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 December 31, 1999
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
----------------------------------
(exact name of registrant as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 Heber Avenue, Suite 204
P.O. Box 8000
Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(435) 655-3617
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The Registrant has
two classes of stock issued and outstanding, Common Stock with $.0001 par value,
of which 35,633,588 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.
1
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
ASSETS
December 31, June 30,
1999 1999
-------------------- --------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 8,694,090 $ 2,381,356
Receivable from payment services processor 2,385,072 -
Trade accounts receivable 1,290,172 548,046
Other receivables 500,000 800,000
Available-for-sale security - CommTouch Software, Ltd. 10,093,334 -
Prepaid software license 903,456 903,456
Receivable from an officer - 56,000
Prepaid expenses and other current assets 118,651 193,167
Net current assets of discontinued operations - 288,752
-------------------- --------------------
Total current assets 23,984,775 5,170,777
-------------------- --------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,485,556 6,010,440
Furniture, fixtures and leasehold improvements 1,080,366 966,745
-------------------- --------------------
7,565,922 6,977,185
Less accumulated depreciation and amortization (4,172,915) (3,378,528)
-------------------- --------------------
Net property and equipment 3,393,007 3,598,657
-------------------- --------------------
GOODWILL, net of accumulated amortization of $10,044,926 and $2,392,938,
respectively 110,967,535 29,628,037
-------------------- --------------------
PREPAID SOFTWARE LICENSE, net of current portion 2,936,232 3,387,960
-------------------- --------------------
INVESTMENT IN COMMTOUCH SOFTWARE, LTD - 750,000
-------------------- --------------------
-------------------- --------------------
OTHER ASSETS 2,666,089 2,581,108
-------------------- --------------------
$ 143,947,638 $ 47,102,186
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1999 1999
------------------ ---------------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 1,903,342 $ 2,110,614
Current portion of capital lease obligations 871,571 1,090,507
Accounts payable 1,087,993 311,431
Settlements due to merchants 6,383,062 -
Merchant reserves 2,165,255 -
Accrued chargebacks 1,797,906 -
Deferred revenue - 198,430
Other accrued liabilities 2,299,203 1,382,833
------------------ ---------------------
Total current liabilities 16,508,332 5,093,815
------------------ ---------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 120,443 432,704
------------------ ---------------------
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares authorized; 360 shares of Series A Common
stock, $.0001 par value; 50,000,000 shares authorized, 35,243,353
Additional paid-in capital 161,166,292 72,759,439
Accumulated other comprehensive income 9,343,334 -
Warrants outstanding 1,363,100 1,363,100
Stock subscription receivable (12,000) (12,000)
Accumulated deficit (48,145,387) (36,136,728)
------------------ ---------------------
Total stockholders' equity 127,318,863 41,575,667
------------------ ---------------------
$ 143,947,638 $ 47,102,186
================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
NET REVENUES $ 6,157,954 $ 357,211
COST OF REVENUES 3,434,725 291,930
------------------ -------------------
Gross margin 2,723,229 65,281
------------------ -------------------
OPERATING EXPENSES:
Depreciation and amortization 6,478,108 1,084,860
Credit card chargebacks 2,884,247 -
General and administrative 1,901,494 929,235
Selling 916,969 1,209,102
Research and development 696,839 843,996
AOL interactive marketing contract costs - 5,156,135
------------------ -------------------
Total operating expenses 12,877,657 9,223,328
------------------ -------------------
OPERATING LOSS (10,154,428) (9,158,047)
------------------ -------------------
OTHER INCOME (EXPENSE):
Interest and other income 70,209 16,502
Interest and other expense (111,197) (196,581)
------------------ -------------------
Other expense, net (40,988) (180,079)
------------------ -------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(10,195,416) (9,338,126)
INCOME TAX BENEFIT 413,957 -
------------------ -------------------
LOSS FROM CONTINUING OPERATIONS (9,781,459) (9,338,126)
------------------ -------------------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
(Continued)
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
DISCONTINUED OPERATIONS:
Loss from operations of discontinued WeatherLabs operations, net of income
tax benefit of $46,526 and $0, respectively (77,542) (264,522)
Gain on sale of WeatherLabs operations, net of income tax provision of 767,472 -
$460,482 ------------------ -------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 689,930 (264,522)
------------------ -------------------
NET LOSS $ (9,091,529) $ (9,602,648)
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.26) $ (0.70)
================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 35,183,224 13,745,159
================== ===================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
NET LOSS $ (9,091,529) $ (9,602,648)
Unrealized holding gains arising during the period on 7,001,714 -
------------------- -------------------
COMPREHENSIVE LOSS $ (2,089,815) $(9,602,648)
------------------- -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
NET REVENUES $ 8,990,883 $ 613,227
COST OF REVENUES 4,781,519 471,811
------------------ -------------------
Gross margin 4,209,364 141,416
------------------ -------------------
OPERATING EXPENSES:
Depreciation and amortization 8,449,620 1,715,219
Credit card chargebacks 2,884,247 -
General and administrative 2,785,259 1,523,996
Selling 1,519,686 1,552,615
Research and development 1,273,058 882,666
AOL interactive marketing contract costs - 5,156,135
Acquired in-process research and development - 3,700,000
------------------ -------------------
Total operating expenses 16,911,870 14,530,631
------------------ -------------------
OPERATING LOSS (12,702,506) (14,389,215)
------------------ -------------------
OTHER INCOME (EXPENSE):
Interest and other income 146,043 26,396
Net gain on sale of assets - 308,245
Interest and other expense (250,371) (214,036)
------------------ -------------------
Other expense, net (104,328) 120,605
------------------ -------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(12,806,834) (14,268,610)
INCOME TAX BENEFIT 299,316 -
------------------ -------------------
LOSS FROM CONTINUING OPERATIONS (12,507,518) (14,268,610)
------------------ -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
(Continued)
<CAPTION>
1999 1998
------------------ -------------------
<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) (454,618)
Gain on sale of WeatherLabs operations, net of income tax provision of 767,471 -
$480,859
------------------ -------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 498,859 (454,618)
------------------ -------------------
NET LOSS $(12,008,659) $ (14,723,28)
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.45) $ (1.28)
================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 26,509,492 11,468,256
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
NET LOSS $ (12,008,659) $ (14,723,228)
Unrealized holding gains arising during the period on
Available-for-sale security 9,343,334 -
COMPREHENSIVE LOSS $ (2,665,325) $(14,723,228)
------------------- -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
9
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<CAPTION>
Increase (Decrease) in Cash
1999 1998
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,008,659) $ (14,723,228)
Adjustments to reconcile net loss to net cash provided by (used in)
Depreciation and amortization 8,449,620 1,715,219
Compensation expense related to cashless exercise of stock options 188,768 -
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. - 1,051,588
Amortization and write-off of AOL anchor tenant placement costs - 5,516,135
Gain on sale of WorldNow assets - (308,245)
Loss on disposition of equipment - 78,551
Changes in operating assets and liabilities, net of effect of
Trade accounts receivable (330,813) (42,800)
Receivable from payment services processor (2,385,072) -
Other receivables 300,000 (78,172)
Receivable from officer 56,000
Inventory - 21,046
Prepaid software license 451,728 -
Prepaid expenses and other current assets 71,273 (1,196,678)
Net current assets of discontinued operations (550,947) (4,482)
Other assets (84,981) (8,235)
Accounts payable (1,043,534) (1,279,870)
Settlements due to merchants 6,383,062 -
Merchant reserves 2,165,255 -
Accrued chargebacks 1,797,906
Accrued rental payments for vacated facilities - (263,765)
Other liabilities 717,940 (7,172)
----------------- -------------------
Net cash provided by (used in) operating activities 2,949,592 (5,079,831)
----------------- -------------------
See accompanying notes to condensed consolidated financial statements
</TABLE>
10
<PAGE>
<TABLE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
Increase (Decrease) in Cash
(Continued)
<CAPTION>
1999 1998
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of WeatherLabs operations 3,383,000 -
Net cash acquired in acquisition 428,096 -
Purchase of property and equipment (403,737) (630,475)
Advances to Digital Courier International, Inc. - (849,203)
Net cash proceeds from sale of WorldNow assets - 108,246
Decrease in net long-term assets of discontinued operations 670,300 107,346
Proceeds from sale of equipment - 72,225
----------------- -------------------
Net cash provided by (used in) investing activities 4,077,659 (1,191,861)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 3,298,000
Net proceeds from borrowings - 1,000,000
Net proceeds from issuance of common stock upon exercise of stock options - 838,751
Net proceeds from issuance of common stock upon exercise of warrants 23,952 -
Principal payments on capital lease obligations (531,197) (318,115)
Principal payments on borrowings (207,272) (53,047)
----------------- -------------------
Net cash provided by (used in) financing activities (714,517) 4,765,589
----------------- -------------------
NET INCREASE (DECREASE) IN CASH 6,312,732 (1,506,103)
CASH AT BEGINNING OF PERIOD 2,381,356 3,211,724
----------------- -------------------
CASH AT END OF PERIOD $ 8,694,090 $ 1,705,621
================= ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 180,102 $ 131,804
</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 financial statements as of December 31, 1999
and for the three and six months ended December 31, 1999 and 1998 are unaudited.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation have been included. The
financial statements are condensed and, therefore, do not include all
disclosures normally required by generally accepted accounting principles. These
financial statements should be read in conjunction with the Company's annual
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999. The results of operations for the three and
six months ended December 31, 1999 are not necessarily indicative of the results
to be expected for the entire fiscal year ending June 30, 2000. Certain
previously reported amounts have been reclassified to conform to the current
period presentation. These reclassifications had no affect on the previously
reported net income (loss).
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange Agreement
(the "Exchange Agreement") with Digital Courier International, Inc. ("DCII").
Pursuant to the Exchange Agreement, the Company agreed to issue 4,659,080 shares
of its common stock valued at $14,027,338 to the shareholders of DCII. The
issuance of the common shares was recorded at the quoted market price on the
date of acquisition. The acquisition was approved by the shareholders of the
Company on September 16, 1998.
The acquisition of DCII has been accounted for as a purchase and the results of
operations of DCII are included in the accompanying consolidated financial
statements since the date of acquisition. The tangible assets and contra-equity
acquired included $250,000 of equipment, $20,500 of deposits and $12,000 of
stock subscriptions receivable. Liabilities assumed consisted of $219,495 of
accounts payable and accrued liabilities. After entering into the Exchange
Agreement, the Company made advances to DCII to fund its operations. The amount
loaned to DCII totaled $1,659,418 as of the date of acquisition. The excess of
the purchase price over the estimated fair market value of the acquired assets
was $15,623,750. Of this amount, $11,923,750 was recorded as goodwill and other
intangibles and is being amortized over a period of five years and $3,700,000
was expensed as acquired in-process research and development.
12
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Upon consummation of the DCII acquisition, the Company immediately expensed
$3,700,000 representing purchased in-process technology that had not yet reached
technological feasibility and has no alternative future use. The in-process
projects were focused on the continued development and evolution of internet
e-commerce solutions including: netClearing and two virtual store projects
(videos and books). The nature of these projects is to provide full service
credit card clearing and merchant banking services over the Internet for
businesses and financial institutions and to market software to help customers
develop virtual stores on the Internet. When completed, the projects will enable
the creation of any "virtual store" through a simplified interface.
As of the date of acquisition, DCII had invested $1,300,000 in the in-process
projects identified above. The developmental projects at the time of the
acquisition were not technologically feasible and had no alternative future use.
This conclusion was attributable to the fact that DCII had not completed a
working model that had been tested and proven to work at performance levels
which were expected to be commercially viable, and that the technologies
constituting the projects had no alternative use other than their intended use.
Development of the acquired in-process technology into commercially viable
products and services required efforts principally related to the completion of
all planning, designing, coding, prototyping, scalability verification, and
testing activities necessary to establish that the proposed technologies would
meet their design specifications, including functional, technical, and economic
performance requirements. Management estimates that approximately $500,000 will
be required over the next 3 to 6 months to develop the aforementioned products
to commercial viability.
Management estimates that the projects were approximately 50% complete at the
date of the acquisition given the nature of the achievements to date. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur.
The net cash flows resulting from the projects underway at DCII, which were used
to value the purchased research and development, are based on management's
estimates of revenues, cost of revenues, research and development costs,
selling, general, and administrative costs, and income taxes from such projects.
These estimates assume that the revenue projections are based on the potential
market size that the projects are addressing, the Company's ability to gain
market share in these segments, and the life cycle of in-process technology.
Estimated total revenues from the purchased in-process projects peak in the
fiscal years 2001 and 2002 and then decline rapidly in the fiscal years 2003 and
2004 as other new products are expected to enter the market. There can be no
assurances that these assumptions will prove accurate, or that the Company will
realize the anticipated benefit of the acquisition. The net cash flows generated
from the in-process technology are expected to reflect earnings before interest
and taxes, of approximately 35% to 48% for the sales generated from in-process
technology.
13
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The discount of the net cash flows to their present value is based on the
weighted average cost of capital ("WACC"). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
the enterprise. The discount rates used to discount the net cash flows from the
purchased in-process technology were 45% for DCII. This discount rate reflects
the uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, if any, and the uncertainty of technological
advances, all of which are unknown at this time.
As evidenced by its continued support for these projects, management believes
the Company is well positioned to successfully complete the research and
development projects. However, there is risk associated with the completion of
the projects, and there is no steadfast assurance that each will meet with
either technological or commercial success. The substantial delay or outright
failure of these e-commerce solutions would negatively impact the Company's
financial condition. If these projects are not successfully developed, the
Company's business, operating results, and financial condition may be negatively
affected in future periods. In addition, the value of other intangible assets
acquired may become impaired.
To date, DCII results have not differed significantly from the forecast
assumptions. The Company's research and development expenditures since the DCII
acquisition have not differed materially from expectations. Revenue contribution
from the acquired technology falls within an acceptable range of plans in its
role in the Company's suite of internet and e-commerce solutions.
Access Services, Inc.
Effective April 1, 1999, the Company acquired all of the outstanding stock of
Access Services, a credit card processing company. The shareholders of Access
Services were issued 300,000 shares of the Company's common stock valued at
$1,631,400 (based on the quoted market price of the Company's common stock on
the date of the acquisition), $75,000 in cash and warrants to purchase 100,000
shares of the Company's common stock at $5.50 per share valued at $440,000. The
acquisition of Access Services has been accounted for as a purchase and the
results of operations of Access Services are included in the accompanying
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $97,999 of cash, $110,469 of accounts receivable,
$25,939 of equipment and $2,780 of deposits. Liabilities assumed consisted of
$264,794 of accounts payable and accrued liabilities and $10,100 of notes
payable.
The excess of the purchase price over the estimated fair market value of the
acquired net assets of $2,327,866 has been recorded as goodwill and is being
amortized over a period of 5 years.
In connection with the acquisition of Access Services, the Company entered into
a 2-year employment agreement with a key officer. Pursuant to the employment
agreement, the Company has committed to pay a base annual salary of $120,000 and
14
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
bonuses as determined by the Company. If the Company terminates the officer's
employment without cause, the officer is generally entitled to the salary,
bonuses and benefits otherwise payable under the agreement as severance. The
employment agreement automatically continues after the initial term on a year to
year basis until terminated by either party.
SB.com, Inc.
Effective June 1, 1999, the Company acquired all of the outstanding stock of
SB.com, a credit card transaction processing company. The shareholders of SB.com
were issued 2,840,000 shares of the Company's common stock valued at $17,838,040
(based on the quoted market price of the Company's common stock on the date of
the acquisition). The acquisition of SB.com has been accounted for as a purchase
and the results of operations of SB.com are included in the accompanying
consolidated financial statements since the date of acquisition. The former
shareholders of SB.com retained all tangible assets and liabilities existing at
the date of acquisition. Accordingly, the purchase price of $17,838,040 has been
recorded as goodwill and is being amortized over a period of 5 years. 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.
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.
15
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. These shares will be subject to a two year restriction
on their sale. Therefore the Company will issue 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 will be recorded as goodwill and will be
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).
In November 1998, the Company and the former owner reached a severance
agreement, wherein, the former owner and President of Books Now is to receive
severance payments equal to one year's salary ($81,000). Additionally, the
Company agreed to issue 205,182 shares of the Company's common stock valued at
$1,051,558, based on the quoted market price of the shares on the date of the
severance agreement, to the former shareholders of Books Now. Because the
operations of Books Now were not achieving the performance criteria, both the
$81,000 of cash and the $1,051,558 of common stock 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
16
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DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
years. As of June 30, 1999, an additional 101,035 shares of common stock with a
fair market value of $593,580 were issuable pursuant to the contingency
provisions. Based on the stock price of the Company's common stock, as defined,
at the end of fiscal years 2000 and 2001, the shareholders may be entitled to
receive up to a total of 375,200 shares of the Company's common stock.
The acquisition has been accounted for as a purchase and the operations of
WeatherLabs are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $3,716 of
cash, $19,694 of accounts receivable, $115,745 of equipment and $13,300 of
deposits. Liabilities assumed included $100,000 of notes payable, $56,902 of
capital lease obligations and $134,444 of accounts payable and accrued
liabilities. The excess of the purchase price over the estimated fair value of
the acquired assets of $1,441,599 has been recorded as goodwill and is being
amortized over a period of 5 years. During the quarter ended December 31, 1999,
the Company sold substantially all of the assets of Weatherlabs (see additional
discussion below).
Unaudited Pro Forma Data Related to Acquisitions
The unaudited pro forma results of operations of the Company for the three and
six months ended December 31, 1999 and 1998 (assuming the acquisitions of DCII,
Access Services, SB.com and DataBank had occurred as of July 1, 1998) are as
follows:
<TABLE>
<CAPTION>
Three Months Ended December 31
------------------------------
1999 1998
----------------------- ----------------------
<S> <C> <C>
Revenues $ 6,157,954 $ 3,562,556
Loss from continuing operations (9,781,459) (8,653,093)
Loss from continuing operations per
share (0.28) (0.20)
Six Months Ended December 31
----------------------------
1999 1998
----------------------- ----------------------
Revenues $ 12,534,335 $ 4,683,519
Loss from continuing operations (10,913,215) (10,506,827)
Loss from continuing operations per
share (1.26) (0.32)
</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
17
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
network of local television stations. Pursuant to the asset purchase agreement,
Gannaway agreed to pay $487,172 (less certain amounts as defined) in
installments over a one-year period from the date of closing and agreed to pay
earn-out amounts of up to $500,000. The earn-out amounts are calculated as ten
percent of monthly revenues actually received by Gannaway in excess of $100,000
and are to be paid quarterly. Gannaway acquired tangible assets of approximately
$100,000 consisting primarily of computer and office equipment and assumed no
liabilities. The operations of WorldNow through the date of the sale of the
assets are reflected in the accompanying condensed consolidated financial
statements in loss from continuing operations. The Company realized a pretax
gain of $308,245 on the sale.
Sale of Certain Assets Related to Books Now and the Company's Videos Now
Operations
Effective May 28, 1999, the Company entered into an Asset Purchase Agreement
with ClickSmart.com, Inc., a new corporation formed for the purpose of combining
the assets acquired from the Company with certain assets contributed by Video
Direct Inc. Pursuant to the agreement, the Company exchanged certain assets for
19.9 percent of the common stock of ClickSmart.com 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.
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
18
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 1,970,550 and 998,125 shares of common stock at weighted
average exercise prices of $6.04 and $3.49 per share as of December 31, 1999 and
1998, respectively, warrants to purchase 2,990,000 and 1,079,000 shares of
common stock at weighted average exercise prices of $6.53 and $8.78 per share as
of December 31, 1999 and 1998, respectively, and 360 shares of Series A
preferred stock convertible to 800,000 shares of common stock at $4.50 per share
at December 31, 1999 were not included in the computation of Diluted EPS. The
inclusion of the options, warrants and preferred stock would have been
antidilutive, thereby decreasing net loss per common share. As of December 31,
1999 the Company has agreed to issue up to an additional 375,200 shares of
common stock in connection with the acquisition of WeatherLabs, contingent on
the future price of the Company's common stock. These contingent shares have
also been excluded from the computation of diluted EPS.
NOTE 4 - SOFTWARE LICENSE AGREEMENT
On March 25, 1999, the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for ACI's BASE24(R) software which
will be used to enhance the Company's existing Internet-based platforms that
offer secure payments processing for business-to-consumer electronic commerce.
Pursuant to the agreement, the Company agreed to pay ACI $5,941,218 during the
life of the contract. The Company made a payment upon signing the contract of
$591,218 and was scheduled to make equal payments at the beginning of each
quarter totaling $1,000,000 for calendar year 2000, $1,200,000 for calendar year
2001, $1,400,000 for calendar year 2002, $1,400,000 for calendar year 2003 and a
final payment of $350,000 on January 1, 2004.
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
19
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
exchange for $6,500,000. As part of the securities purchase agreement, the
Company agreed to amend the software license agreement with ACI. Pursuant to the
amended software license agreement, the Company agreed to immediately pay ACI
the discounted future payments under the original agreement that amounted to
$3,888,453. The amounts paid under the agreement have been recorded as prepaid
software license in the accompanying consolidated financial statements and are
being expensed ratably over the term of the agreement.
NOTE 5 - CREDIT CARD CHARGEBACKS
During the three months ended December 31, 1999, the Company experienced
$2,884,247 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 expenses 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.
NOTE 6 - SUBSEQUENT EVENT
Stock Purchase and Exchange Agreement with CaribCommerce, Ltd.
The Company has 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 agreed to
issue 600,000 shares of its common stock (the "DCTI Shares") and $150,000 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
will be accounted for as a purchase and the results of operations of
CaribCommerce will be 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 will be recorded as goodwill and will be amortized
over a period of 5 years.
20
<PAGE>
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 Mondex, National
Australia Bank Group, TSAI and GlobalPlatform.
The Company was incorporated under the laws of the State of Delaware on May 16,
1985. It was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
The Company recruited an experienced management and technical team to design and
implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, the Company acquired an Internet access business and entered
into strategic alliances with companies in the electronic mail ("e-mail")
business. The Company formed a division to create a network of interconnected
Web communities to be promoted by local television station affiliates. The
Company divested its direct marketing and internet access businesses in fiscal
1998. The Company divested its television web site hosting businesses, Books Now
operations and Videos Now operations in fiscal 1999. In March 1998, the Company
signed an agreement to acquire Digital Courier International, Inc., a private
Internet software development company. The acquisition was consummated in
September 1998, and the Company formally changed its name to Digital Courier
Technologies, Inc. The Company acquired Access Services, Inc. and SB.com, Inc.,
both credit card processors, during the fourth quarter of fiscal 1999.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
Inc. ("Books Now") a book reseller, in exchange for a maximum of 362,500 shares
of the Company's common stock. One hundred thousand common shares valued at
$312,500 were issued at closing and 262,500 common shares were subject to a
three-year earn-out contingency based upon achieving certain financial
performance objectives. The fair market value of the common shares issued was
determined to be the quoted market price on the date of acquisition. The
acquisition was accounted for as a purchase.
In May 1999, the Company sold certain assets related to Books Now and the
Company's VideosNow division to Clicksmart, Inc. in exchange for 19.9% of
21
<PAGE>
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.
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
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
22
<PAGE>
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 will also issue 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 is issue
the contingent shares at a 12.5% discount.
Results of Operations
Three months ended December 31, 1999 compared with three months ended December
31, 1998, and six months ended December 31, 1999 compared with six months ended
December 31, 1998.
Net Revenues
Net revenues for the three months ended December 31, 1999 were $6,157,954 as
compared to $357,211. The acquisitions of Access Services, Secure Bank and
DataBank accounted for all of the net revenues for the three months ended
December 31, 1999. 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 $351,211 of total net revenues and technical support
services accounted for $6,000 of total net revenue for the three months ended
December 31, 1998.
Net revenues for the six months ended December 31, 1999 were $8,990,883 as
compared to $613,227. The acquisitions of Access Services, Secure Bank and
DataBank accounted for all of the net revenues for the six months ended December
31, 1999. The Books Now and Videos Now operations which were sold in May 1999,
accounted for $613,093 of total net revenues, technical support services
23
<PAGE>
accounted for $6,000 of total net revenues and online subscriber services
accounted for $134 of total net revenues for the six months ended December 31,
1998.
Cost of Revenues
Cost of revenues for the three months ended December 31, 1999 were $3,434,725 or
53.2% of net revenues. Cost of revenues for the three months ended December 31,
1998 were $291,930 or 81.7% 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 six months ended December 31, 1999 were $4,718,519 or
52.5% of net revenues. Cost of revenues for the six months ended December 31,
1998 were $471,811 or 76.9% of net revenues. Cost of revenues as a percent of
sales has changed due to the change in revenue mix.
Operating Expenses
Depreciation and amortization expense increased 497.1% to $6,478,108 during the
three months ended December 31, 1999 from $1,084,860 during the three months
ended December 31, 1998. 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 392.6% to $8,449,620 during the
six months ended December 31, 1999 from $1,715,219 during the six months ended
December 31, 1998. The increase in depreciation and amortization expense was
principally due to the amortization of goodwill related to the acquired
companies.
Credit card chargebacks during the three and six months ended December 31, 1999
were $2,884,247. 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.
General and administrative expense increased 104.6% to $1,901,493 during the
three months ended December 31, 1999 from $929,235 during the three months ended
December 31, 1998. The increase in general and administrative expense was due to
24
<PAGE>
the addition of administrative and support staff and facilities costs associated
with the acquisitions during the past nine months.
General and administrative expense increased 82.8% to $2,785,259 during the six
months ended December 31, 1999 from $1,523,996 during the six months ended
December 31, 1998. The increase in general and administrative expense was due to
the addition of administrative and support staff and facilities costs associated
with the acquisitions during the past nine months.
Selling expense decreased 24.2% to $916,969 during the three months ended
December 31, 1999 from $1,209,102 during the three months ended December 31,
1998. The decrease in selling expense is attributable to the reduction in
selling expense related the Books Now and VideosNow operations.
Selling expense decreased 2.1% to $1,519,686 during the six months ended
December 31, 1999 from $1,552,615 during the six months ended December 31, 1998.
The decrease in selling expense is attributable to the reduction in selling
expense related the Books Now and VideosNow operations.
Research and development expense decreased 17.4% to $696,839 during the three
months ended December 31, 1999 from $843,996 during the three months ended
December 31, 1998. Research and development expense decreased because of the
divestiture of the Books Now and VideosNow operations.
Research and development expense increased 30.7% to $1,273,058 during the six
months ended December 31, 1999 from $882,666 during the six months ended
December 31, 1998. Research and development expense increased because of the
acquisition of DCII which is performing significant research and development
activities for the Company's payment processing operations offset by the
divestiture of the Books Now and VideosNow operations.
During the three and six months ended December 31, 1998, the Company incurred
expenses of $5,156,135 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.
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.
25
<PAGE>
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. ("AOL") was for an
initial term of 39 months (the "Agreement"), which could be extended for
successive one-year terms by AOL thereafter. Under the Agreement, the Company
was to pay AOL $12,000,000 in cash and issue a seven-year warrant to purchase
318,471 shares of the Company's common stock at $12.57 per share (the
"Performance Warrant") in exchange for AOL providing the Company with certain
permanent anchor tenant placements for its Videos Now site on the AOL Network
and promotion of the Videos Now site. The Performance Warrant was to vest over
the term of the agreement as certain promotion criteria were achieved by AOL.
The agreement included an option whereby AOL elected to provide additional
permanent anchor tenant placements for Videos Now on AOL.com (a separate and
distinct website) in exchange for 955,414 shares of the Company's common stock
and a seven-year, fully vested warrant to purchase 318,471 shares of the
Company's common stock at a price of $6.28 per share (the "Option Warrant").
The write off of acquired in-process research and development during the 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 three months ended December 31, 1999, the Company sold substantially
all of its assets related to WeatherLabs. The results of the WeatherLabs
26
<PAGE>
operations are presented as discontinued operations. During the three months
ended December 31, 1999, the pretax loss from this operation was $124,068. Also
during the three months ended December 31, 1999, the Company recorded a pretax
gain from the sale of the WeatherLabs assets of $1,227,954. During the three
months ended December 31, 1998 the pretax loss from the WeatherLabs operations
was $264,522.
During the six months ended December 31, 1999, the pretax loss from the
WeatherLabs operations was $429,779. Also during the six months ended December
31, 1999, the Company recorded a pretax gain from the sale of the WeatherLabs
assets of $1,227,954. During the six months ended December 31, 1998, the pretax
loss from the WeatherLabs operations was $454,618.
Liquidity and Capital Resources
On October 22, 1998, the Company borrowed $1,200,000 from a group of individual
lenders (the "Loan"). The annual interest rate on the Loan is 24% and the Loan
is secured by receivables owed to the Company. The maturity date of the Loan 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 November 24, 1998, the Company raised $1.8 million by selling its common
stock and warrants to purchase common stock to The Brown Simpson Strategic
Growth Funds (the "Purchasers") pursuant to a Securities Purchase Agreement
between the Company and the Purchasers (the "Purchase Agreement"). On December
2, 1998, the Company sold an additional $1.8 million of common stock to the
Purchasers and amended the Purchase Agreement and related documents (the
"Amended Agreements").
Pursuant to the Purchase Agreement and Amended Agreements, the Purchasers
acquired 800,000 shares of the Company's common stock and five-year warrants to
purchase 800,000 additional shares ("Tranche A"). The exercise price for 400,000
of the warrants is $5.53 per share and the exercise price of the remaining
400,000 warrants is $9.49 per share. The exercise price of the warrants is
subject to adjustment on the six month anniversary of each respective closing to
the lesser of the initial exercise price and the average price of the Company's
common stock during any five consecutive business days during the 22 business
days ending on such anniversary of the closing. The warrants 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.
27
<PAGE>
The Amended Agreements also required the Company to sell to the Purchasers, and
the Purchasers to purchase from the Company, an additional tranche of 800,000
units, each unit consisting of one share of the Company's common stock and a
warrant to purchase one share of common stock (the "Tranche B Units"), if
certain conditions are met. A condition to the sale of the Tranche B Units,
among others, was that the closing bid price of the Company's common stock be
more than $7 per share for fifteen consecutive trading days. The price for the
Tranche B Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche B Unit will be equal to 110% of the closing bid price of the
Company's stock on the day of the sale of the Tranche B Units.
On March 3, 1999, the Company raised an additional $3.6 million through the sale
of Series A Convertible Preferred Stock (the "Preferred Stock") and warrants to
purchase common stock to the Purchasers pursuant to a Securities Purchase
Agreement between the Company and the Purchasers (the "March Purchase
Agreement").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360 shares of
the Preferred Stock convertible into 800,000 shares of common stock and
five-year warrants to purchase an additional 800,000 shares of common stock. The
Preferred Stock is convertible into common stock at a price of $4.50 per share
of common stock. The initial exercise price for the warrants is $5.23 per share,
subject to adjustment on the six month anniversary of the closing, to the lesser
of the initial exercise price and the average price of the Company's common
stock during any five consecutive business days during the 22 business days
ending on such anniversary of the closing. The warrants are callable by the
Company if for 30 consecutive trading days, the closing bid price of the
Company's common stock is at least two times the then-current exercise price.
The March Purchase Agreement also requires the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 1,600,000 units, each unit consisting of Series B Convertible
Preferred Stock convertible into one share of the Company's common stock and a
five-year warrant to purchase one share of common stock (the "Tranche D Units"),
if certain conditions are met. A condition to the sale of the Tranche D Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for 30 consecutive trading days. The price for the
Tranche D Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche D Unit will be $7.70. The March Purchase Agreement terminates the
commitment for Tranche B Units previously discussed.
On 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
28
<PAGE>
processing for business-to-consumer electronic commerce. The license agreement
called for payments totaling $5,941,218 to be made over a 5 year period. The
Company made a payment to ACI of $591,248 in March 1999.
On June 3, 1999, the Company entered into a 3 year international software
distribution agreement with ACI to market the Company's netClearing product. The
Company received a $700,000 deposit against this contract from ACI in July 1999.
On June 14, 1999, the Company raised $6,500,000 by selling 1,250,000 shares of
its common stock and warrants to purchase 1,000,000 shares of common stock at
$5.20 per share to Transaction Systems Architects, Inc. ("TSAI"), the parent
company of ACI. In connection with this stock purchase agreement the software
licensing agreement with ACI was modified to reduce the total payments due under
the software license agreement to $4,517,296. The Company made the additional
required payment to ACI of $3,888,435 from the proceeds received from TSAI.
Operating activities provided $2,949,592 during the six months ended December
31, 1999 compared to using $5,079,831 during the six months ended December 31,
1998.
Cash provided by investing activities was $4,077,659 during the six months ended
December 31, 1999 as compared with cash used by investing activities of $
1,191,861 during the six months ended December 31, 1998. During the six months
ended December 31, 1999, the Company's investing activities included 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
$403,737. During the six months ended December 31, 1998, the Company's investing
activities included cash advances for operating activities to DCII of $849,203,
the acquisition of equipment for $630,475, offset by the receipt of $108,246
from the sale of certain WorldNow assets, $72,225 net proceeds from the sale of
equipment and $107,346 from a decrease in net long-term assets of discontinued
operations .
Cash used in financing activities was $714,517 during the six months ended
December 31, 1999 as compared to $4,765,589 provided by financing activities
during the six months ended December 31, 1998. The cash used during the six
months ended December 31, 1999 was attributable to principal repayments on
capital lease obligations of $531,197, repayments on borrowings of $207,272
offset by the receipt of net proceeds of $23,952 from the exercise of warrants.
The cash provided during the six months ended December 31, 1998 was attributable
to the net proceeds from the issuance of common stock of $3,298,000, net
proceeds from borrowings of $1,000,000, and net proceeds from the issuance of
common stock upon the exercise of stock options of $838,751, offset by
repayments on capital lease obligations of $318,115 and principal repayments on
borrowings of $53,047.
Management projects that with the acquisition of DataBank International, Ltd.
there will be sufficient cash flows from operating activities during the next
29
<PAGE>
twelve months to provide capital for the Company to sustain its operations. As
of December 31, 1999, the Company had $8,694,090 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 six months ended December 31,
1999 provided $2,949,592 of cash.
Year 2000 Issue
Computer systems, software applications, and microprocessor dependent equipment
may cease to function properly or generate erroneous data when the year 2000
arrives. The problem affects those systems or products that are programmed to
accept a two-digit code in date code fields. To correctly identify the year
2000, a four-digit date code field will be required to be what is commonly
termed "year 2000 compliant."
To date we have invested $60,000 in an effort to certify all aspects of the
business are year 2000 compliant. The areas of the business which have been
targeted for compliance testing are our operations and our software products and
services. We conducted the certification process over a three-month period in
which all software products and service components under our direct control
certified year 2000 compliant. For the major operational components and
remaining software and services that are under the control of third party
organizations, we have received written confirmation and evidence of year 2000
compliance. e may realize operational exposure and risk if the systems for which
we are dependent upon to conduct day-to-day operations are not year 2000
compliant. The potential areas of software exposure include:
o electronic data exchange systems operated by third parties with whom we
transact business;
o server software which we use to present content and advertising to our
customers and partners; and
o computers, software, telephone systems and other equipment used internally.
In October 1997, we initiated the review and assessment of all of our
computerized hardware and internal-use software systems to ensure that such
systems will function properly in the year 2000 and beyond. During the last two
years, our computerized information systems have been substantially upgraded to
be year 2000 compliant.
We have not yet determined a contingency plan in the event that any
non-compliant critical systems are not remedied by the year 2000, nor have we
formulated a timetable to create such a contingency plan. It is possible that
costs associated with year 2000 compliance efforts may exceed our current
projections of an additional $20,000 to reach total compliance. In such a case,
these costs could have a material negative impact on our financial position and
results of operations. It is also possible that if systems material to our
operations have not been made year 2000 compliant, or if third parties fail to
30
<PAGE>
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: February 11, 2000 By /s/ James A. Egide
-----------------
James A. Egide
Chairman and Chief Executive Officer
32
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