPENSE):
Gain on sale of CommTouch stock 8,331,427 -
Interest and other income 150,173 19,583
Loss on dispositions of equipment - (58,109)
Interest and other expense (97,708) (128,163)
------------------ -------------------
Other expense, net 8,383,892 (166,689)
------------------ -------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(4,169,524) (2,935,812)
INCOME TAX BENEFIT - -
------------------ -------------------
LOSS FROM CONTINUING OPERATIONS (4,169,524) (2,935,812)
------------------ -------------------
</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 MARCH 31, 2000 AND 1999 (Continued)
(Unaudited)
2000 1999
------------------ -------------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued WeatherLabs operations, net of income
<S> <C> <C>
tax benefit of $0 in 1999 - (187,033)
Gain on sale of WeatherLabs operations, net of income tax provision of
$460,482 - -
------------------ -------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - (187,033)
------------------ -------------------
NET LOSS $ (4,169,524) $ (3,122,845)
------------------ -------------------
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.09) $ (0.22)
================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 45,954,213 14,166,766
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
------------------ -------------------
<S> <C> <C>
NET LOSS $ (4,169,524) $ (3,122,845)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding loss arising during the period on
available- for- sale security 8,316,427 -
Less reclassification adjustment for gains included in net loss (8,331,427) -
------------------ -------------------
NET LOSS RECOGNIZED IN OTHER COMPREHENSIVE INCOME (15,000) -
------------------ -------------------
COMPREHENSIVE LOSS $ (4,184,524) $ (3,122,845)
------------------ -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
------------------ -------------------
<S> <C> <C>
NET REVENUES $ 17,790,265 $ 933,796
COST OF REVENUES 9,183,397 727,582
------------------ -------------------
Gross margin 8,606,868 206,214
------------------ -------------------
OPERATING EXPENSES:
Depreciation and amortization 20,851,723 2,767,289
General and administrative 4,630,504 2,566,998
Credit card chargebacks 3,144,686 -
Selling 2,277,645 691,126
Research and development 1,611,163 1,379,244
Non-cash compensation for issuance of stock options and stock 1,347,069 1,051,558
AOL interactive marketing contract costs - 5,208,337
Acquired in-process research and development - 3,700,000
------------------ -------------------
Total operating expenses 33,862,790 17,364,552
------------------ -------------------
OPERATING LOSS (25,255,922) (17,158,338)
------------------ -------------------
OTHER INCOME (EXPENSE):
Gain on sale of CommTouch stock 8,331,427 -
Interest and other income 296,216 45,979
Net gain on sale of assets - 171,585
Interest and other expense (348,079) (263,648)
------------------ -------------------
Other income, net 8,279,564 (46,084)
------------------ -------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(16,976,358) (17,204,422)
INCOME TAX BENEFIT 299,316 -
------------------ -------------------
LOSS FROM CONTINUING OPERATIONS (16,677,042) (17,204,422)
------------------ -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (Continued)
(Unaudited)
2000 1999
------------------ -------------------
<S> <C> <C>
DISCONTINUED OPERATIONS:
Loss from operations of discontinued WeatherLabs operations, net of income
tax benefit of $161,167 and $0, respectively (268,612) (641,651)
Gain on sale of WeatherLabs operations, net of income tax provision of -
$460,482 767,471
------------------ -------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 498,859 (641,651)
------------------ -------------------
NET LOSS $ (16,178,183) $ (17,846,073)
------------------ -------------------
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.49) $ (1.44)
================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 32,896,111 12,354,627
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
------------------ -------------------
<S> <C> <C>
NET LOSS $ (16,178,183) $ (17,846,073)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gain arising during the period on
available- for- sale securities 8,765,972 -
Less reclassification adjustment for gains included in net loss (8,331,427) -
------------------ -------------------
NET LOSS RECOGNIZED IN OTHER COMPREHENSIVE INCOME 434,545
-
------------------ -------------------
COMPREHENSIVE LOSS $ (15,743,638) $(17,846,073)
------------------ -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
Increase (Decrease) in Cash
2000 1999
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,178,183) $ (17,846,073)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 20,851,723 2,767,284
Compensation expense related to cashless exercise of stock options and
issuance of stock 1,347,069 -
Gain on sale of CommTouch stock (8,331,427)
Gain on sale of Weatherlabs operations (1,227,954) -
Acquired in-process research and development - 3,700,000
Issuance of common stock and warrants in connection with
@Home agreement - 1,110,307
Issuance of common stock in settlement with former shareholders of
Books Now, Inc. - 1,051,558
Amortization and write-off of AOL anchor tenant placement costs
- 5,208,337
Gain on sale of WorldNow assets - (308,245)
Loss on disposition of equipment - 136,660
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable 395,156 (192,130)
Receivable from payment services processor (7,518,737) -
Other receivables 800,000 (178,172)
Receivable from officer 56,000
Inventory - 21,046
Prepaid software license (4,322,408) (628,861)
Prepaid expenses and other current assets (603,412) (471,922)
Net current assets of discontinued operations (550,947) 50,361
Other assets (90,419) (466,438)
Accounts payable (915,575) (1,344,090)
Settlements due to merchants 5,486,188 -
Merchant reserves 8,562,672 -
Accrued chargebacks 159,236
Deferred revenue 460,380
Other liabilities 5,702,420 (350,019)
----------------- -------------------
Net cash provided by (used in) operating activities 4,074,786 (7,740,397)
----------------- -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
Increase (Decrease) in Cash
(Continued)
2000 1999
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of CommTouch stock 9,045,341 -
Net proceeds from the sale of WeatherLabs operations 3,383,000 -
Net cash acquired in acquisition 428,096 -
Purchase of property and equipment (661,562) (745,190)
Cash paid in acquisition of CaribCommerce SKB, Ltd (150,000)
Advances to Digital Courier International, Inc. - (849,203)
Net cash proceeds from sale of WorldNow assets - 286,418
Decrease in net long-term assets of discontinued operations 670,300 164,895
Proceeds from sale of equipment - 76,225
----------------- -------------------
Net cash provided by (used in) investing activities 12,715,175 (1,066,855)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 6,524,000
Net proceeds from borrowings - 1,000,000
Net proceeds from issuance of common stock upon exercise of stock options
590,520 943,750
Net proceeds from issuance of common stock upon exercise of warrants
71,876 -
Principal payments on capital lease obligations (811,097) (579,836)
Principal payments on borrowings (960,614) (153,047)
----------------- -------------------
Net cash (used in) provided by financing activities (1,109,315) 7,734,867
----------------- -------------------
NET INCREASE (DECREASE) IN CASH 15,680,646 (1,072,385)
CASH AT BEGINNING OF PERIOD 2,381,356 3,211,724
----------------- -------------------
CASH AT END OF PERIOD $ 18,062,002 $ 2,139,339
================= ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 259,274 $ 259,969
</TABLE>
See accompanying notes to condensed consolidated financial statements.
11
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements as of March
31, 2000 and for the three and nine months ended March 31, 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, 1999. The results of operations for the three
and nine months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the entire fiscal year ending June 30, 2000. Certain
previously reported amounts have been reclassified to conform to the current
period presentation. These reclassifications had no affect on the previously
reported net loss.
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange Agreement
(the "Exchange Agreement") with Digital Courier International, Inc. ("DCII").
Pursuant to the Exchange Agreement, the Company agreed to issue 4,659,080 shares
of its common stock valued at $14,027,338 to the shareholders of DCII. The
issuance of the common shares was recorded at the quoted market price on the
date of acquisition. The acquisition was approved by the shareholders of the
Company on September 16, 1998.
The acquisition of DCII has been accounted for as a purchase and the results of
operations of DCII are included in the accompanying 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 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.
12
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Access Services, Inc.
Effective April 1, 1999, the Company acquired all of the outstanding stock of
Access Services, a credit card processing company. The shareholders of Access
Services were issued 300,000 shares of the Company's common stock valued at
$1,631,400 (based on the quoted market price of the Company's common stock on
the date of the acquisition), $75,000 in cash and warrants to purchase 100,000
shares of the Company's common stock at $5.50 per share valued at $440,000. The
acquisition of Access Services has been accounted for as a purchase and the
results of operations of Access Services are included in the accompanying
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $97,999 of cash, $110,469 of accounts receivable,
$25,939 of equipment and $2,780 of deposits. Liabilities assumed consisted of
$264,794 of accounts payable and accrued liabilities and $10,100 of notes
payable.
The excess of the purchase price over the estimated fair market value of the
acquired net assets of $2,327,866 has been recorded as goodwill and is being
amortized over a period of 5 years.
In connection with the acquisition of Access Services, the Company entered into
a 2-year employment agreement with a key officer. Pursuant to the employment
agreement, the Company had committed to pay a base annual salary of $120,000 and
bonuses as determined by the Company. If the Company terminated the officer's
employment without cause, the officer is generally entitled to the salary,
bonuses and benefits otherwise payable under the agreement as severance. The
employment agreement automatically continued after the initial term on a year to
year basis until terminated by either party. The officer voluntarily terminated
his employment on February 29, 2000.
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 is less than the current market interest rate.
The notes have been discounted using a 10 percent interest rate and the
difference between the discounted value of $1,856,240 and the $2,000,000 face
value of the notes amounting to $143,760 has been recorded as additional
purchase price.
13
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DataBank International SKB, 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 International SKB, Ltd., a credit card processing company organized
under the laws of St. Christopher and Nevis ("DataBank"). 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 eneted into the merger
agreement. If DataBank met certain performance criteria, as defined, the Company
would be required to issue up to an additional 13,066,000 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 consolidated financial statements since the date of
acquistion. 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
13,066,000 contingent shares with an approximate 12.5% discount 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 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 in January 2000.
Books Now
In January 1998, the Company acquired all of the outstanding stock of Books Now,
a seller of books through advertisements in magazines and over the Internet. The
shareholders of Books Now received 100,000 shares of the Company's common stock
valued at $312,500 and an earn-out of up to 262,500 additional common shares.
The issuance of the common shares was recorded at the quoted market price on the
date of acquisition.
The acquisition was accounted for as a purchase and the results of operations of
Books Now are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $261 of
cash, $21,882 of inventory and $50,000 of equipment. Liabilities assumed
included $112,335 of notes payable, $24,404 of capital lease obligations and
$239,668 of accounts payable and accrued liabilities. The excess of the purchase
price over the estimated fair market value of the acquired assets of $616,764
was recorded as goodwill and was being amortized over a period of 5 years.
Effective May 28, 1999, the Company sold certain assets of Books Now to
ClickSmart.com (see additional discussion below).
14
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 1998, the Company and the former owner reached a severance
agreement, wherein, the former owner and President of Books Now received
severance payments equal to one year's salary ($81,000). Additionally, the
Company agreed to issue 205,182 shares of the Company's common stock valued at
$1,051,558, based on the quoted market price of the shares on the date of the
severance agreement, to the former shareholders of Books Now. Because the
operations of Books Now were not achieving the performance criteria, both the
$81,000 of cash and the $1,051,558 of common stock were expensed as of the date
of the severance agreement.
WeatherLabs
On March 17, 1998, the Company entered into a Stock Exchange Agreement to
acquire all of the outstanding stock of WeatherLabs, one of the leading
providers of weather and weather-related information on the Internet. The
acquisition was closed in May 1998. At closing the shareholders of WeatherLabs
were issued 253,260 shares of the Company's common stock valued at $762,503. The
issuance of the common shares was recorded at the quoted market price on the
date of acquisition. These shareholders were entitled to receive a total of
523,940 additional shares over the next 3 years based on the stock price of the
Company's common stock, as defined, at the end of the Company's next 3 fiscal
years. In August 1999, an additional 101,035 shares of common stock with a fair
market value of $593,580 were issued pursuant to the contingency provisions.
Based on the stock price of the Company's common stock, as defined, at the end
of fiscal years 2000 and 2001, the shareholders may be entitled to receive up to
a total of 375,200 shares of the Company's common stock.
The acquisition has been accounted for as a purchase and the operations of
WeatherLabs are included in the accompanying 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 was recorded as goodwill. During the
quarter ended December 31, 1999, the Company sold substantially all of the
assets of Weatherlabs (see additional discussion below).
CaribCommerce, Ltd.
The Company entered into a Stock Purchase and Exchange Agreement with
CaribCommerce SKB, Ltd., a sales and marketing company organized under the laws
of St. Christopher and Nevis ("CaribCommerce"), and the selling shareholders of
CaribCommerce (the "Selling Shareholders") (the "Exchange Agreement"), dated as
of December 9, 1999. Pursuant to the Exchange Agreement, the Company issued
600,000 shares of its common stock (the "DCTI Shares") and $150,000 in cash to
the Selling Shareholders in exchange for all of the issued and outstanding
shares of CaribCommerce. In January 2000, the Exchange Agreement was consummated
and the shareholders of CaribCommerce 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). The acquisition of
CaribCommerce has been accounted for as a purchase and the results of operations
of CaribCommerce are included in the Company's consolidated financial statements
from the date of acquisition. CaribCommerce had no tangible assets and no
liabilities existing at the date of acquisition. Accordingly, the purchase price
of $4,987,800 has been recorded as goodwill and will be amortized over a period
of 5 years.
15
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unaudited Pro Forma Data Related to Acquisitions
The unaudited pro forma results of operations of the Company for the three and
nine months ended March 31, 2000 and 1999 (assuming the acquisitions of DCII,
Access Services, SB.com , DataBank and CaribCommerce had occurred as of July 1,
1998) are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
2000 1999
----------------------- ----------------------
<S> <C> <C>
Revenues $ 8,799,382 $ 5,277,584
Loss from continuing operations (4,169,524) (1,666,758)
Loss from continuing operations per
share (0.09) (0.05)
Nine Months Ended March 31
2000 1999
----------------------- ----------------------
Revenues $ 21,333,717 $ 9,961,103
Loss from continuing operations (14,905,794) (12,173,605)
Loss from continuing operations per
share (0.39) (0.30)
</TABLE>
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.
16
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sale of Certain Assets Related to Books Now and the Company's Videos Now
Operations
Effective May 28, 1999, the Company entered into an Asset Purchase Agreement
with ClickSmart.com, Inc., a new corporation formed for the purpose of combining
the assets acquired from the Company with certain assets contributed by Video
Direct Inc. Pursuant to the agreement, the Company exchanged certain assets for
19.9 percent of the common stock of ClickSmart.com and is entitled to receive
$2,000,000 from ClickSmart either by receiving 75% of ClickSmart's net cash
flows until DCTI receives an aggregate amount of $2,000,000 or from proceeds
received by ClickSmart as an equity investment of not less than $10,000,000. The
assets exchanged by the Company primarily related to the operations of Books Now
and Videos Now and consisted of $57,183 of net equipment, $52,204 of prepaid
advertising and certain intangibles represented by net goodwill of $442,020.
ClickSmart did not assume any existing liabilities related to Books Now and
Videos Now. The operations of Books Now and Videos Now were not generating
positive cash flows prior to the exchange and the operations of Video Direct did
not have any history of profitability. Due to these uncertainties with respect
to the future cash flows and profitability of ClickSmart.com, at the time of the
exchange management determined that the Company's investment in ClickSmart.com
of $551,407 should be written off. Prior to the exchange, management was
considering the termination of the Books Now and Videos Now operations. In
connection with the exchange, the Company loaned ClickSmart $300,000 under a
promissory note bearing interest at 8 percent and due in May of 2000.
17
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sale of Substantially All Assets Related to WeatherLabs
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 combining the assets acquired
from the Company. Pursuant to the agreement, the Company exchanged certain net
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 including $132,556 of deferred income and $100,000 of notes
payable were assumed by the purchaser. The Company recorded the resulting gain
of $1,227,954 from this sale as discontinued operations during the nine months
ended March 31, 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 2,746,050 and 679,793 shares of common stock at weighted
average exercise prices of $7.16 and $4.36 per share as of March 31, 2000 and
1999, respectively, warrants to purchase 2,990,000 and 1,935,000 shares of
common stock at weighted average exercise prices of $6.53 and $7.21 per share as
of March 31, 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 March
31, 2000 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, 2000 the Company has
agreed to issue up to an additional 375,200 shares of common stock in connection
with the acquisition of WeatherLabs, contingent on the future price of the
Company's common stock. These contingent shares have also been excluded from the
computation of diluted EPS.
NOTE 4 - SOFTWARE LICENSE AGREEMENT
On March 25, 1999, the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for ACI's BASE24(R) software which
will be used to enhance the Company's existing Internet-based platforms that
offer secure payments processing for business-to-consumer electronic commerce.
Pursuant to the agreement, the Company agreed to pay ACI $5,941,218 during the
life of the contract. The Company made a payment upon signing the contract of
$591,218 and was scheduled to make equal payments at the beginning of each
quarter totaling $1,000,000 for calendar year 2000, $1,200,000 for calendar year
2001, $1,400,000 for calendar year 2002, $1,400,000 for calendar year 2003 and a
final payment of $350,000 on January 1, 2004.
18
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 14, 1999, Transactions Systems Architects, Inc. ("TSAI"), the parent of
ACI, purchased 1,250,000 shares of the Company common stock and warrants to
purchase an additional 1,000,000 shares of the Company's common stock in
exchange for $6,500,000. As part of the securities purchase agreement, the
Company agreed to amend the software license agreement with ACI. Pursuant to the
amended software license agreement, the Company agreed to immediately pay ACI
the discounted future payments under the original agreement, 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.
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 is obligated to make a payment of an
additional $2,500,000 on July 15, 2000.
NOTE 5 - DISTRIBUTION AGREEMENT
One June 3, 1999, the Company entered into a three year agreement with ACI
Worldwide, Inc. ("ACI") to distribute the Company's e-commerce products. As
consideration for this agreement ACI paid the Company a deposit of $700,000 and
will pay the Company distibution license fees of 40% of the license fees earned
on the sales of these e-commerce products until the Company receives $800,000;
35% of the license fees until the Company receives $1,500,000 and 30% of license
fees after the Company has received $1,500,000.
On April 1, 2000 the distribution agreement was modified to extend the minimum
term of the agreement to six years and to provide minimum guaranteed payments to
the Company totaling $6,000,000. The payments to be made to the Company are five
equal payments of $1,200,000 due on September 1 of each year beginning on
September 1, 2000 and ending on September 1, 2004.
NOTE 6 - CREDIT CARD CHARGEBACKS
During the three and nine months ended March 31, 2000, the Company experienced
$260,439 and $2,884,247, respectively, of credit card chargebacks related to
fraudulent merchant transactions. The Company's arrangements with its merchants
and agents provide for the recovery of chargebacks from the merchant and/or the
agents. Management intends to pursue recovery of the chargebacks; however, due
to the lack of any historical experience and other factors the potential
recovery is not estimable. Accordingly, the Company has expensed the full amount
of the chargebacks. Management does not anticipate any additional significant
chargebacks in excess of merchant resources. However, actual results could
differ materially from these estimates.
19
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - SUBSEQUENT EVENT
Software Purchase and Sales Agreement with MasterCoin, International, Inc.
In April 2000, the Company entered into a Software Purchase and Sales Agreement
with MasterCoin, International, Inc. ("MasterCoin"). In exchange for $1,000,000
in cash, the Company received all right, title and interest in and to
Mastercoin's e-commerce and e-cash software. MasterCoin is partially owned by
Don Marshall, President and a Director of the Company.
Asset Purchase and Sales Agreement with MasterCoin, Inc.
In April 2000, the Company finalized an Asset Purchase and Sales Agreement with
MasterCoin, Inc, wherein the Company agreed to purchase all of MasterCoin,
Inc.'s fixed assets located in St. Kitts, West Indies consisting principally of
computer and satellite equipment for $1,200,000. Mr. James Egide, Chief
Executive Officer and Chairman of the Company has a minority interest in
MasterCoin, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Digital Courier Technologies, Inc. (referred to herein as "DCTI" or the
"Company") provides advanced e-payment services. The Company specializes in risk
management and fraud control, and designs payment software and systems for
businesses, Internet merchants and financial institutions. Payment features of
the DCTI system include authentication, validation, fraud screening, payment
authorization, settlement and real-time reporting. DCTI's client base and
affiliations include U.S. and international banks and merchants, and ongoing
development partnerships with industry leaders that include NatWest,
Travelscape.com, TSAI and GlobalPlatform.
20
<PAGE>
The Company was incorporated under the laws of the State of Delaware on May 16,
1985. It was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
The Company recruited an experienced management and technical team to design and
implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, the Company acquired an Internet access business and entered
into strategic alliances with companies in the electronic mail ("e-mail")
business. The Company formed a division to create a network of interconnected
Web communities to be promoted by local television station affiliates. The
Company divested its direct marketing and internet access businesses in fiscal
1998. The Company divested its television web site hosting businesses, Books Now
operations and Videos Now operations in fiscal 1999. In March 1998, the Company
signed an agreement to acquire Digital Courier International, Inc., a private
Internet software development company. The acquisition was consummated in
September 1998, and the Company formally changed its name to Digital Courier
Technologies, Inc. The Company acquired Access Services, Inc. and SB.com, Inc.,
both credit card processors, during the fourth quarter of fiscal 1999. It
acquired DataBank in October 1999.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
Inc. ("Books Now") a book reseller, in exchange for a maximum of 362,500 shares
of the Company's common stock. One hundred thousand common shares valued at
$312,500 were issued at closing and 262,500 common shares were subject to a
three-year earn-out contingency based upon achieving certain financial
performance objectives. The fair market value of the common shares issued was
determined to be the quoted market price on the date of acquisition. The
acquisition was accounted for as a purchase.
In May 1999, the Company sold certain assets related to Books Now and the
Company's VideosNow division to ClickSmart, Inc. in exchange for 19.9% of
ClickSmart's common stock and is entitled to receive $2,000,000 from Clicksmart
either by receiving 75% of ClickSmart's net cash flows until DCTI receives an
aggregate amount of $2,000,000 or from proceeds received by ClickSmart as an
equity investment of not less than $10,000,000. The Company loaned ClickSmart
$300,000 to be paid from ClickSmart's net cash flows before payment of the
$2,000,000 deferred payment. The assets transferred to ClickSmart included
$52,204 of prepaid advertising, $57,183 of computer and office equipment, and
$442,020 of unamortized goodwill, resulting in a pretax loss on the sale of
$551,407.
In May 1998, the Company acquired all of the outstanding stock of WeatherLabs,
Inc., ("WeatherLabs") a provider of weather and weather-related information and
products on the Internet, in exchange for up to 777,220 shares of the Company's
common stock. At closing 253,260 common shares were issued valued at $762,503,
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.
21
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 combining the assets acquired
from the Company. Pursuant to the agreement, the Company exchanged certain net
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 $1,227,954 from this sale as discontinued operations during the three months
ended December 31, 1999.
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
condensed consolidated financial statements from September 16, 1998, the date of
acquisition.
In April 1999, the Company acquired all of the outstanding stock of Access
Services, Inc. ("Access Services"), a credit card processing company, in
exchange for 300,000 shares of the Company's common stock valued at $1,631,400,
the quoted market price of the common shares issued on the date of acquisition
and $75,000 in cash. The former owners of Access Services also received warrants
to purchase 20,000 shares of the Company's common stock at $5.50 per share
valued at $440,000.
In June 1999, the Company acquired all of the outstanding stock of SB.com, Inc.
("Secure Bank") a credit card processing company, in exchange for 2,840,000
shares of the Company's common stock valued at $17,838,040, the quoted market
price of the common shares issued on the date of acquisition. The Company also
loaned $2,000,000 to the officers of Secure Bank. The loans are payable with 6
percent interest and are to be repaid within 2 years or from the proceeds from
the sale of the Company's common stock, whichever is earlier. In addition, each
of the four principal former stockholders' of Secure Bank received individual
one year employment contracts with an annual salary of $150,000.
In October 1999, the Company acquired all of the outstanding stock of DataBank
International SKB, 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. The Company also 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, at a 12.5% discount.
22
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $4,837,500, the quoted market price of
the common shares issued on the date of acquisition, and $150,000 in cash.
Results of Operations
Three months ended March 31, 2000, compared with three months ended March 31,
1999, and nine months ended March 31, 2000 compared with nine months ended March
31, 1999.
Net Revenues
Net revenues for the three months ended March 31, 2000 were $8,799,382 as
compared to $320,569. The acquisitions of Access Services, Secure Bank and
DataBank accounted for all of the net revenues for the three months ended March
31, 2000. Access Services operations were acquired in April 1999, Secure Bank
operations were acquired in June 1999, and Databank was acquired in October
1999. The Books Now and Videos Now operations, which were sold in May 1999,
accounted for $295,069 of total net revenues, and technical support services
accounted for $25,500 of total net revenue for the three months ended March 31,
1999.
Net revenues for the nine months ended March 31, 2000 were $17,790,265 as
compared to $933,796. The acquisitions of Access Services, Secure Bank and
DataBank accounted for all of the net revenues for the nine months ended March
31, 2000. The Books Now and Videos Now operations which were sold in May 1999,
accounted for $893,194 of total net revenues, technical support services
accounted for $40,468 of total net revenues and online subscriber services
accounted for $134 of total net revenues for the nine months ended March 31,
1999.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2000 were $4,401,878 or
50.0% of net revenues. Cost of revenues for the three months ended March 31,
1999 were $255,771 or 79.8% of net revenues. Cost of revenues as a percent of
sales has changed due to the change in revenue mix.
Cost of revenues for the nine months ended December 31, 1999 were $9,183,397 or
51.6% of net revenues. Cost of revenues for the nine months ended March 31, 1999
were $727,582 or 77.9% of net revenues. Cost of revenues as a percent of sales
has changed due to the change in revenue mix.
23
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating Expenses
Depreciation and amortization expense increased 1078.8% to $12,402,103 during
the three months ended March 31, 2000 from $1,052,070 during the three months
ended March 31, 1999. The increase in depreciation and amortization expense was
principally due to the amortization of goodwill related to the acquired
companies.
Depreciation and amortization expense increased 653.5% to $20,851,723 during the
nine months ended March 31, 2000 from $2,767,289 during the nine months ended
March 31, 1999. The increase in depreciation and amortization expense was
principally due to the amortization of goodwill related to the acquired
companies.
General and administrative expense increased 95.0% to $2,034,013 during the
three months ended March 31, 2000 from $1,043,002 during the three months ended
March 31, 1999. The increase in general and administrative expense was due to
the addition of administrative, operational and support staff and facilities
costs associated with the acquisitions during the past year.
General and administrative expense increased 80.4% to $4,630,504 the nine months
ended March 31, 2000 from $2,566,998 during the nine months ended March 31,
1999. The increase in general and administrative expense was due to the addition
of administrative, operational and support staff and facilities costs associated
with the acquisitions during the past year.
Credit card chargebacks during the three and nine months ended March 31, 2000
were $260,439 and $3,144,686, respectively. These chargebacks resulted primarily
from fraudulent merchant transactions from the Company's "brick and mortar"
merchants. The Company's contracts with the merchants and the agents for these
merchants permits the Company to recover chargebacks from the merchants and/or
the agents. The Company will pursue all available avenues to recover these
chargebacks.
Selling expense increased 298.8% to $757,959 during the three months ended March
31, 2000 from $190,069 during the three months ended March 31, 1999. The
increase in selling expense is attributable expenses incurred for selling
expenses for our payment processing products offset by a reduction in selling
expense related the Books Now, WeatherLabs and VideosNow operations.
24
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Selling expense increased 229.6% to $2,277,645 during the nine months ended
March 31, 2000 from $691,126 during the nine months ended March 31, 1999. The
increase in selling expense is attributable expenses incurred for selling
expenses for our payment processing products offset by a reduction in selling
expense related the Books Now, WeatherLabs and VideosNow operations.
Research and development expense decreased 31.9% to $338,105 during the three
months ended March 31, 2000 from $496,578 during the three months ended March
31, 1999. Research and development expense decreased because of the divestiture
of the Books Now and VideosNow operations.
Research and development expense increased 16.8% to $1,611,163 during the nine
months ended March 31, 2000 from $1,379,244 during the nine months ended March
31, 1999. Research and development expense increased because of the acquisition
of DCII which is performing significant research and development activities for
the Company's payment processing operations offset by the divestiture of the
Books Now and VideosNow operations.
Non-cash compensation for issuance of stock options and stock was $1,158,301
during the three months ended March 31, 2000. The value of cashless exercises of
stock options was $1,096,801 and the issuance of stock in settlement of a suit
by a former employee was $61,500.
Non-cash compensation for the issuance of stock options and stock increased
28.1% to $1,347,069 during the nine months ended March 31, 2000 from $1,051,558
during the nine months ended March 31, 1999. During the nine months ended March
31, 2000, the value of cashless exercises of stock options was $1,285,569 and
the issuance of stock in settlement of a suit by a former employee was $61,500.
During the nine months ended March 31, 1999 the Company and the former owner
reached a severance agreement, wherein, the former owner and President of Books
Now and original shareholders of Books Now were issued 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 agreement. Because the operations of Books Now
were not achieving the performance criteria, the $1,051,558 of common stock was
expensed as of the date of the agreement.
During the three and nine months ended March 31, 1999, the Company incurred
expenses of $52,202 and $5,208,337, respectively, associated with terminating
the interactive marketing agreement with America Online, Inc. ("AOL"). 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.
25
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 1, 1999, we entered into a second amendment with AOL, under which
AOL agreed to return to us (a) the 636,942 warrants 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.
We have no further financial obligations to AOL.
Under the original contract with AOL the Company was to be one of only two
predominantly displayed online stores ("permanent anchor tenant") for the sale
of videos on the AOL channels where subscribers would most likely go to purchase
videos. In addition to the predominant display on the AOL channels, AOL was
providing advertising on its other channels to send customers to the permanent
anchor tenant sites. The permanent anchor tenancy included "above the fold
placement" (no scrolling required to see the Company's video site) and an
oversized logo (larger than a banner or a button). Under the amended contract
with AOL the Company only received "button" placement on the AOL shopping
channel. "Button" placement is not predominant on the AOL channels, is smaller,
need not be "above the fold" and is not the beneficiary of AOL advertising
designed to send customers to the site.
As a result of the February 1, 1999 agreement with AOL, the Company determined
that the remaining balance of the AOL anchor tenant placement costs of
$12,364,123, less $139,206 representing the fair market value of the permanent
location 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 $5,156,135 during the three months ended
December 31, 1998.
The interactive marketing agreement with America Online, Inc. 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").
26
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The write off of acquired in-process research and development during the six
months ended December 31, 1998 was $3,700,000, which was attributable to the
acquisition of DCII (see Note 2 to the condensed consolidated financial
statements).
Discontinued operations
During the nine months ended March 31, 2000, the Company sold substantially all
of its assets related to WeatherLabs. The results of the WeatherLabs operations
are presented as discontinued operations. During the three months ended March
31, 1999, the pretax loss from the WeatherLabs operations was $187,033.
During the nine months ended March 31, 2000, the pretax loss from this operation
was $429,779. Also during the nine months ended March 31, 2000, the Company
recorded a pretax gain from the sale of the WeatherLabs assets of $1,227,953.
During the nine months ended March 31, 1999 the pretax loss from the WeatherLabs
operations was $641,651.
Liquidity and Capital Resources
On October 22, 1998, the Company borrowed $1,200,000 from a group of individual
lenders (the "Loan"). The annual interest rate on the Loan is 24% and the Loan
is secured by receivables owed to the Company. The original maturity date of the
Loan was October 22, 1999. It may be prepaid without penalty any time after
February 22, 1999. In connection with the Loan, the Company paid a finders fee
of $27,750 and issued two-year warrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share. The finders' fee and the
fair market value of the two-year warrants have been capitalized and are being
amortized over the life of the loan. On October 15, 1999, the Company extended
the loan for the current principal amount of $753,342 with a maturity date of
October 20, 2000. On February 28, 2000 the Company paid off this 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").
27
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were callable by
the Company if for 15 consecutive trading days, the closing bid price of the
Company's stock is at least two times the then-current exercise price.
The Amended Agreements also required the Company to sell to the Purchasers, and
the Purchasers to purchase from the Company, an additional tranche of 800,000
units, each unit consisting of one share of the Company's common stock and a
warrant to purchase one share of common stock (the "Tranche B Units"), if
certain conditions are met. A condition to the sale of the Tranche B Units,
among others, was that the closing bid price of the Company's common stock be
more than $7 per share for 15 consecutive trading days. The price for the
Tranche B Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche B Unit will be equal to 110% of the closing bid price of the
Company's stock on the day of the sale of the Tranche B Units.
On March 3, 1999, the Company raised an additional $3.6 million through the sale
of Series A Convertible Preferred Stock (the "Preferred Stock") and warrants to
purchase common stock to the Purchasers pursuant to a Securities Purchase
Agreement between the Company and the Purchasers (the "March Purchase
Agreement").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360 shares of
the Preferred Stock convertible into 800,000 shares of common stock and
five-year warrants to purchase an additional 800,000 shares of common stock. The
Preferred Stock is convertible into common stock at a price of $4.50 per share
of common stock. The initial exercise price for the warrants is $5.23 per share,
subject to adjustment on the six month anniversary of the closing, to the lesser
of the initial exercise price and the average price of the Company's common
stock during any five consecutive business days during the 22 business days
ending on such anniversary of the closing. The warrants are callable by the
Company if for 30 consecutive trading days, the closing bid price of the
Company's common stock is at least two times the then-current exercise price.
The March Purchase Agreement also requires the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 1,600,000 units, each unit consisting of Series B Convertible
Preferred Stock convertible into one share of the Company's common stock and a
five-year warrant to purchase one share of common stock (the "Tranche D Units"),
if certain conditions are met. A condition to the sale of the Tranche D Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for 30 consecutive trading days. The price for the
Tranche D Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche D Unit will be $7.70. The March Purchase Agreement terminates the
commitment for Tranche B Units previously discussed.
28
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 7, 1999 the Company and Brown Simpson entered into an agreement which
increased the number of trading days required for the warrant call option and
the Tranche D trigger to 130 consecutive trading days.
On March 25 1999, the Company entered into a 5 year software licensing agreement
with ACI Worldwide, Inc. ("ACI") to license ACI's BASE24 software to enhance the
Company's existing Internet-based platforms that offer secure payments
processing for business-to-consumer electronic commerce. The license agreement
called for payments totaling $5,941,218 to be made over a five year period. The
Company made a payment to ACI of $591,248 in March 1999. 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 is obligated to make a payment of an additional $2,500,000 on
July 15, 2000.
On June 3, 1999, the Company entered into a 3 year international software
distribution agreement with ACI to market the Company's payment processing
software. The Company received a $700,000 deposit against this contract from ACI
in July 1999. On April 1, 2000 the distribution agreement was modified to extend
the minimum term of the agreement to six years and to provide minimum guaranteed
payments to the Company totaling $6,000,000 in addition to royalties. The
payments are due in five equal installments of $1,200,000 due on September 1 of
each year beginning on September 1, 2000 and ending on September 1, 2004.
On June 14, 1999, the Company raised $6,500,000 by selling 1,250,000 shares of
its common stock and warrants to purchase 1,000,000 shares of common stock at
$5.20 per share to Transaction Systems Architects, Inc. ("TSAI"), the parent
company of ACI. In connection with this stock purchase agreement the software
licensing agreement with ACI was modified to reduce the total payments due under
the software license agreement to $4,517,296. The Company made the additional
required payment to ACI of $3,888,435 from the proceeds received from TSAI.
Operating activities provided $4,074,786 during the nine months ended March 31,
2000 compared to using $7,740,397 during the nine months ended March 31, 1999.
Cash provided by investing activities was $12,715,175 during the nine months
ended March 31, 2000 as compared with cash used by investing activities of $
1,066,855 during the nine months ended March 31, 1999. During the nine months
ended March 31, 2000, the Company's investing activities included the receipt of
$9,045,341 from the sale of CommTouch stock that was previously held as an
investment, the receipt of $3,383,000 from the sale of the WeatherLabs assets,
the receipt of $428,096 of cash from the acquistion of DataBank, and a decrease
in net long-term assets of discontinued operations of $670,300, offset by the
purchase of equipment of $661,562 and the payment of $150,000 in cash in
conjunction with the acquisition of CaribCommerce. During the nine months ended
March 31, 1999, the Company's investing activities included cash advances for
operating activities to DCII of $849,203, the acquisition of equipment for
$745,190, offset by the receipt of $286,418 from the sale of certain WorldNow
assets, $76,225 net proceeds from the sale of equipment and $164,895 from a
decrease in net long-term assets of discontinued operations.
29
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash used in financing activities was $1,109,315 during the nine months ended
March 31, 2000 as compared to $7,734,867 provided by financing activities during
the nine months ended March 31,1999. The cash used during the nine months ended
March 31, 2000 was attributable to principal repayments on borrowings of
$960,614, principal repayments on capital lease obligations of $811,097 offset
by the receipt of net proceeds from the issuance of common stock upon the
exercise of stock options of $590,520 and receipt of $71,876 from the exercise
of warrants. The cash provided during the nine months ended March 31, 1999 was
attributable to the net proceeds from the issuance of common stock of
$6,524,000, net proceeds from borrowings of $1,000,000, and net proceeds from
the issuance of common stock upon the exercise of stock options of $943,750,
offset by repayments on capital lease obligations of $579,836 and principal
repayments on borrowings of $153,047.
Management projects that with the acquisition of DataBank there will be
sufficient cash flows from operating activities during the next twelve months to
provide capital for the Company to sustain its operations. As of March 31, 2000,
the Company had $17,940,219 of cash. Although, the Company has incurred losses
from continuing operations of $21,364,713, $5,597,967 and $7,158,851 and the
Company's operating activities have used $7,783,023, $6,377,970 and $6,334,660
of cash during the years ended June 30, 1999, 1998 and 1997, respectively,
operating activities for the nine months ended March 31, 2000 provided
$4,495,575 of cash.
Year 2000 Issue
Computer systems, software applications, and microprocessor dependent equipment
may cease to function properly or generate erroneous data in the year 2000. The
problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed "year
2000 compliant."
To date we have invested $80,000 in an effort to certify all aspects of the
business are year 2000 compliant. The areas of the business which have been
targeted for compliance testing are our operations and our software products and
services. We conducted the certification process over a three-month period in
which all software products and service components under our direct control
certified year 2000 compliant. For the major operational components and
remaining software and services that are under the control of third party
organizations, we have received written confirmation and evidence of year 2000
compliance. We may realize operational exposure and risk if the systems for
which we are dependent upon to conduct day-to-day operations are not year 2000
compliant. The potential areas of software exposure include:
30
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
o electronic data exchange systems operated by third parties with whom we
transact business;
o server software which we use to present content and advertising to our
customers and partners; and
o computers, software, telephone systems and other equipment used internally.
During the last two years, our computerized information systems have been
substantially upgraded to be year 2000 compliant. Thus far in the year 2000, we
have not experienced any date-related problems. It is still possible that if
systems material to our operations have not been made year 2000 compliant, or if
third parties failed to make their systems compliant in a timely manner, the
year 2000 issue could have a material adverse effect on our business, financial
condition, and results of operations. This would result in an inability to
provide functioning software and services to our customers in a timely manner,
and could then result in lost revenues from these customers, until such problems
are resolved by us or the responsible third parties.
Forward-Looking Information
Statements regarding the Company's expectations as to future revenue from its
business strategy, and certain other statements presented herein, constitute
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to the risks
described in the "Risk Factors" section of our Annual Report on Form 10-K for
the year ended June 30, 1999.
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 4, 2000 By /s/ James A. Egide
------------------------------------
James A. Egide
Chairman and Chief Executive Officer
32
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