SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
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(exact name of registrant as specified in its charter)
Delaware 87-0461856
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
(Address of principal executive offices) (Zip Code)
(801) 266-5390
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of November 15, 2000, 40,044,444 of the Registrant's Common Shares
were outstanding. As of November 2, 2000, the aggregate market value of voting
stock held by non-affiliates of the Registrant was approximately $106 million
based on the average of the closing bid and asked prices for the Registrant's
Common Shares as quoted by the National Market System of the Nasdaq Stock
Market.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
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DCTI: E-Commerce Payments Processing
Digital Courier Technologies, Inc. (referred to herein as "DCTI" or the
"Company"; the Company is also referred to in the first person, using terms like
"we", "our" and "us") is a leading provider of advanced e-payment services for
businesses, merchants, and financial institutions. In fiscal 2000, our revenues
were primarily derived from processing payments for the internet gaming and
e-tailing industries. The Company's services have introduced to the marketplace
a secure and cost-effective system for credit card processing and merchant
account management. By integrating services under one provider, DCTI can offer
to customers an outsource solution for merchant account set-up, an Internet
Payment Gateway, payment processing, fraud control technology, and Web-based
reporting.
E-Payment Services for Merchants
Merchant Account Services
As part of its single-source e-payment services, DCTI offers merchant account
support services. These services include merchant account setup, settlement
information, chargeback tracking, chargeback handling, and customer inquiry
research and resolution.
Payment Processing with DCTI
DCTI offers credit-card processing services for Visa(R), MasterCard(R), American
Express(R), and Discover(R). Payment features of the DCTI service include
authentication, fraud control, authorization, settlement handling, and real-time
reporting.
The Payment Plug-In and Internet Payment Gateway
Designed for ease of use, DCTI's "Payment Plug-in" software application delivers
transaction processing capabilities in a small, easy-to-install format. Because
the Payment Plug-in was built with technology based on open standards, it is
quickly and easily integrated into a wide range of e-commerce server platforms,
software packages, and the infrastructure of financial systems. Once installed,
this lightweight application interface (API) securely transmits transaction data
to the DCTI Internet Payment Gateway, discussed below. The gateway examines the
transaction for fraudulent activity, logs the transaction in a database for
reporting, and routes the transaction to the card networks for authorization.
ePOS
DCTI's ePOS(R) is an easy to use Web-based point-of-sale terminal application.
Merchants can use ePOS from a desktop computer to submit credit card and order
information to the Payment Plug-in. With its Web-based functionality, ePOS
provides flexibility for multiple station processing facilities such as call
centers and customer service centers. Most importantly, because ePOS accesses
DCTI's Payment Plug-in, transactions enjoy the same rapid response times,
Web-based reporting, and access to important fraud protection services.
Fraud Control: Sophisticated Payment Protection
All transactions that are passed to DCTI's Internet Payment Gateway are guarded
by the Payment Protection System (the "PPS"), a suite of fraud-detection
software routines and applications. The PPS constantly monitors for suspicious
transactions and data entry errors. Merchants are alerted to evidence of the
misuse of card information, detected by such metrics as the verification of
addresses, velocity of purchases, and bad card histories.
Tools and Reports
DCTI offers its merchant clients 24-hour access to account information on a
secure, password-protected Web site. With the appropriate login and password
information, an authorized user can access this Web site via a desktop computer
with Internet Explorer 4.0+. Because DCTI's system captures and displays
transaction data in real-time, all reports provide an accurate reflection of
account activity. Some of the features of DCTI's reporting function are:
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o "My Account"
o Search tools
o Transaction Summaries
o Detailed Transaction Histories
o Account Velocity
o ePOS
o Merchant Ledger Views
o Chargeback Reviews
o Users and Groups tools
o Online Help
Payment Services for Financial Institutions
DCTI's payment services for financial institutions provide an outsource solution
for electronic payment services and merchant portfolio management tools. The
payment services include an Internet Payment Gateway, direct connections to the
credit card networks, and portfolio management tools provide reliable
transaction processing services for institutions with an existing merchant
acquiring program. With DCTI's Web-based portfolio management tools, financial
institutions can control the level of risk associated with their portfolio, a
merchant category, or an individual merchant. This important technology is
available to financial institutions either remotely through a standard Web
browser, or by electing to install the hardware and software directly at the
bank location.
Internet Payment Gateway
The Internet Payment Gateway is a term used to describe the collection of DCTI's
risk management, reporting, and merchant account management tools which interact
directly with legacy financial and banking networks, operating systems,
acquiring gateways, and credit-card networks. The gateway is comprised of a
commerce server, a transaction database, and fraud screening software that
seamlessly integrate into existing systems.
Integrating a portfolio of merchants with the Internet Payment Gateway is
straightforward and efficient. Online account management tools come with an
easy-to-use administration interface that helps users perform functions that
include adding and updating merchants, accessing reports, and monitoring fraud.
Risk Management
Both merchants and financial institutions are protected by DCTI's matrix of
fraud detection analysis and software, the PPS. Through the PPS, an individual
merchant or an entire merchant portfolio can be monitored for potentially
fraudulent credit-card activity and data entry errors.
The risk management software alerts financial institutions to evidence of the
misuse of card information, detected by such metrics as the use of a compromised
Bank Identification Number (a "BIN"), unusual velocity or volume of
transactions, or the use of a compromised card number. Fraud control
administrators (such as risk management officers) can use DCTI's secure Web site
to manage their merchant portfolio and to set fraud detection limits with a
graphical user interface.
Tools and Reports
DCTI offers real-time activity reports and portfolio management tools on a
password-protected Web site. With a desktop computer and Microsoft's Internet
Explorer 4.0+, clients can log-on to a secure Web site to view and interact with
transactions as they occur. All reports are generated from the live transaction
database. Custom reports are dynamically generated reports based on any of 16
parameters such as transaction number, cardholder, or BIN.
Because DCTI has direct access to the card networks (instead of through a third
party), the Company can record and display transaction activity in real-time.
Reporting functions available to financial institution clients include:
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o Portfolio Analysis
o Customer Risk and Valuation
o Deposit Baseline Review
o Merchant Velocity
o Data Searches
o Settlement Activity
o Merchant Ledger
o Chargeback Administration
o Chargeback Review
o Adjustments
o Merchant set-up modules
o Merchant I-Guard
o Users and Groups
Risk Management and Internet Fraud Control
DCTI offers data screening software to help merchants reduce their exposure to
losses generated by credit-card fraud and/or data entry errors. As with all DCTI
products, these controls were developed specifically for e-commerce businesses,
which typically experience higher rates of credit-card fraud. The software
protects the processing banks and merchants by scrubbing all transactions
through various fraud-detection software routines and databases. Potentially
fraudulent transactions are detected and rejected prior to authorization.
Currently, DCTI offers risk management in two packages, one for the merchant
clients, and one for the financial institution clients. These packages include
the following services:
Risk Management for Merchants
Checksum (Luhn check)
A basic check of how many digits are in a credit card number to ensure
the customer's credit card is valid.
Address Verification System ("AVS")
Merchants can require customers to submit the billing address of their
credit card. The address supplied by the customer is compared to the
address on file with the issuing bank. Merchants may choose the degree
of match (between credit card number and address) at which the
transaction should fail.
Difference between name and card number
A credit card number can be matched to a card holders name for an
existing client. A mismatch may indicate that a card has been
compromised.
Unusual frequency of purchases
A merchant may record information about how frequently their product or
service is typically purchased with a particular card number
(indicating an individual). The information is matched to actual
activity so merchants are notified of any significant variation from
that mean.
Unusual time of day for purchases
A merchant may record typical transaction volumes for a particular time
of day. The information is matched to actual activity so merchants are
notified of any significant variation from that mean.
Compromised BIN and card database
All transactions can be checked against a database of BINs or card
numbers that may have been compromised. These options include:
BIN screening
A BIN corresponds to a whole set of cards that a card issuing
bank has released. When the security of a BIN is compromised,
chances for fraud increase for all cards bearing that BIN.
DCTI BIN screens help to flag numbers that may be compromised.
Card screening
Transactions may be checked against a database of invalid,
compromised and otherwise questionable credit card numbers.
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Declined card screening
All transactions may be checked against a database of credit
card numbers that have declined charges recently. This service
saves clients transaction fees by declining the charge before
it is submitted to the banking network.
Risk Management for Financial Institutions
Summary activity
Financial institutions can monitor activity of a single merchant or all
merchants to track sales, credits and single transactions. Even the
flow of money across credit cards can be reviewed to reveal customer
histories, purchasing habits, and money flow into or out of a card on a
daily basis or on an historical timeline.
Fraud reporting
Financial institutions can survey and analyze activity by BIN, card
number, AVS and velocity of purchases. Stolen credit cards and
questionable transactions present themselves on demand.
BIN check
Entire BINs can be reviewed for questionable activity and transactions.
Customer data associated with credit cards can be compared to locate
unreported, stolen or generated card usage. Related merchants are a
click away from review of any particular transaction under suspicion.
Unusual activity
DCTI also provides the ability to generate 90-day baseline data for any
merchant in a Bank's portfolio. Side reports offer the ability to
locate transactions exceeding the baseline by whatever range a Bank
determines is valid for that merchant. Excessive tickets, unusual daily
deposits and more can be located quickly and reviewed 24 hours a day.
Review merchant and portfolio activity in real-time A financial
institution's entire merchant portfolio or a single merchant can be
viewed with DCTI's online charting tools. The ability to graphically
review a merchant's dollar and transaction count can be a simple
indicator of merchant or consumer fraud. Peak hours can be located
within hourly summaries that appear in easy to understand bar charts.
Credit Card Clearing Process
To understand DCTI's service better, the following explanation and diagram
describes how the credit card clearing process works, and how the Company
simplifies the process. DCTI generates real-time reporting and transaction
management services through a secure Web server. Information such as
authorization notices and settlement data from the credit card companies are
stored in the DCTI database, which generates reports on the DCTI account
activity reporting sites. This means that merchants and financial institutions
can view real-time transaction information any time of the day via a Web
browser.
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[Graphic Ommitted]
Authorization - When merchants are ready to begin accepting credit
cards as payment for goods or services on their Web site (1a), they may
download DCTI's Payment Plug-In and request DCTI's assistance in
establishing a merchant account. They are then ready to begin accepting
payments.
Once the customer submits a credit card number on the merchant's Web
site, the Payment Plug-in contacts the DCTI Internet Payment Gateway
(1b) to undergo screening for fraud and then to request authorization,
final sale or credit.
If the transaction is not rejected for potential fraud, the transaction
information is then sent to the credit card network (1c) for
authorization or declination of the charge. This process is completed
in-house; the Company does not use third party acquiring processors. If
the transaction is approved, an authorization code is returned to the
merchant's Web site and the authorization is complete. With DCTI's
system, the real-time authorization and capture process occurs within
seconds. Batch requests are completed within ten to thirty minutes.
2. Settlement - Once the product the customer ordered is shipped (or
downloaded), the authorization code is used to settle the amount of the
transaction. DCTI's Internet Payment Gateway and the credit card
network exchange information with the Settlement Authority (2) to
confirm the transaction.
3. Funds transfer - Finally the Settlement Authority requests a funds
transfer from the Issuing Bank (3a), which moves money through the
Settlement Authority into the merchant's bank (3b). The payment process
is now complete.
Sales and Marketing
In an effort to expand its merchant base, DCTI has recently initiated
development of an internal sales force and business development group.
This sales effort is largely focused on the establishment of
partnerships for sales leads and referrals, financial institutions and
their merchant bases, and on targeted campaigns directed at Internet
merchants and other retailers who are already familiar with the
industry's payment processing offerings.
Under this new model, it is believed that credible partners will assist the
Company in securing viable merchants at a faster rate than what it would be able
to do by itself. The targeted campaigns, directed at merchants already
experienced at Internet payment processing, is proving to help speed up the
sales cycle. New partnerships and notable accounts secured over the last year
include Innuity, Travelscape, VerticalNet, and Preview Systems.
Technology
We have computer facilities in Salt Lake City, Utah and in Clearwater, Florida
to support all of our products and services. These data centers have redundant
systems in place for power, telecommunications, environmental, and fire
suppression thus assuring consistently optimal performance through
state-of-the-art system scalability and reliability. Features of the facilities
include:
o multiple fiber optic OC-3's from distinct Tier 1 Internet Service
Providers providing highly scalable bandwidth, load balancing,
fault tolerance, and data redundancy for e-commerce and other
Internet applications and customers;
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o fully redundant network architecture composed of dual switches,
routers, firewalls, and load balancing devices providing internet
scalability, load balancing and fault tolerance;
o a range of high availability multiprocessor servers from various
manufacturers including Hewlett-Packard, Dell, Sun Microsystems and
Tandem Computers supporting our business operations. The
super-scalar processing architecture of these systems manages our
service components including simultaneous payment processing,
real-time report generation and merchant accounting; and
o modern fire retardant systems, security systems, quad-power
conditioners, and industrial battery backup arrays as well as an
8-day backup diesel generator, which all guarantee continuous power
and environmental control to insure seamless, around-the-clock
systems uptime and availability.
Payment Plug-In
The Payment Plug-in is a lightweight software application that provides a live
link to all DCTI's transaction processing services. Merchants who install the
plug-in with their e-commerce server or software can automatically process
credit cards, generate real-time transaction reports, and lower their risk of
loss due to chargebacks. All transactions and results are logged to the
transaction database. Merchants obtain real-time activity reports via DCTI's
password-protected Web site.
The plug-in is available in Java and C/C++ and is easily installed on all major
operating systems including Unix. DCTI provides a variety of templates for
installing DCTI's plug-in: CGI, ISAPI, NSAPI, CORBA, RMI, SGI, Visual Basic,
Java Servlets and Perl for all Unix platforms. Once installed, the plug-in
connects with the payment server when a customer clicks a "submit" or "enter"
button on a merchant's e-commerce site.
Performance and attributes
DCTI's technology gives online businesses the high-speed performance they need.
Transactions are usually complete in 1-2 seconds. The architecture of DCTI's
Internet Payment Gateway makes its performance fast, secure, and reliable enough
to be considered automatic:
o Capacity
The entire Internet Payment Gateway (IPG) is tracked for
availability. Once every minute, a test transaction is sent to Visa
and MasterCard. Also, all transaction servers are equipped with
Redundant Arrays of Independent Disks (RAID) and multiple power
supplies to ensure network availability.
o Security
Firewall systems exceed industry standards and work in tandem with
an Intrusion Detection System, which uses algorithms to detect any
hacking attempt. Connections and information are protected by
standard RSA encryption to SSLv3.0.
o Scalability
DCTI's infrastructure is highly scalable for future expansion and
increased performance requirements. To ensure scalability and
improve performance for real-time credit card transactions, the
Company offers persistent connection pooling between merchants and
DCTI. This pool can shrink or grow depending upon transaction
volume.
Significant Customers
The Company has two customers who individually accounted for more than 10% of
the Company's revenue for the year ended June 30, 2000, Cybernet Ventures whose
revenue was approximately 17% and Web Players whose revenue constituted
approximately 12%.
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Competition
The market for our services is intensely competitive and subject to rapid
technological change. We expect competition to intensify in the future. Our
primary source of competition comes from developers of other systems for
e-commerce transaction processing such as Clear Commerce, CyberCash,
CyberSource, Digital River, HNC Software, FDMS and Hewlett-Packard (VeriFone).
We also face competition from online merchants who have made large initial
investments to develop custom systems and may therefore be less likely to adopt
an outsourced transaction processing strategy. In addition, other companies may
enter the market for our services. In the future, we may compete with large
Internet-centric companies that derive a significant portion of their revenues
from e-commerce and may offer, or provide a means for others to offer,
e-commerce transaction services.
Many of our competitors have longer operating histories, substantially greater
financial, technical, marketing or other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Competition
could seriously impede our ability to sell additional services on terms
favorable to us. Our current and potential competitors may develop and market
new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other e-commerce transaction service providers, thereby increasing the
ability of their services to address the needs of our prospective customers.
Competitive pressures could reduce our market share or require the reduction of
the prices of our services, either of which could materially and adversely
affect our business, results of operations or financial condition.
We compete on the basis of certain factors, including:
o system reliability;
o product performance;
o breadth of service offering;
o ease of implementation;
o time to market;
o customer support; and
o price.
We believe that we presently compete favorably with respect to each of these
factors. However, the market for our services is still rapidly evolving, and we
may not be able to compete successfully against current and potential
competitors.
Research and Development
The Company has invested significant resources in research and development over
the last three years. During the fiscal years ended June 30, 2000, 1999 and
1998, we have spent $2,078,184, $1,906,893 and $1,432,006, respectively, on
research and development.
Seasonality
The Company experiences seasonal shifts in its revenues proportionate to its
merchants' business cycles. Gaming revenues, for example, are higher in the fall
through spring periods compared to the summer, while retail merchants'
disproportionately large holiday sales generate higher revenues for the Company
in the fall pre-holiday season.
Development of Company
The Company was incorporated under the laws of the State of Delaware on May 16,
1985 as DataMark Holding, Inc. It was formed as a national direct marketing
company, and began incorporating online business strategies in fiscal 1994 with
the objective of becoming a national leader in the interactive online direct
marketing industry. We recruited an experienced management and technical team to
design and implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, Utah, we acquired an Internet access business and entered into
strategic alliances with companies in the electronic mail ("e-mail") business.
We formed a division to create a network of interconnected Web communities to be
promoted by local television station affiliates and divested our direct
marketing, and internet access businesses in fiscal 1998. We divested our
television website hosting businesses, Books Now operations and Videos Now
operations in fiscal 1999 and WeatherLabs in fiscal 2000. In 1998, we acquired
Digital Courier International, Inc., a private Internet software development
company, and formally changed our name to Digital Courier Technologies, Inc. We
acquired Access Services, Inc., SB.com, Inc., and Databank International, Ltd.,
all of which were credit card processors, during the fourth quarter of fiscal
1999 and the first quarter of fiscal 2000, completing our transition to an
e-payments company.
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PROPRIETARY RIGHTS
The Company regards its patents, copyrights, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success, and the
Company relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights.
EMPLOYEES
As of November 2, 2000 the Company had 59 full-time employees. The Company's
future success is substantially dependent on the performance of its management,
sales force, key technical personnel, and its continuing ability to attract and
retain highly qualified technical, sales and managerial personnel.
INTERNAL INVESTIGATION
During fiscal 2000, the Company received information indicating that its Chief
Executive Officer and Chairman at the time, Mr. James Egide, may have had a
conflicting, undisclosed, interest in DataBank International Ltd. at the time
the Company acquired it. Specifically, there were two general allegations.
First, it was alleged that he had been a part of a group that had acquired 75%
of the stock of DataBank (the "Group DataBank Transaction") approximately 2
months before the Company entered into a letter of intent to acquire it. That
earlier purchase was for 75% of DataBank at a purchase price of $6.2 million,
while the Company's subsequent acquisition, deemed fair and equitable at the
time, was priced at 28,027,500 shares of the Company's common stock. Second, it
was alleged that Mr. Egide did not adequately disclose to the Company his
ownership position in DataBank at or prior to the time of the Company's
acquisition of DataBank. The Company's Board of Directors formed a special
committee of directors, each of whom had no involvement in the transaction
themselves, to investigate these allegations; as finally constituted, that
committee consisted of Mr. Ken Woolley and Mr. Greg Duman (the "Special
Committee"). The Special Committee, in turn, retained Munger, Tolles & Olson
LLP, as outside counsel to conduct an investigation into this matter (the
"Internal Investigation").
During this period, Mr. Egide resigned first as Chief Executive Officer and,
later, as a director and as Chairman of the Board of Directors. Additionally,
some DataBank shareholders who had received shares of the Company pursuant to
the DataBank acquisition returned some or all of the DCTI shares they had
received, although they did not present the Company with any signed agreement or
otherwise document any right of the Company to take action with respect to the
returned shares. (Approximately 7.7 million DCTI shares were received by the
Company in this fashion.) All of these facts were promptly disclosed by the
Company in press releases as they occurred.
The investigation was conducted between August and October of 2000. In the
process of conducting its investigation, the Special Committee's counsel
retained private investigators, reviewed all relevant documents in the Company's
possession and conducted interviews of some 11 individuals. On October 25, 2000,
they released the "Summary and Conclusions" of their final report. (The Summary
and Conclusions were released while the remainder of the report was in technical
preparation and review in order to facilitate certain corporate plans, including
consummation of settlement negotiations with certain individuals, and to permit
the preparation of annual financial statements for submission to the Company's
independent auditors, both of which were dependent to some degree upon the
results of the report.)
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The results of the investigation were inconclusive. Conflicting testimony was
received as to the ownership of certain offshore entities, and dispositive
evidence was not found. As to certain other factual questions, more subtle
differences of interpretation were identified that could have had legal
significance. For example, there were conflicting views as to whether the
initial purchase of DataBank shares was made available to the Company. Moreover,
there were significant uncertainties as to the legal effect of the different
possible factual interpretations. In the view of counsel to the Special
Committee, it was not fairly predictable what version of the facts a court would
find credible. Also, it was not clear what legal conclusions a court would
reach, or what remedies it would find to be available and appropriate, even if
the factual questions were not in dispute.
At approximately the time that the investigation was being completed, Mr.
Woolley entered into discussions with certain of the stockholders who received
DCTI shares in the DataBank acquisition. Ultimately, 7 stockholders agreed to
return to the Company 8,637,622 DCTI shares in settlement of any claims by the
Company of impropriety against them in connection with the transaction. These
shares included the DCTI shares that had earlier been returned to the Company,
but this time the Company's right to accept and cancel the shares was made
clear. Also included in the returned shares were 1,120,000 shares returned by
Mr. Don Marshall, the Company's President, and a former controlling shareholder
of DataBank (before the Group DataBank Transaction). The Special Committee
agreed that Mr. Marshall had no responsibility or liability with respect to any
of the alleged improprieties, but he also agreed that, as the Company's
President, and a former DataBank stockholder, he should not benefit through an
increased percentage ownership in the Company from the return of stock by others
from the DataBank transaction. Accordingly, his return of shares was designed to
preserve, after the return of all the shares involved, his percentage interest
in the Company at a level equal to what it was immediately before any such share
returns. In the view of counsel to the Special Committee who had conducted the
investigation, the settlement of claims in exchange for the return of shares was
a favorable settlement for the Company in comparison to the certain expenses,
and uncertain recoveries, that would have attended any litigation of the matter.
After careful consideration of the final report of the Special Committee's
counsel, the Company's Board of Directors continues to believe that the Company
paid a fair price for DataBank.
RISK FACTORS
Our business, like any business, involves a number of risks. Some of those risks
affect all companies, some of them may affect us differently from other
companies. As with any investment, you should be aware of the risks that affect
us and should satisfy yourself that the potential benefits of an investment in
our company warrant exposure to those risks. We have described below the risks
that we think are most pertinent. Any discussion of risks necessarily involves
forward looking information, information that falls within the "safe harbor" 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.
Nasdaq is Considering Delisting Our Stock
We were notified by Nasdaq that, primarily due to the missed filing deadline for
this Annual Report on Form 10-K, our stock would be delisted subject to our
right to a hearing. The hearing before a panel of Nasdaq hearing officers was
held on November 9, 2000 and we are awaiting the decision of the panel. If the
decision of the panel is adverse, our stock will no longer trade on the Nasdaq
National Market System. Trading could take place only on the Over the Counter
Bulletin Board, which would likely reduce the liquidity in the stock.
The Securities and Exchange Commission is Conducting an Informal Inquiry into
Our Acquisition of DataBank
We have been notified by the U.S. Securities and Exchange Commission that it is
conducting an informal inquiry into the circumstances surrounding our
acquisition of DataBank, primarily as a result of our own Internal Investigation
into those matters and the public reports we filed regarding that investigation.
We are cooperating fully with the inquiry. While we believe that we have
defenses in response to any action the SEC may bring against us, the inquiry may
require us to expend resources and distract management in defending ourselves.
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Fluctuations of Our Quarterly Results Could Cause Our Stock Price to Fluctuate
or Decline
Our quarterly operating results may fluctuate significantly in the future based
upon a number of factors, many of which are not within our control. We base the
level of our operating expenses on anticipated market growth and our operating
expenses are relatively fixed in the short term. As a result, if our revenues
are higher or lower than we expected, our quarterly operating results may be
correspondingly greater or less than our projections or the expectations of
public market analysts or investors. Such fluctuations in earnings could
adversely affect the market price of our common stock, and periods in which our
revenues are lower than expected could particularly cause the market price of
our common stock to decline.
Our quarterly results may fluctuate in the future as a result of many factors,
including the following:
o changes in the number and size of transactions effected by our merchants,
especially as a result of seasonality or general economic conditions;
o our ability to attract and retain financial institutions as clients;
o our ability to attract new merchants and to retain our existing merchants;
o merchant and financial institution acceptance of our pricing model; and
o our success in expanding our sales and marketing programs.
Other factors that may affect our quarterly results are set forth elsewhere in
this section. As a result of these factors, our revenues are not predictable
with any significant degree of certainty.
Due to the uncertainty surrounding our revenues and expenses, we believe that
quarter-to-quarter comparisons of our historical operating results should not be
relied upon as an indicator of our future performance.
Management of Internal Growth
If our growth is faster than we project, we may not be able to manage the
expansion of our operations effectively and our systems, procedures or controls
may not be adequate to support our operations. Additionally, when market
opportunities arise, we may not have sufficient personnel or procedures in place
to be able to take advantage of those opportunities.
Ability to Continue as a Going Concern and Potential Need for Additional Funding
in the Future
The report of independant public accountants on our consolidated financial
statements as of and for the year ended June 30, 2000 includes an explanatory
paragraph with respect to the Company's ability to continue as a going concern.
The Company has suffered recurring losses from continuing operations of
$34,867,900, $20,353,229 and $5,544,363 during the years ended June 30, 2000,
1999 and 1998, respectively. The Company's operating activities, excluding cash
retained for merchant reserves, used $4,097,019, $7,291,791 and $6,400,982 of
cash during the years ended June 30, 2000, 1999, and 1998,
respectively.Additionally, the Company had a tangible working capital deficit of
$4,872,841 as of June 30, 2000. With the growth of our e-payment processing
services, our negative cash flows from operations are expected to decrease
significantly. However, our capital requirements depend on several factors,
including the rate of market acceptance of our services, the ability to expand
our customer base, the growth of sales and marketing, and other factors. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. Additional financing may
not be available when needed on terms favorable to us or at all. If it is
available, it could necessitate the issuance of additional shares or series of
preferred stock (discussed below) with rights that are senior to those of our
common stockholders or holders of shares of the Company's preferred stock. If
adequate funds are not available or are not available on acceptable terms, our
growth may be limited and we may be unable to develop or enhance our services,
take advantage of future opportunities or respond to competitive pressures.
We May Be Liable for Customer Credit Card Chargebacks
If merchants for which we process credit cards go out of business or otherwise
cannot satisfy customers' legitimate returned credit card charges, and the
reseller responsible for such merchant is also not financially viable, then we
could be liable to the merchant bank for the amount of the customer chargebacks.
During the year ended June 30, 2000, the Company incurred $3,144,686 of
chargeback expense. Future chargebacks could have a materially adverse effect on
our future operating results.
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The Demand for Our Services Could Be Negatively Affected by a Reduced Growth of
E-Commerce or Delays in the Development of the Internet Infrastructure
Our business depends on sales of goods and services over the Internet by our
customers. Such sales do not currently represent a significant portion of
overall sales of goods and services in the total market. Our growth generally
depends on the growing use and acceptance of the Internet as a medium of
commerce by merchants and customers. Rapid growth in the use of and interest in
the Internet is a relatively recent development. We cannot be certain that
acceptance and use of the Internet will continue to develop or that a
sufficiently broad base of merchants and consumers will adopt, and continue to
use, the Internet as a medium of commerce.
The development of the Internet as a commercial marketplace may occur more
slowly than we anticipate for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the number
of Internet users or their use of Internet resources continues to grow, it may
overwhelm the existing Internet infrastructure and adversely affect the growth
of the Internet as a marketplace. Delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet activity
could also have a detrimental effect. These factors could result in slower
response times or adversely affect usage of the Internet, ultimately resulting
in lower numbers of e-commerce transactions and lower demand for our services.
Proprietary Technology is Important to our Business
Our success depends upon our proprietary technology. We rely on a combination of
patent, copyright, trademark and trade secret rights, confidentiality procedures
and licensing arrangements to establish and protect our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees and others. Despite these precautions, third
parties could copy or otherwise obtain and use our technology without
authorization, or develop similar technology independently. Effective protection
of intellectual property rights may be unavailable or limited in foreign
countries. To date, we are not aware of our confidential information having been
compromised, but we cannot be certain that the protection of our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology, duplicate our services or design around any patents or other
intellectual property rights we hold.
We also cannot be certain that third parties will not claim that our current or
future services infringe upon their rights. We have not conducted any search to
determine whether any of our services or technologies may be infringing upon
patent rights of third parties. As the number of services in our market
increases and functionalities increasingly overlap, companies such as ours may
become increasingly subject to infringement claims. In addition, these claims
also might require us to enter into royalty or license agreements. Any
infringement claims, with or without merit, could cause costly litigation that
could absorb significant management time. If required to do so, we may not be
able to obtain royalty or license agreements, or obtain them on terms acceptable
to us.
We Depend Upon Third Parties
We depend substantially upon third parties for several critical elements of our
business, including:
o Equifax and NDC e-Commerce, for merchant settlement services;
o St. Kitts Nevis Anguilla National Bank Limited and Capital Cities Bank, to
sponsor our portal to the credit card associations;
o Sprint and ELI, for telecommunications services;
o Hewlett Packard, for maintenance and upgrades of the HP-9000 computers in
our data center;
o Sun Microsystems, for maintenance and upgrades of the Sun servers in our
data center;
o Dell Computer, for maintenance upgrades on our Dell servers;
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o Cisco, for maintenance and upgrades of our routers which are used to connect
our computer network to the Internet; and
o Other vendors of software and hardware for maintenance and upgrades of
software, systems, and hardware used to deliver our products on the
Internet.
For most of these services, we believe that there are other third party
providers who can provide the same services as those providers we currently use
at comparable prices to us. Nonetheless, any loss or interruption of service by
such providers would have an adverse effect on our business and prospects.
A Majority of our Revenue is Concentrated in One Industry
More than half of our revenue is derived from processing payments for the
internet gaming industry. If the gaming industry as a whole fails or contracts,
it would have a material adverse effect on our results of operations.
A Significant Portion of Our Revenue Comes From Two Merchants
The Company has two customers who individually accounted for more than 10% of
the Company's revenue for the year ended June 30, 2000, Cybernet Ventures whose
revenue was approximately 17% and Web Players whose revenue constituted
approximately 12%. The loss of these customers could have a material adverse
effect on our results of operations.
We Depend on Our Existing Technology and Infrastructure
Our ability to deliver services to our merchants depends on the uninterrupted
operation of our Internet payments processing systems. Our systems and
operations are vulnerable to damage or interruption from:
o earthquake, fire, flood and other natural disasters;
o power loss, telecommunications or data network failure;
o operator negligence, improper operation by employees;
o physical and electronic break-ins and similar events; and
o computer viruses.
Despite the fact that we have implemented redundant servers in our data centers,
we may still experience service interruptions for the reasons listed above and
for a variety of other reasons. If our redundant servers are not available, we
may suffer substantial losses as well as loss of business. In addition, any
interruption in our systems that impairs our ability to provide services could
damage our reputation and reduce demand for our services.
Our success also depends on our ability to grow, or scale, our payments
processing systems to accommodate increases in the volume of traffic on our
system, especially during peak periods of demand. We may not be able to
anticipate increases in the use of our systems and successfully expand the
capacity of our network infrastructure. Our inability to expand our systems to
handle increased traffic could result in system disruptions, slower response
times and other difficulties in providing services to our merchant banks and
customers, which could materially harm our business.
A Breach of Security Measures Could Reduce Demand for Our Services
A requirement of the continued growth of e-commerce is the secure transmission
of confidential information over public networks. We rely on SSL, Secure Socket
Layer Protocol, to provide the security and authentication necessary for secure
transmissions of confidential information. In addition, we rely on private key
cryptography, an encryption method that utilizes two keys for encoding and
decoding data, for ensuring the integrity of our computer networks. A party who
is able to circumvent our security measures could misappropriate proprietary
information or interrupt our operations. Any compromise or elimination of our
security could reduce demand for our services.
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We may be required to expend significant capital and other resources to protect
against security breaches or to address any problems they may cause. Concerns
over the security of the Internet and other online transactions and the privacy
of users may also inhibit the growth of the Internet and other online services
generally, and the Web in particular, especially as a means of conducting
commercial transactions. Because our activities involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent security breaches may disrupt our
operations.
The Intense Competition in Our Industry Could Reduce or Eliminate the Demand for
Our Services
The market for our services is intensely competitive and subject to rapid
technological change. We expect competition to intensify in the future. Our
primary source of competition comes from developers of other systems for
e-commerce transaction processing such as Clear Commerce, CyberCash,
CyberSource, Digital River, HNC Software, FDMS and Hewlett-Packard (VeriFone).
We also face competition from online merchants who have made large initial
investments to develop custom systems and may therefore be less likely to adopt
an outsourced transaction processing strategy. In addition, other companies may
enter the market for our services. In the future, we may compete with large
Internet-centric companies that derive a significant portion of their revenues
from e-commerce and may offer, or provide a means for others to offer,
e-commerce transaction services.
Many of our competitors have longer operating histories, substantially greater
financial, technical, marketing or other resources, or greater name recognition
than we do. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Competition
could seriously impede our ability to sell additional services on terms
favorable to us. Our current and potential competitors may develop and market
new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other e-commerce transaction service providers, thereby increasing the
ability of their services to address the needs of our prospective customers.
Competitive pressures could reduce our market share or require the reduction of
the prices of our services, either of which could materially and adversely
affect our business, results of operations or financial condition.
We Must Continually Enhance our Systems To Remain Competitive
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. The Internet and the e-commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading technologies
to enhance our existing services and develop new services. We must continue to
address the increasingly sophisticated and varied needs of our financial
institutions and merchants, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of proprietary technology involves significant technical and
business risks. We may fail to develop new technologies effectively or to adapt
our proprietary technology and systems to merchant and financial institution
requirements or emerging industry standards. If we are unable to adapt to
changing market conditions, customer requirements or emerging industry
standards, our business would be materially harmed.
Attracting and Retaining Qualified Employees
Our future success and our ability to expand our operations depends on our
continuing ability to attract and retain highly qualified technical and
managerial employees. Competition for people experienced in the technical areas
in which we operate is intense due to the limited number of qualified
professionals and the possibility that, as a small company, we may not be able
to attract them. Failure to attract and retain personnel, particularly marketing
and technical personnel, could make it difficult for us to manage our business
and meet our objectives.
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We May Become Subject to Government Regulation and Legal Uncertainties
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly applicable to e-commerce.
However, due to the increasing usage of the Internet, it is possible that a
number of laws and regulations may be applicable or may be adopted in the future
with respect to conducting business over the Internet covering issues such as:
o taxes;
o user privacy;
o pricing;
o content;
o right to access personal data;
o copyrights;
o distribution; and
o characteristics and quality of services.
For example, we believe that some of our services may require us to comply with
the Federal Credit Reporting Act. Complying with this statute would require us
to provide information about personal data stored by us or our merchants.
Failure to comply with this act (if it applies to us) could result in claims
being made against us.
Furthermore, the growth and development of the market for e-commerce may prompt
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our services and increase our cost
of doing business.
The applicability of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
export or import matters and personal privacy to the Internet is uncertain. The
vast majority of laws were adopted prior to the broad commercial use of the
Internet and related technologies. As a result, they do not contemplate or
address the unique issues of the Internet and related technologies. Changes to
these laws intended to address these issues, including some recently proposed
changes in the United States regarding taxation and encryption and in the
European Union regarding contract formation and privacy, could create
uncertainty in the Internet marketplace and impose additional costs and other
burdens. To date, we have been able to respond successfully to the legal and
regulatory environment, and we would expect to be able to do so in the future.
However, it is always possible that the regulatory environment, or uncertainties
regarding it, could reduce demand for our services or increase the cost of doing
business due to increased costs of litigation or increased service delivery
costs.
Volatility of Stock Price
Broad market and industry fluctuations may adversely affect the trading price of
our common stock, regardless of our operating performance. The trading price of
our common stock has been and may continue to be subject to wide fluctuations.
In the twelve months ended December 6, 2000, our stock has traded as low as
$1.56 and as high as $14.50. The wide swings in the price of our stock have not
always been in response to any factors that we can identify.
Failure to File 10-K in Timely Fashion
We did not file this report on Form 10-K when it was required, because the
Internal Investigation, together with other factors, prevented our obtaining
audited financial statements in time to make the required filing. There were
some immediate consequences from the delinquency, such as the suspension of
trading in our stock on the Nasdaq Stock Market. The Company's Annual Report on
Form 10-K has now been filed, and we do not believe there is any intrinsic
ongoing harm to the Company from the delay. However, it could cause some
uncertainty about us which could affect investors or analysts. Moreover, for at
least one year, we will not be able to use simplified SEC forms for registration
of our securities, which could affect the speed with which we could engage in
capital raising activities, or even our ability to complete any such activities.
No such capital raising activities are specifically planned at this time, but
our needs for capital are, as discussed above, potentially uncertain.
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Future Issuance of Preferred Stock Could Hurt Common Stockholders
Rights of preferred stockholders take priority over common stockholders. The
only preferred stock currently outstanding consists of 360 shares of Series A
Convertible Preferred Stock, although we are contractually obligated (following
the satisfaction of certain conditions) to issue shares of series B Convertible
Preferred Stock to one of our current stockholders. Our Board of Directors has
the authority to issue up to 2,500,000 shares of preferred stock and can
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. Although the Series A Convertible Preferred Stock does not have
voting rights except in certain circumstances, future preferred stockholders
could delay, defer or prevent a change of control of which our common
stockholders may have been in favor.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding (i) the current directors of the
Company, who will serve until the next annual meeting of stockholders or until
their successors are elected or appointed and qualified, and (ii) the current
executive officers of the Company, who serve at the discretion of the Board of
Directors.
The Company's executive officers and directors are as follows:
Name Age Position
---- --- --------
Kenneth M. Woolley* 54 Director and Chairman of the Board
Don Marshall 42 Director and President
Becky H. Takeda 37 Director; Senior Vice President and Chief
Operating Officer
Glenn Hartman* 43 Director
Gregory J. Duman** 45 Director
Kenneth Nagel 53 Director
John J. Hanlon 52 Senior Vice President and Chief Financial
Officer
Bobbie Downey 46 Vice President, Secretary and General
Counsel
*Serves on compensation and audit committees.
**Serves on audit committee.
Kenneth M. Woolley: Director and Chairman of the Board
Mr. Woolley has been a founder and director of several companies and has been a
director of the Company since March 1996. He was elected Chairman of the Board
in August 2000. Mr. Woolley served on the Board of Directors of Megahertz
Holding Corporation, a leading manufacturer of fax/modems for laptop and
notebook computers until February 1995. Prior to the merger of Megahertz and
VyStar Group, Inc. in June 1993, Mr. Woolley had served as President of the
parent company. Since 1979, Mr. Woolley has been a principal in Extra Space
Management, Inc. and Extra Space Storage, privately held companies engaged in
the ownership and management of mini-storage facilities. Since 1989, Mr. Woolley
has been a partner in D.K.S. Associates, and since 1990 a director and executive
officer of Realty Management, Inc., privately held companies engaged in the
ownership and management of apartments, primarily in Las Vegas, Nevada. Mr.
Woolley is a director of Richmond Foods, PLC, a London Stock Exchange company,
which he co-founded in 1985. Mr. Woolley also serves as an adjunct associate
professor of business management at Brigham Young University. Mr. Woolley holds
a B.A. in Physics from Brigham Young University, an M.B.A. and a Ph.D. in
Business Administration from the Stanford University Graduate School of
Business.
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Don Marshall: President.
Mr. Marshall has been President of the Company since July 1999 and a member of
the Board of Directors since October 1999. For the past five years Mr. Don
Marshall has been developing software and business solutions for DataBank
International Ltd., the company he created in St. Kitts, which was subsequently
acquired by the Company. He is a professional engineer with a doctoral education
in the field of instrumentation and control. Mr. Marshall is also one of the
owners of Caribe Yachts, a privately owned yacht construction company in St.
Kitts. He is managing director and sits on the Board of Directors of Caribe
Yachts Ltd.
Becky H. Takeda: Director, Senior Vice President and Chief Operating Officer
Ms. Takeda joined the Company in January 2000, became Chief Operating Officer in
June 2000, and was appointed to the Board in August 2000. Before joining the
Company, she was vice president of worldwide marketing and investor relations
for SMART Modular Technologies, a global high tech manufacturing and services
firm. She also has held executive management positions with several leading
technology companies including IBM, Apex Data, Inc., Asia Interactive Services
and Instant Replay Corporation. Ms. Takeda holds an M.B.A. in Finance from Santa
Clara University and a B.A. in Economics from UCLA.
Glenn Hartman: Director
Mr. Hartman has been a director of the Company since July 1998. Mr. Hartman is a
founding shareholder of, and has been a member of the board of directors of,
Cosine Communications, Inc. since 1996. Mr. Hartman is also the founding general
partner of Falcon Capital, LLC, a private equity investment company specializing
in technology companies, since 1995. From 1992 to 1995 Mr. Hartman served as CEO
and Chairman of Apex Data, Inc., a computer peripherals manufacturing company.
Mr. Hartman holds a B.A. in Economics from UCLA.
Gregory J. Duman: Director
Mr. Duman was elected a director of the Company in January 2000. He also serves
as a director of Transaction Systems Architects, Inc., an international provider
of enterprise e-payments software and services, and a director of Transgenomic,
Inc., a biotechnology company. He is currently the Chief Financial Officer of
Artios, Inc. and prior to that was Executive Vice President and Chief Financial
Officer for Transaction Systems Architects, Inc. He is a Certified Public
Accountant and holds a B.S. in Business Administration from the University of
Nebraska.
Kenneth Nagel: Director
Mr. Nagel has been a director of the Company since October 1999. He was a
co-founder of SB.com, which the Company acquired in June 1999. He is president
and founder of Worldwide Card Acceptance, an independent sales organization in
the credit card industry, as well as president and founder of Stream Line
Processing Inc. For the past more than 10 years, Mr. Nagel has been developing
software and business solutions for the companies he co-founded. Mr. Nagel has
been employed in the payment processing industry since 1980.
John J. Hanlon: Senior Vice President and Chief Financial Officer
Mr. Hanlon joined the Company as its Senior Vice President and Chief Financial
Officer in August 2000. For the previous 13 years he served as chief financial
officer at Personic, Inc. and MDL Information Systems, Inc. He is a Certified
Public Accountant with experience in public offerings, private placement
activities, acquisitions, mergers and joint ventures. He holds a B.S. in
Business Administration from California State University, Hayward.
Bobbie Downey: Vice President, Secretary and General Counsel
Ms. Downey joined the Company in 1998 and was appointed General Counsel in April
2000. She has more than twenty years' experience as a corporate and securities
law attorney. Prior to joining the Company, she worked as a staff attorney at
the United States Securities and Exchange Commission investigating securities
fraud. While working for a life insurance company and then as Executive Vice
President of a brokerage firm, she was instrumental in developing industry
standard investor protections in the high yield bond market. Ms. Downey holds a
J.D. from the University of Chicago and a B.A. in Economics from the State
University of New York at Buffalo.
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Significant Employees
Stephen T. Cannon: Vice President of Technology
Mr. Cannon joined the Company in June 1999 when it acquired SB.com, a company
which Mr. Cannon co-founded more than five years ago. He has extensive
experience in Internet-based credit card security, fraud control and transaction
integrity, e-commerce operations involving dynamic data distribution,
transaction processing and customer tracking systems. Mr. Cannon holds a B.A. in
Philosophy from the University of South Florida.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met, except for one filing by Mr. Marshall that was two
days late.
ITEM 2. PROPERTIES
----------
The Company is leasing a total of 35,513 square feet of modern office space in
Clearwater, Florida; San Francisco, California; Haywards Heath, England; St.
Kitts; Park City, Utah and Salt Lake City, Utah. These offices include computer
data centers in Salt Lake City, Haywards Heath, England and Clearwater, Florida
and general offices. All facilities are leased from third parties. The offices
are being leased under three to five year arrangements. Some leases contain
options to renew. These facilities are believed adequate for the Company's
current needs. The current total monthly rental for all facilities is $48,682.
Some of the leases are subject to annual increases for inflation adjustments.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is the subject of certain legal matters which it considers
incidental to its business activities. It is the opinion of management, after
consultation with independent legal counsel, that the ultimate disposition of
these legal matters will not individually or in the aggregate have a material
adverse effect on the consolidated financial position, liquidity or results of
operations of the Company. The following claims, if determined adversely to the
Company, could have a material adverse effect on the Company's financial
position, liquidity and results of operations.
ePayment Solutions ("EPS") was a processing client of DataBank. Unbeknownst to
present management of the Company, various non-EPS owned merchants were sending
credit card payments to EPS, who in turn processed the transactions with the
Company under the EPS name. EPS in turn was supposed to take its settlement
funds and disburse them to its various merchants. The Company began seeing large
chargebacks in EPS's account and therefore larger reserves were withheld in the
EPS account to cover expected chargebacks. As of November 27, 2000, reserves
held for EPS totaled approximately $5 million. The Company believes that
adequate reserves are being held for all remaining chargebacks.
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On November 15, 2000, the Company received a letter from an attorney
representing EPS demanding payment of approximately $11 million which he claimed
is an amount withheld from EPS. The Company does not believe that there is any
validity to EPS's claim because all funds held are being held in reserve for
chargebacks and the amounts are reasonable based upon the chargebacks that have
been experienced to date.
Two additional merchants have made claims of approximately $600,000 to the
Company regarding amounts they believe are owed them due to processing errors.
The Company is working with these merchants to reconcile activity and resolve
differences. Management believes that any amount ultimately owed these merchants
will not be materially different than amounts currently recorded.
The Company processed a limited number of transactions through the Bank of
Nevis, located in the British West Indies ("the Bank") during fiscal 2000.
DataBank, acquired by the Company in October 1999, processed through the Bank
prior to the acquisition. In February 2000, the Bank informed the Company that
unspecified amounts were due the Bank for periods before and after the DataBank
acquisition due to processing errors. The Company responded that, in fact, it
believes the Bank owes the Company certain amounts that were never settled after
the Company ceased processing. The Bank engaged an audit firm to analyze the
matter and that audit continues today. The Bank claims the Company owes it
$581,000 for the period prior to the DataBank acquisition and $500,000 for the
period after the acquisition. The Company believes that the $581,000 was
incorrectly overpaid by the Bank to various merchants and that it is the
obligation of the Bank to recover these amounts from those merchants. The
Company is liable for any unrecovered overpayments as DataBank's liabilities
were assumed by the Company in the acquisition. During fiscal 2000, the Company
increased the liabilities assumed in the DataBank transaction by $581,000 and
increased acquired goodwill by the same amount. The Company believes the Bank's
claim regarding the $500,000 for the period after the acquisition is erroneous
as it includes one merchant that was never a client of DataBank or the Company
and another merchant whose payments to the Bank have not been considered in the
audit. The Company wrote off a receivable due from the Bank of $255,531 in
fiscal 2000. Management will continue to work with the Bank and their auditors
and believes the issues with the Bank will be settled during fiscal 2001 and
that no material adverse impact will result.
The Company has been advised by the United States Securities and Exchange
Commission that it is conducting an informal review of the facts underlying the
Internal Investigation. The Company is cooperating in that inquiry which, to the
best of the Company's knowledge, is continuing.
See also Item 1. Business-Internal Investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Price Range of Common Stock
On February 5, 1997, the Company's common stock began trading on the National
Market System of the Nasdaq Stock Market. Prior to that time and commencing in
January 1995, the Company's common stock was quoted on the OTC Bulletin Board.
During 1993 and 1994, there was no public market for the securities of the
Company's predecessor, and the Company is not aware of any quotations for its
securities during this period. In prior years, securities of the Company's
predecessor were traded in the over-the-counter market.
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The Company's common stock trades on the National Market System of the Nasdaq
Stock Market under the symbol "DCTI". The following table reflects the high and
low sales price reported by The Nasdaq National Market for the periods
indicated.
High Low
---- ---
Period Following Fiscal Year
October 1 to October 11 $ 3.47 $ 1.56
July 1 to September 30, 2000 $ 9.13 $ 2.45
Fiscal Year Ended June 30, 2000
April 1 to June 30, 2000 $11.25 $ 3.38
January 1 to March 31, 2000 $14.50 $ 7.06
October 1 to December 31, 1999 $10.50 $ 4.06
July 1 to September 30, 1999 $ 7.13 $ 5.06
Fiscal Year Ended June 30, 1999
April 1 to June 30, 1999 $ 8.75 $ 4.81
January 1 to March 31, 1999 $ 8.19 $ 4.13
October 1 to December 31, 1998 $13.94 $ 1.81
July 1 to September 30, 1998 $17.00 $ 3.13
On October 11, 2000 the common stock was quoted at a closing price of $2.91.
Trading has been suspended on The Nasdaq Stock Market since October 11, 2000 and
is expected to resume trading following the filing of this Report. See "Risk
Factors".
As of October 11, 2000, there were approximately 745 holders of record of the
Company's common stock.
Dividend Policy
The Company has not paid any cash dividends since its inception. The Company
currently intends to retain future earnings in the operation and expansion of
its business and does not expect to pay any cash dividends in the foreseeable
future.
Changes in Securities
Since June 30, 1999, the Company sold the following securities without
registration under the Securities Act of 1933, as amended (the "Act") relying
upon the exemption to registration under Section 4(2) of the Act:
In October 1999, the Company issued 16,600,000 shares, 5,115,851 of which were
subsequently returned to the Company, of its common stock, in a private
placement, in exchange for all the issued and outstanding shares of DataBank
International, Ltd.
In December 1999, the Company issued 8,332 shares of common stock upon exercise
of warrants to a previous lender to the Company.
In January 2000, the Company issued 16,668 shares of common stock upon exercise
of warrants to a previous lender to the Company.
In January 2000, the Company issued 11,427,500 shares, 3,521,771 of which were
subsequently returned to the Company, of its common stock, in a private
placement, in connection with the earn-out associated with the DataBank
International acquisition.
In January 2000, the Company issued 600,000 shares of its common stock, in a
private placement, in exchange for all the issued and outstanding shares of
CaribCommerce, Ltd.
20
<PAGE>
In January 2000, the Company issued 101,200 shares of its common stock to a
former officer of the Company upon his exercise of non-qualified stock options.
In February 2000, the Company issued 6,000 shares of common stock to a former
employee of the Company to settle the former employee's claims against the
Company.
During the twelve-month period ending June 30, 2000, the Company issued 364,976
shares of common stock pursuant to exercises of stock options issued under the
Company's Amended and Restated Incentive Plan.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following audited selected financial data should be read in conjunction with
the Company's consolidated financial statements appearing elsewhere herein.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 25,819,883 $ 3,601,273 $ 773,883 $ 8,812 $ --
Cost of revenue 16,509,887 2,562,371 745,871 492 --
------------ ----------- ----------- ------------- ------------
Gross margin 9,309,996 1,038,902 28,012 8,320 --
------------ ----------- ----------- ------------- ------------
Operating expenses:
General and administrative 9,160,772 3,259,243 3,669,362 1,400,916 685,528
Selling 3,215,291 1,048,244 1,198,130 1,897,665 --
Research and development 2,078,184 1,906,893 1,432,006 3,966,185 1,478,890
Depreciation and amortization 33,687,849 4,157,201 1,522,078 398,066 86,828
Chargebacks 3,144,686 -- -- -- --
Non-cash expense related to issuance
of stock and stock options 1,996,369 1,065,956 423,375 -- --
AOL marketing agreement
-- 5,558,137 -- -- --
Acquired in-process research and
development -- 3,700,000 -- -- --
Compensation expense related to
issuance of options by principal
stockholder -- -- -- -- 1,484,375
------------ ----------- ----------- ------------- ------------
Total operating expenses 53,283,151 20,695,674 8,244,951 7,662,832 3,735,621
------------ ----------- ----------- ------------- ------------
Operating loss (43,973,155) (19,656,772) (8,216,939) (7,654,512) (3,735,621)
Other income (expense), net 8,735,779 (696,457) 20,738 495,661 57,209
------------ ----------- ----------- ------------- ------------
Loss from continuing operations before
income taxes and discontinued operations (35,237,376) (20,353,229) (8,196,201) (7,158,851) (3,678,412)
Income tax benefit 369,476 -- 2,651,838 -- 91,999
Loss from continuing operations (34,867,900) 20,353,229) (5,544,363) (7,158,851) (3,586,413)
------------ ----------- ----------- ------------- ------------
Discontinued operations:
Gain on sale of WeatherLabs operations,
net of income tax provision of $530,643 884,404 -- -- -- --
Loss from operations of discontinued
WeatherLabs operations, net of income
taxes (268,612) (1,011,484) (53,604) -- --
Income from discontinued direct mail
advertising operations, net of
income taxes -- -- 111,377 300,438 153,332
Gain on sale of direct mail advertising
operations, net of income taxes -- -- 4,394,717 -- --
Loss from discontinued Internet
service provider subsidiary, net of
income taxes -- -- (265,674) (3,040,643) --
Gain on sale of Internet service
provider subsidiary, net of income taxes -- -- 232,911 -- --
------------ ----------- ----------- ------------- ------------
Income (loss) from discontinued
operations 615,792 (1,011,484) 4,419,727 (2,740,205) 153,332
------------ ----------- ----------- ------------- ------------
Net loss (34,252,108) (21,364,713) (1,124,636) (9,899,056) (3,433,081)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Preferred stock dividend -- (200,000) -- -- --
------------ ----------- ----------- ------------- ------------
Net loss attributable to common
shareholders $(34,252,108) $(21,564,713) $(1,124,636) $ (9,899,056) $ (3,433,081)
============ =========== =========== ============= ============
Basic and diluted net loss per common share:
Loss from continuing operations $ (0.95) $(1.56) $(0.66) $ (0.86) $ (0.61)
Net Loss (0.94) (1.64) (0.13) (1.19) (0.58)
Weighted average common shares
outstanding 36,582,662 13,130,216 8,422,345 8,309,467 5,917,491
As of June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $ (2,718,985) $ 76,962 $ 3,639,313 $ 3,624,308 $ 12,774,113
Total assets 241,167,763 47,102,186 24,020,746 11,320,660 16,222,902
Long-term obligations 93,181 432,704 1,384,132 -- --
Stockholders' equity 211,585,172 41,575,667 18,995,696 9,826,083 15,541,624
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
Overview
The Company is a leading provider of advanced e-payment services for businesses,
merchants, and financial institutions. The Company's services have introduced to
the marketplace a secure and cost-effective system for credit card processing
and merchant account management. By integrating services under one roof, DCTI
can offer to customers an outsource solution for merchant account set-up, an
Internet Payment Gateway, payment processing, fraud control technology, and
Web-based reporting.
As discussed previously (Item 1. Business - Development of the Company), the
Company was incorporated under the laws of the State of Delaware on May 16, 1985
as DataMark Holding, Inc. It was formed as a national direct marketing company
and began incorporating online business strategies in fiscal 1994 with the
objective of becoming a national leader in the interactive online direct
marketing industry.
Sisna Acquisition and Divestiture. In January 1997, the Company acquired Sisna,
Inc. ("Sisna"), an Internet service provider headquartered in Salt Lake City,
Utah, for an acquisition price of $2,232,961. In December 1997, the Board of
Directors reviewed the performance of Sisna in conjunction with a review of the
strategic opportunities available to the Company. Among the conclusions of the
Board were the following: (a) the Internet service provider business had become
very competitive during the previous six months, with major corporations such as
US West, America Online, MCI and others aggressively marketing their internet
access offerings; (b) the margins in the Internet service provider business were
declining as fixed-price, unlimited time access had become prevalent, and (c)
Sisna's losses on a monthly basis were increasing with no apparent near-term
prospect of profitability. For these reasons, the Board concluded that it was in
the best interests of the Company to sell Sisna. The Board solicited offers to
buy Sisna over a period of three months, but due to Sisna's continuing losses of
over $40,000 per month, no offers materialized.
In February 1998, while the Board considered terminating the operations of Sisna
to cut the Company's losses, Mr. Henry Smith, a director of the Company and one
of the former owners of Sisna, offered to assume the ongoing cost of running
Sisna. After arms-length negotiations between the independent members of the
Board and Mr. Smith, the Company agreed to sell the operations of Sisna to Mr.
Smith. In March 1998, the Company sold the operations of Sisna to Mr. Smith and
certain other buyers in exchange for 35,000 shares of the Company's common
stock, valued at $141,904 based on the stock's quoted market price. Mr. Smith
and the other buyers received tangible assets of $55,547 of accounts receivable,
$35,083 of prepaid expenses, $47,533 of computer and office equipment, and
$9,697 of other assets and assumed liabilities of $33,342 of accounts payable,
$101,951 of notes payable, and $243,320 of other accrued liabilities, resulting
in a pretax gain on the sale of $372,657. The sales price to Mr. Smith was
determined by arms' length negotiations between Mr. Smith and the independent
directors and was approved by the Board of Directors, with Mr. Smith abstaining.
Sisna's results of operations are included in the accompanying consolidated
statements of operations as discontinued operations.
22
<PAGE>
Books Now Acquisition and Divestiture. In January 1998, the Company acquired all
of the outstanding stock of Books Now, Inc. ("Books Now") a book reseller, in
exchange for a maximum of 362,500 shares of the Company's common stock. One
hundred thousand shares of the Company's common stock valued at $312,500 were
issued at closing and 262,500 shares of the Company's common stock were subject
to a three-year earn-out contingency based upon achieving certain financial
performance objectives. The fair market value of the common shares issued was
determined to be the quoted market price on the date of acquisition. The
acquisition was accounted for as a purchase. Books Now's results of operations
prior to its divestiture are included in the accompanying consolidated
statements of operations since the date of acquisition.
In May 1999, the Company sold certain assets related to Books Now and the
Company's VideosNow division to Clicksmart, Inc. in exchange for 19.9% of
Clicksmart's common stock and a right to receive $2,000,000 from Clicksmart
either by receiving 75% of Clicksmart's net cash flows until DCTI received an
aggregate amount of $2,000,000 or from proceeds received by Clicksmart as an
equity investment of not less than $10,000,000. The Company also loaned
Clicksmart $300,000 to be paid from Clicksmart's net cash flows before payment
of the $2,000,000 deferred payment. The assets transferred to Clicksmart
included $52,204 of prepaid advertising, $57,183 of computer and office
equipment, and $442,020 of unamortized goodwill. The operations of Books Now and
Videos Now were not generating positive cash flows prior to the exchange and
Clicksmart did not have any history of profitability. Due to these
uncertainties, the net investment of $551,407 was written off at the time of the
exchange. In May 2000, Clicksmart was sold to Ubrandit.com ("UBI") for 300,000
shares of UBI, of which the Company received 100,000 shares in exchange for all
of its interest in Clicksmart and cancellation of indebtedness. The UBI shares
will be available for resale in May 2001. The Company has not recorded an asset
relative to the shares as their value remains uncertain.
WeatherLabs Acquisition and Divestiture. In May 1998, the Company acquired all
of the outstanding stock of WeatherLabs, Inc. ("WeatherLabs"), a provider of
weather and weather-related information and products on the Internet, in
exchange for up to 777,220 shares of the Company's common stock. At closing
253,260 shares of the Company's common stock were issued valued at $762,503, and
an additional 523,960 shares of the Company's common stock were issuable based
upon the price of the Company's common stock over the next three years. The fair
market value of the shares of the Company's common stock issued was determined
to be the quoted market price on the date of acquisition. The acquisition was
accounted for as a purchase. The results of operations of WeatherLabs prior to
its divestiture are included in the accompanying consolidated financial
statements from the date of acquisition.
Effective October 31, 1999, the Company entered into an Asset Purchase Agreement
with WL Acquisition Corporation, a wholly owned subsidiary of Landmark
Communications, Inc., formed for the purpose of acquiring and combining the
WeatherLabs assets acquired from the Company. Pursuant to the agreement, the
Company exchanged certain net WeatherLabs assets for $3,383,000 in cash. The
assets exchanged by the Company consisted of $192,950 of accounts receivable,
$879,305 of prepaid advertising, $126,290 of net equipment, and certain
intangibles represented by net goodwill of $1,189,057 and liabilities consisting
of $132,556 of deferred income and $100,000 of notes payable were assumed by the
purchaser. The Company recorded the resulting gain of $1,415,047 from this sale
as discontinued operations during the year ended June 30, 2000.
Digital Courier Acquisition. The Company entered into a Stock Exchange Agreement
with Digital Courier International, Inc., a Nevada corporation ("DCII"), dated
as of March 17, 1998 (the "DCII Exchange Agreement"). The DCII Exchange
Agreement was approved by the shareholders of the Company in a special meeting
held on September 16, 1998 during which the shareholders also approved a name
change from DataMark Holding, Inc. to Digital Courier Technologies, Inc.
Pursuant to the DCII Exchange Agreement, the Company issued 4,659,080 shares of
its common stock valued at $14,027,338, the fair market value of the shares
based on the quoted market price on the date of acquisition. This acquisition
was accounted for as a purchase. The results of operations of DCII are included
in the accompanying consolidated financial statements from September 16, 1998,
the date of acquisition.
23
<PAGE>
Access Services Acquisition. In April 1999, the Company acquired all of the
outstanding stock of Access Services, Inc. ("Access Services"), a credit card
processing company, in exchange for 300,000 shares of the Company's common stock
valued at $1,631,400, the quoted market price of the common shares issued on the
date of acquisition and $75,000 in cash. The former owners of Access Services
also received warrants to purchase 100,000 shares of the Company's common stock
at $5.50 per share which were valued at $440,000 as of the close of the
transaction.
Secure Bank Acquisition. In June 1999, the Company acquired all of the
outstanding stock of SB.com, Inc. ("Secure Bank") a credit card processing
company, in exchange for 2,840,000 shares of the Company's common stock valued
at $17,838,040, the quoted market price of the common shares issued on the date
of acquisition. The Company also loaned $2,000,000 to the officers of Secure
Bank. The loans are payable with 6 percent interest and are to be repaid within
2 years or from the proceeds from the sale of the Company's common stock by such
officers, whichever is earlier. In addition, each of the four principal former
stockholders of Secure Bank received individual one year employment contracts
with an annual salary of $150,000.
DataBank Acquisition. In October 1999, the Company acquired all of the
outstanding stock of DataBank International, Ltd. ("DataBank"), a credit card
processing company, in exchange for 16,600,000 shares of the Company's common
stock valued at $88,195,800, the quoted market price of the common shares issued
on the date of acquisition and 13,060,000 contingent shares based on future
performance criteria. In January 2000, the Company issued an additional
11,427,500 shares of the Company's common stock valued at $108,561,250, the
quoted market price of the common shares issued on the date that the Board of
Directors elected to issue the contingent shares. The number of additional
shares issued was based on the original contingent shares discounted by 12.5
percent.
The Company recently completed an Internal Investigation related to the
Company's acquisition of DataBank. As a result of the investigation,
negotiations with certain individuals resulted in the return of 8,637,622 shares
of the Company's common stock. See Item 1. Business - Internal Investigation and
Note 12 to the Consolidated Fiinancial Statements.
CaribCommerce Acquisition. In January 2000, the Company acquired all of the
outstanding stock of CaribCommerce SKB, Ltd., a sales and marketing company
organized under the laws of St. Christopher and Nevis ("CaribCommerce"), in
exchange for 600,000 shares of the Company's common stock valued at $4,837,800,
the quoted market price of the common shares issued on the date of acquisition,
and $150,000 in cash.
MasterCoin Acquisition. In April 2000, the Company acquired software, a merchant
portfolio, and equipment from various entities referred to jointly as MasterCoin
for $2.9 million in cash.
Results of Operations
Year ended June 30, 2000 compared with year ended June 30, 1999
Revenue
Revenue for the year ended June 30, 2000 (fiscal 2000) was $25,819,883 as
compared to $3,601,273 for the year ended June 30, 1999 (fiscal 1999). Revenue
of $25,159,219 was received from payment processing, $192,440 from technical
support and $468,224 from software distribution agreements during fiscal 2000.
During fiscal 1999 revenue of $2,474,829 was received from payment processing,
$940,811 from the Books Now operations which were sold in May 1999, $128,406
from the VideosNow operations which were sold in May 1999 and $57,227 for
technical support services.
Cost of Revenue
Cost of revenue for fiscal 2000 was $16,509,887 or 63.9% of revenue as compared
to $2,562,371 or 71.2% of revenue for fiscal 1999. Cost of revenue as a percent
of revenue decreased primarily due to the increase in payment processing
revenues offset by added costs due to processing errors.
24
<PAGE>
Operating Expenses
General and administrative expense increased 181.1% to $9,160,772 during fiscal
2000 from $3,259,243 during fiscal 1999. The increase in general and
administrative expense was principally attributable to the increase in
administrative staff costs associated with the acquisitions of DataBank,
SecureBank and CaribCommerce, and $936,500 of expenses associated with bad
debts.
Selling expense increased 206.7% to $3,215,291 during fiscal 2000 from
$1,048,244 during fiscal 1999. The increase in selling expense is attributable
to additional staff costs associated with the payment processing operations.
Research and development expense increased 9.0% to $2,078,184 during fiscal 2000
from $1,906,893 during fiscal 1999. Research and development expense increased
due to an increase in staff as the company continued to develop its payment
processing software.
Depreciation and amortization expense increased 710.3% to $33,687,849 during
fiscal 2000 from $4,157,201 during fiscal 1999. The increase was due to the
amortization of goodwill associated with the acquisitions of DataBank,
CaribCommerce, DCII, Access Services, and Secure Bank.
During fiscal 2000, the Company experienced $3,144,686 of credit card
chargebacks related to fraudulent merchant transactions. The Company's
arrangements with its merchants and agents provide for the recovery of
chargebacks form 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.
Non-cash expense related to the issuance of stock and stock options increased
87.3% to $1,996,369 during fiscal 2000 from $1,065,956 during fiscal 1999.
Non-cash compensation during fiscal 2000 was principally attributable to
cashless exercises of stock options and accounting for stock options under
variable plan accounting. Non-cash compensation during fiscal 1999 related to
stock issued at the then current market value for the severance agreement
payments made to the former owner of Books Now (see Note 3 to the consolidated
financial statements). Non-cash expense in future periods will be effected by
changes in the quoted market price of the Company's common stock due to variable
plan accounting for stock options.
Other Income (Expense)
The Company recorded other income, net of $8,735,779 in fiscal 2000. Interest
expense of $366,137 on notes and capital leases was offset by the gain on the
sale of CommTouch of $8,636,575 and interest income of $500,941. In fiscal 1999
a loss on the sale of assets of $379,822 and interest expense of $371,203 were
partially offset by interest income of $63,846. The Company recorded other
expense, net of $696,457 in fiscal 1999.
Discontinued Operations
During October 1999, the Company sold its WeatherLabs operation , which resulted
in a pretax gain of $1,415,047. The results of the WeatherLabs operation are
presented as discontinued operations. The WeatherLabs operations incurred pretax
losses of $429,779 and $1,011,484 for the fiscal 2000 and 1999, respectively.
Year ended June 30, 1999 compared with year ended June 30, 1998
Revenue
Revenue for the year ended June 30, 1999 (fiscal 1999) was $3,601,273 as
compared to $773,883 for the year ended June 30, 1998 (fiscal 1998). The Access
Services operations which were acquired in April 1999 accounted for $2,138,808,
the Books Now operations which were sold in May 1999 accounted for $940,811, the
Secure Bank operations which were acquired in June 1999 accounted for $336,021,
the VideosNow operations which were sold in May 1999 accounted for $128,406 and
technical support services accounted for $57,227 of revenue during fiscal 1999.
The Books Now operations which were acquired in January 1998 accounted for
$392,719 of the fiscal 1998 revenue and a one time sale of a turn-key Internet
computer system accounted for the remainder of the fiscal 1998 revenue.
25
<PAGE>
Cost of Revenue
Cost of revenue for fiscal 1999 was $2,562,371 or 71.2% of revenue as compared
to $745,871 or 96.4% of revenue for fiscal 1998. Cost of revenue as a percent of
revenue primarily decreased due to the increase in revenue from credit card
processing which have higher gross margins.
Operating Expenses
During fiscal 1999, the Company incurred total expenses of $5,558,137 associated
with the AOL contract, including $87,002 of advertising expense associated with
the permanent placement on the AOL Shopping channel and $5,471,135 associated
with terminating the interactive marketing agreement with AOL. Effective June 1,
1998, the Company entered into a marketing agreement with AOL which gave the
Company "permanent anchor tenancy" and advertising for its Videos Now website on
key channels of the America Online Network, AOL.com and Digital City. Due to low
sales volume and unacceptable gross margins from the sale of videos on its
Videos Now website on AOL, the Company entered into discussions with AOL
beginning in November 1998 to restructure the terms of the marketing agreement
with AOL. Effective January 1, 1999, the Company amended the Marketing Agreement
to: (1) reduce the previously required January 1, 1999 payment of $4,000,000 to
AOL to a payment of $315,000 which was made prior to January 31, 1999, and (2)
eliminate any additional cash payments to AOL in the future under the marketing
agreement.
On February 1, 1999, we entered into a second amendment with AOL, under which
AOL returned to the Company (a) 636,942 warrants to purchase common shares and
(b) 601,610 of the 955,414 shares of its common stock previously issued to AOL
under the marketing agreement. All advertising ceased immediately, but the
Company continued to have a permanent location or "button" on AOL's shopping
channel until August 31, 1999. The Company has no further financial obligations
to AOL.
Under the original contract with AOL the Company was to be one of only two
predominantly displayed online stores ("permanent anchor tenant") for the sale
of videos on the AOL channels where subscribers would most likely go to purchase
videos. In addition to the predominant display on the AOL channels, AOL was
providing advertising on its other channels to send customers to the permanent
anchor tenant sites. The permanent anchor tenancy included "above the fold
placement" (no scrolling required to see the Company's video site) and an
oversized logo (larger than a banner or a button). Under the amended contract
with AOL the Company only received "button" placement on the AOL shopping
channel. "Button" placement is not predominant on the AOL channels, is smaller,
need not be "above the fold" and is not the beneficiary of AOL advertising
designed to send customers to the site.
As a result of the February 1, 1999 agreement with AOL, the Company determined
that the remaining balance of the AOL anchor tenant placement costs of
$12,364,123, less $139,206 representing the fair market value of the permanent
location on the shopping channel for 8 months, should be written off. A portion
of the write-off has been offset by recording the return of the 601,610 shares
of common stock, which had a quoted market price of $4,234,675 as of the
termination date, and by recording the cancellation of the warrants which had a
recorded value of $2,519,106 as of December 31, 1998. This resulted in the net
write-off of $5,471,135 during fiscal 1999.
The interactive marketing agreement with AOL was for an initial term of 39
months (the "Agreement"), which could be extended for successive one-year terms
by AOL thereafter. Under the Agreement, the Company was to pay AOL $12,000,000
in cash and issue a seven-year warrant to purchase 318,471 shares of the
Company's common stock at $12.57 per share (the "Performance Warrant") in
exchange for AOL providing the Company with certain permanent anchor tenant
placements for its Videos Now site on the AOL Network and promotion of the
Videos Now site. The Performance Warrant was to vest over the term of the
agreement as certain promotion criteria were achieved by AOL. The agreement
included an option whereby AOL elected to provide additional permanent anchor
tenant placements for Videos Now on AOL.com (a separate and distinct website) in
exchange for 955,414 shares of the Company's common stock and a seven-year,
fully vested warrant to purchase 318,471 shares of the Company's common stock at
a price of $6.28 per share (the "Option Warrant").
26
<PAGE>
Depreciation and amortization expense increased 173.1% to $4,157,201 during
fiscal 1999 from $1,522,078 during fiscal 1998. The increase was due to the
amortization of goodwill associated with the acquisitions of DCII, WeatherLabs,
Access Services, and Secure Bank.
The write off of acquired in-process research and development during the year
ended June 30, 1999 was $3,700,000, which was attributable to the acquisition of
DCII (see Note 3 to the consolidated financial statements).
General and administrative expense decreased 11.2% to $3,259,247 during fiscal
1999 from $3,669,362 during fiscal 1998. The decrease in general and
administrative expense was principally due to the accrual of $544,014 for the
cost of subleasing idle facilities and the future costs of idle facilities
during fiscal 1998 which did not occur during fiscal 1999.
Research and development expense increased 33.2% to $1,906,893 during fiscal
1999 from $1,432,006 during fiscal 1998. Research and development expense
increased due to increased levels of activity required for the development of
VideosNow and the Company's payment processing suite.
Non-cash expense related to the issuance of stock and stock options increased
151.8% to $1,065,956 during fiscal 1999 from $423,375 during fiscal 1998. The
increase is related to stock issued at the then current market value associated
with the severance agreement payments made to the former owner of Books Now (see
Note 3 to the consolidated financial statements).
Selling expense decreased 12.5% to $1,048,244 during fiscal 1999 from $1,198,130
during fiscal 1998. The decrease in selling expense is attributable to a
reduction of selling expense related to Videos Now.
Other Income (Expense)
Other income (expense) decreased from net other income of $20,738 in fiscal 1998
to net other expense of $(696,457) in fiscal 1999. In fiscal 1998, interest
income exceeded interest expense, while in fiscal 1999 interest income was
offset by a net loss on asset sales and interest expense due on notes payable
and lease obligations.
Discontinued Operations
During March 1998, the Company sold its direct mail marketing and Internet
service operations, therefore, their results of operations are presented as
discontinued operations. During fiscal 1998, pretax income from the direct mail
marketing operations was $178,204. During fiscal 1998, the Internet service
operations incurred a pretax loss of $425,420. The Company realized a pretax
gain of $7,031,548 from the sale of its direct mail marketing operations and a
$372,657 gain from the sale of its Internet service operations during fiscal
1998.
During October 1999, the Company sold its WeatherLabs operation, therefore,
their results of operations are presented as discontinued operations. The
WeatherLabs operations incurred pretax losses of $1,011,484 and $85,766 for
fiscal 1999 and 1998, respectively.
Quarterly Results
The following tables set forth certain quarterly financial information of the
Company for each quarter of fiscal 2000 and fiscal 1999. This information has
been derived from the quarterly financial statements of the Company which are
unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited financial statements included herein and include all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the financial results for such periods.
27
<PAGE>
This information should be read in conjunction with the financial statements and
the notes thereto and the other financial information appearing elsewhere
herein.
<TABLE>
<CAPTION>
For the three months ended
--------------------------
Sep. 30, 1999 Dec. 31, 1999 Mar. 31, 2000 Jun 30, 2000
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 2,832,929 $ 6,157,954 $ 8,799,382 $ 8,029,618
Cost of revenue 1,346,794 3,434,725 4,401,878 7,326,490
Gross margin 1,486,135 2,723,229 4,397,504 703,128
------------- ------------- ------------- ------------
Operating expenses:
Depreciation and amortization 1,971,512 6,478,108 12,402,103 12,836,126
General and administrative 876,473 1,720,019 2,034,013 4,530,267
Non-cash expense related to the issuance
of stock options and stock 7,293 181,475 1,158,301 649,300
Selling 602,717 916,969 757,959 937,646
Research and development 576,219 696,839 338,105 467,021
Chargebacks -- 2,884,247 260,439 --
------------- ------------- ------------- ------------
Total operating expenses 4,034,214 12,877,657 16,950,920 19,420,360
------------- ------------- ------------- ------------
Operating loss (2,548,079) (10,154,428) (12,553,416) (18,717,232)
Other income (expense), net (63,340) (40,988) 8,383,892 456,214
------------- ------------- ------------- ------------
Loss before income taxes and discontinued
operations (2,611,419) (10,195,416) (4,169,524) (18,261,018)
Income tax (expense) benefit (114,641) 413,957 -- 70,160
------------- ------------- ------------- ------------
Loss from continuing operations (2,726,060) (9,781,459) (4,169,524) (18,190,858)
------------- ------------- ------------- ------------
Discontinued operations:
Loss from operations of discontinued
WeatherLabs operations, net of income
tax benefit (191,070) (77,542) -- --
Gain on sale of WeatherLabs operations,
net of income tax provision -- 767,472 -- 116,933
------------- ------------- ------------- ------------
Income (loss) from discontinued operations (191,070) 689,930 -- 116,933
------------- ------------- ------------- ------------
Net loss (2,917,130) $ (9,091,529) $ (4,169,524) (18,190,858)
------------- ------------- ------------- ------------
Net loss per common share:
Basic and diluted $ (0.16) $ (0.26) $ (0.09) $ (0.38)
------------- ------------- ------------- ------------
Weighted average common shares outstanding:
Basic and diluted 18,557,499 35,183,224 45,954,213 47,681,846
============= ============= ============= ============
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
For the three months ended
--------------------------
Sep. 30, 1998 Dec. 31, 1998 Mar. 31, 1999 Jun 30, 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 256,016 $ 357,211 $ 320,569 $ 2,667,477
Cost of revenue 179,881 291,930 255,771 1,834,789
------------- ------------- ------------- ------------
Gross margin 76,135 65,281 64,798 832,688
------------- ------------- ------------- ------------
Operating expenses:
AOL interactive marketing agreement -- 5,471,135 52,202 34,800
Acquired in-process research and
development 3,700,000 -- -- --
Depreciation and amortization 646,909 1,073,648 1,046,732 1,389,912
General and administrative 594,761 614,235 1,043,002 1,007,252
Selling 252,450 210,374 228,301 357,119
Non-cash expense related to the
issuance of stock and stock options -- 1,051,558 -- 14,391
Research and development 38,670 843,996 496,578 527,649
------------- ------------- ------------- ------------
Total operating expenses 5,232,790 9,264,946 2,866,815 3,331,123
------------- ------------- ------------- ------------
Operating loss (5,156,655) (9,199,665) (2,802,017) (2,498,435)
Other income (expense), net 300,684 (180,079) (166,689) (650,373)
------------- ------------- ------------- ------------
Loss from continuing operations (4,855,971) (9,379,744) (2,968,706) (3,148,808)
Discontinued operations:
Loss from discontinued WeatherLabs operations (264,609) (222,904) (154,139) (369,832)
------------- ------------- ------------- ------------
Net loss (5,120,580) (9,602,648) (3,122,845) (3,518,640)
Preferred stock dividend -- -- 200,000) --
------------- ------------- ------------- ------------
Net loss attributable to common shareholders $ (5,120,580) $ (9,602,648) $ (3,322,845) $ (3,518,640)
============= ============= ============= ============
Net loss per common share:
Basic and diluted (0.56) (0.70) (023) (0.23)
============= ============= ============= ============
Weighted average common shares outstanding:
Basic and diluted 9,191,351 13,745,159 14,166,766 15,466,464
============= ============= ============= ============
</TABLE>
(1) The sum of net loss per share amounts for the four quarters
may not equal annual amounts due to rounding.
Liquidity and Capital Resources
In October 1997, the Company entered into a sale and three-year capital
leaseback agreement related to $3,000,000 of the Company's computer equipment.
The agreement provided that $250,000 of the proceeds be placed in escrow upon
signing the agreement. The Company sold its equipment at book value resulting in
no deferred gain or loss on the transaction. This capital lease obligation was
settled in full in July 2000.
In March 1998, the Company sold the net assets of DataMark Systems, Inc., its
direct mail marketing subsidiary. The Company received $7,557,300 from the sale
of these net assets.
In April 1998, the Company purchased 1,800,000 shares of its common stock held
by a former officer of the Company for $1,500,000 in cash.
Effective June 1, 1998, we entered into a marketing agreement with America
Online ("AOL"), which gave us "permanent anchor tenancy" and advertising for our
Videos Now website on key channels of the America Online Network, AOL.com and
Digital City. Due to low sales volume and unacceptable gross margins from the
sale of videos on our Videos Now website on AOL, we entered into discussions
with AOL beginning in November 1998 to restructure the terms of the marketing
agreement with AOL. Effective January 1, 1999, we amended the Marketing
Agreement to: (1) reduce the previously required January 1, 1999 payment of
$4,000,000 to AOL to a payment of $315,000 on or prior to January 31, 1999, and
(2) eliminate any additional cash payments to AOL in the future under the
Marketing Agreement.
29
<PAGE>
On February 1, 1999, we entered into a second amendment with AOL, under which
AOL returned to us (a) 636,942 warrants to purchase shares of common stock and
(b) 601,610 of the 955,414 shares of our common stock previously issued to AOL
under the marketing agreement. All advertising ceased immediately, but we
continued to have a permanent location or "button" on AOL's shopping channel
until August 31, 1999.
As a result of the February 1, 1999 agreement with AOL, the Company determined
that the remaining balance of the AOL anchor tenant placement costs of
$12,364,123 less $139,206, the fair market value of the permanent location on
the shopping channel for 8 months, should be written off. A portion of the
write-off was offset by recording the return of the 601,610 shares of common
stock, which had a quoted market value of $4,234,676 as of the date the
agreement was terminated, and by recording the cancellation of the warrants
which had a recorded value of $2,519,106 as of December 31, 1998. This resulted
in a net write-off of $5,471,135 during fiscal 1999.
In August and September 1997, the Company made an investment in CommTouch
Software Ltd. in the amount of $750,000. During fiscal 2000 all of the CommTouch
Software, Ltd stock was sold and the Company received net proceeds of
$9,386,575.
On October 22, 1998, the Company borrowed $1,200,000 from a group of individual
lenders (the "Loan"). The annual interest rate on the Loan was 24% and it was
secured by receivables owed to the Company. The original maturity date of the
Loan was October 22, 1999. It was prepayable without penalty any time after
February 22, 1999. In connection with the Loan, the Company paid a finders fee
of $27,750 and issued two-year warrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share. The finders' fee and the
fair market value of the two-year warrants were capitalized and were amortized
over the life of the loan. On October 15, 1999, the Company extended the loan
for the current principal amount of $753,342 with a maturity date of October 20,
2000. On February 28, 2000, the Company paid off the note in full.
On November 24, 1998, the Company raised $1.8 million by selling its common
stock and warrants to purchase common stock to The Brown Simpson Strategic
Growth Funds (the "Purchasers") pursuant to a Securities Purchase Agreement
between the Company and the Purchasers (the "Purchase Agreement"). On December
2, 1998, the Company sold an additional $1.8 million of common stock to the
Purchasers and amended the Purchase Agreement and related documents (the
"Amended Agreements").
Pursuant to the Purchase Agreement and Amended Agreements, the Purchasers
acquired 800,000 shares of the Company's common stock and five-year warrants to
purchase 800,000 additional shares ("Tranche A"). The exercise price for 400,000
of the warrants is $5.53 per share and the exercise price of the remaining
400,000 warrants is $9.49 per share. The warrants are callable by the Company if
for 130 consecutive trading days, the closing bid price of the Company's stock
is at least two times the then-current exercise price. Because the shares
acquired by the purchasers were priced at a 10% discount from the quoted market
price no value was allocated to the warrants.
On March 3, 1999, the Company raised an additional $3.6 million through the sale
of Series A Convertible Preferred Stock (the "Preferred Stock") and warrants to
purchase common stock to the Purchasers pursuant to a Securities Purchase
Agreement between the Company and the Purchasers (the "March Purchase
Agreement").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360 shares of
Preferred Stock convertible into 800,000 shares of common stock and five-year
warrants to purchase an additional 800,000 shares of common stock. The Preferred
Stock is convertible into common stock at a price of $4.50 per share of common
stock. The exercise price for the warrants is $5.23 per share. The warrants are
callable by the Company if for 130 consecutive trading days, the closing bid
price of the Company's common stock is at least two times the then-current
exercise price.
The March Purchase Agreement also requires the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 1,600,000 units, each unit consisting of Series B Convertible
Preferred Stock convertible into one share of the Company's common stock and a
five-year warrant to purchase one share of common stock (the "Tranche D Units"),
if certain conditions are met. A condition to the sale of the Tranche D Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for 130 consecutive trading days. The price for the
Tranche D Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche D Unit will be $7.70.
30
<PAGE>
On March 25, 1999, the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for ACI's BASE24(R) software which is
being used to enhance the Company's Internet-based platforms that offer secure
payments processing for business-to-consumer electronic commerce. Pursuant to
the agreement, the Company agreed to pay ACI $5,941,218 during the life of the
contract. The Company made a payment upon signing the contract of $591,218 and
was scheduled to make equal payments at the beginning of each quarter totaling
$1,000,000 for calendar year 2000, $1,200,000 for calendar year 2001, $1,400,000
for calendar year 2002, $1,400,000 for calendar year 2003 and a final payment of
$350,000 on January 1, 2004.
On June 14, 1999, Transactions Systems Architects, Inc. ("TSAI"), the parent of
ACI, purchased 1,250,000 shares of the Company's common stock and warrants to
purchase an additional 1,000,000 shares of the Company's common stock in
exchange for $6,500,000. As part of the securities purchase agreement, the
Company agreed to amend the software license agreement with ACI 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 consolidated financial
statements and are being expensed ratably over the term of the agreement. In
July, 2000, TSAI exercised all of its warrants for a total exercise price of
$5,200,000.
On March 31, 2000, the software license agreement was modified to grant the
Company a non-transferable and non-exclusive license to use ACI's Base24(R)
software in all international markets, as well as the United States, which was
granted in the original contract. In exchange for this agreement the Company
paid ACI $2,500,000 on April 15, 2000 and made a final payment of $2,500,000 on
September 30, 2000.
On June 3, 1999, the Company entered into a three year agreement with ACI to
distribute the Company's e-commerce products. As consideration for this
agreement, ACI paid the Company a non-refundable deposit of $700,000 recorded as
deferred revenue. ACI will pay the Company license fees of 40% of the fee paid
ACI until the Company receives $800,000, 35% of the fees paid ACI until; the
Company receives $1,500,000 and 30% of the fees paid ACI thereafter. On April 1,
2000 the distribution agreement was amended extending the term to six years and
providing a guarantee to the Company of an additional $6,000,000 payable in
installments of $1,200,000 on September 1, 2000 through September 1, 2004. The
Company is recognizing revenue from this agreement ratably over its term. At
June 30, 2000, the Company had recognized $468,224 of revenue under these
agreements.
On June 6, 2000, the Company agreed to process not less than $20,000,000 per
month of gross credit card transactions through the St. Kitts Nevis Anguilla
National Bank Limited ("SKNANB") and to make a minimum deposit with the bank in
the amount of $6,400,000, maintain a 6 month rolling reserve of five percent on
the gross amount of credit card transactions processed through SKNANB and pay
SKNANB 50 basis points for all credit card settlements processed through SKNANB
for DCTI merchants. This payment for basis points shall not be less than $50,000
per month for the six month period ending November 30, 2000 and not less than
$100,000 per month thereafter. In exchange, SKNANB permits the Company's
merchants to process their credit card transactions through SKNANB using their
VISA and Mastercard facilities.
Operating activities provided $1,320,416 in cash during fiscal 2000 and used
$7,291,791 during fiscal 1999. The net loss of $(34,252,108) incurred in fiscal
2000 was offset by non-cash depreciation and amortization expenses of
$33,687,849. The acquisitions discussed previously generated the increase in
amortization in fiscal 2000 over fiscal 1999. Other items that increased cash
provided by operating activities in fiscal 2000 included an increase in merchant
reserves of $14,317,435, an increase in accounts payable of $4,057,222, and
increases in various other liabilities.
Other adjustments that decreased cash provided by operating activities in fiscal
2000 included the $8,636,575 gain on the sale of CommTouch, the movement of
$6,400,000 to provide collateral to SKNANB, the deposit of $2,500,000 placed
with a processor, and increases in the balances of various asset accounts. In
fiscal 1999, the Company used $7,291,791 of cash in operating activities. The
Company's net loss of $(21,364,713) was offset by $4,157,201 of depreciation and
amortization, $5,558,137 of amortization and write-off of AOL related costs, and
$3,700,000 of write-off of acquired in-process research and development costs as
well as other increases and decreases in operation assets and liabilities.
31
<PAGE>
Cash provided by investing activities was $5,054,095 during fiscal 2000 and cash
used for investing activities was $8,534,139 during fiscal 1999. During fiscal
2000, investing activities provided $9,386,575 from the sale of CommTouch
Software, Ltd stock, $3,570,093 from the sale of the WeatherLabs operations,
$670,300 from the increase in net long term assets of discontinued operations
and $428,096 in cash received from acquired companies. Investing activities used
$4,689,000 for software licenses, $3,461,969 for the purchase of equipment,
$150,000 for cash payments associated with acquisitions of companies, and
$700,000 to purchase a merchant portfolio. During fiscal 1999, the Company's
investing activities included a $4,517,296 prepayment of a software license,
$2,000,000 in loans made in connection with the acquisition of Secure Bank to
the former stockholders' of Secure Bank, $849,203 of cash advances for operating
activities to DCII prior to its acquisition by the Company, the acquisition of
equipment for $797,126, $520,827 from a decrease in net long-term assets of
discontinued operations, and a $300,000 loan to Clicksmart in connection with
the sale of Books Now and VideosNow, offset by the receipt of proceeds from the
sale of assets of $362,642 and net cash acquired in acquisitions of $87,671.
Cash used by financing activities was $1,373,094 during fiscal 2000 as compared
to cash provided by financing activities of $14,995,562 during fiscal 1999.
During fiscal 2000, the Company used cash for financing activities for
repayments on capital lease obligations of $1,082,874 and repayments on notes of
$960,614 while cash provided by investing activities was $598,518 from the
issuance of common stock upon the exercise of stock options and $71,876 from the
issuance of common stock upon the exercise of warrants. During fiscal 1999 the
cash provided was attributable to the net proceeds of $13,024,000 from issuance
of preferred and common stock, $2,350,000 from loan proceeds and $943,750 from
proceeds received from the exercise of stock options offset by principal
repayments on capital lease obligations of $867,827 and principal repayments on
loans of $454,361.
The report of independent public accountants on our financial statements as of
and for the year ended June 30, 2000 includes an explanatory paragraph with
respect to the Company's ability to continue as a going concern. The company has
suffered recurring losses from continuing operations of $34,867,900, $20,353,229
and $5,544,363 during the years ended June 30, 2000, 1999 and 1998,
respectively. The Company's operating activities, excluding cash retained for
merchant reserves, used $4,097,019, $7,291,791 and $6,400,982 of cash during the
years ended June 30, 2000, 1999 and 1998, respectively. Additionally, the
Company had a tangible working capital deficit of $4,872, 841 as of June 30,
2000. These matters raise substantial doubt about the Company's ability to
continue as a going concern.
Subsequent to June 30, 2000, warrants to purchase 1,000,000 shares of common
stock at $5.20 per share were exercised by Transaction Systems Architects, Inc.
("TSAI") providing the company with $5,200,000 of cash. In September 2000, the
Company paid TSAI $2,500,000 due under the software license agreement net of
$1,200,000 due from TSAI under the distribution agreement discussed in Note 5 to
the consolidated financial statements. With the growth of the Company's
e-payment processing services, the Company's negative cash flows from operations
are expected to decrease significantly. During the quarter ended September 30,
2000, the Company's operations generated a loss from operations of approximately
$220,000 (unaudited) after excluding non-cash expenses for amortization and
depreciation and excluding the non-cash income related to stock options.
Management projects that there will be sufficient cash flows from operating
activities during the next twelve months to provide capital for the Company to
sustain its operations; however, there can be no assurance that management's
projections will be achieved. Management may also be required to pursue sources
of additional funding to meet marketing and expansion objectives. There can be
no assurance that additional funding will be available or, if available, that it
will be available on acceptable terms or in required amounts.
Year 2000
The Company has not experienced any significant disruptions in any aspect of its
operations and it has not incurred any material expenditures in addition to
those already reported in its prior filings. To date the Company has not
experienced any material Year 2000 system problems, nor does it believe that
there will be any future material impact on the Company's business, operations,
or financial condition related to maintaining its Year 2000 compliance.
32
<PAGE>
Forward-Looking Information
Statements regarding the Company's expectations as to future revenue from its
business strategy, and certain other statements presented herein, constitute
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to risks
relating to the Company's continued ability to create or acquire products and
services that customers will find attractive and the potential for increased
competition which could affect pricing and profitability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company does not hold any investments in market risk sensitive instruments
as contemplated by Item 305 of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
The consolidated financial statements and report of independent public
accountants are filed as part of this report on pages F-1 through F-37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL STATEMENT DISCLOSURE.
-----------------------------------------------------------
On June 28, 1996, the Registrant engaged Arthur Andersen LLP ("Andersen") to
perform its audits and provide accounting services thereafter. The Registrant
did not consult with Andersen prior to such date regarding any reportable
matter.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Located in Part I as permitted by General Instruction G.(3) and by Instruction 3
to Item 401(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer as of June 30, 2000 and to each of the Company's other
executive officers whose annual salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation
--------------------
Long-Term
Annual Compensation Compensation
------------------- ------------
Other Annual
Name and Principal Year Ended Salary Bonus Compensation Options/SARs
Position June 30 ($) ($) ($) (#)
-------- ------- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Donald Marshall 2000 $157,500 (1) $ 0 0
President
James A. Egide 2000 $180,000 $ 0 650,000 (2)
Former Chairman 1999 $ 4,000 $ 0 0
And CEO
1998 $ 0 $ 0 0
Bobbie Downey 2000 $111,875 $ 7,700 65,000
Vice President, Secretary 1999 $ 83,125 (3) $ 0 90,000
and General Counsel
</TABLE>
(1) Mr. Marshall's salary during fiscal year 2000 was for the nine month period
from October 1, 1999 through June 30, 2000.
(2) Mr. Egide's options were cancelled in accordance with the Company's stock
options plan upon his resignation in July 2000.
(3) Ms. Downey's salary during fiscal year 1999 was for the period from
September 16, 1998 through June 30, 1999.
Compensation of the executive officers may be increased from time to time as
recommended by the compensation committee and approved by the Board of
Directors.
34
<PAGE>
Stock Options Granted in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
as Assumed Annual Rates
of Stock Price Appreciations
Individual Grants for Option Term
-------------------------------------------------------------------------------------------------------------
% of Total
Options
Granted to
Options Employees Exercise Expiration 5% 10%
Name Granted (#) in 2000 Price Date ($) ($)
---- ----------- ------- ----- ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
James A.
Egide 650,000(1) 18.7% $5.9375 Oct. 2004 $192,969 $385,938
-------------------------------------------------------------------------------------------------------------
Kenneth M.
Woolley 125,000 3.6% $5.9375 Oct. 2004 37,109 74,219
-------------------------------------------------------------------------------------------------------------
Glen
Hartman 125,000 3.6% $5.9375 Oct. 2004 37,109 74,219
-------------------------------------------------------------------------------------------------------------
Greg
Duman 60,000 1.7% $9.625 Mar. 2005 28,875 57,750
-------------------------------------------------------------------------------------------------------------
Bobbie
Downey 25,000 0.7% $9.50 Jan. 2005 11,875 23,750
-------------------------------------------------------------------------------------------------------------
Bobbie
Downey 40,000 1.1% $5.625 Apr. 2005 11,250 22,500
-------------------------------------------------------------------------------------------------------------
Becky
Takeda 200,000 5.7% $5.625 Jan. 2005 56,250 112,500
-------------------------------------------------------------------------------------------------------------
Becky
Takeda 200,000 5.7% $4.813 Jun. 2005 48,130 96,260
-------------------------------------------------------------------------------------------------------------
Total 1,425,000 40.9% $ 423,567 $ 847,136
========= ========= ========== ==========
</TABLE>
(1) Mr. Egide's options were cancelled in accordance with the Company's stock
options plan upon his resignation in July 2000.
Aggregated Option Exercises and Year-End Option Values in Fiscal 2000
The following table summarizes for each of the named executive officers of the
Company the number of stock options, if any, exercised during fiscal 2000, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at June 30, 2000 and the aggregate dollar value of in-the-money
unexercised options, if any, held at June 30, 2000. Value realized upon exercise
is the difference between the fair market value of the underlying stock on the
exercise date and the exercise price of the option. The value of unexercised,
in-the-money options at June 30, 2000 is the difference between its exercise
price and the fair market value of the underlying stock on June 30, 2000, which
was $6.375 per share based on the closing bid price of the common stock on June
30, 2000. The underlying options have not been, and may never be, exercised; and
actual gains, if any, on exercise will depend on the value of the common stock
on the actual date of exercise. There can be no assurance that these values will
be realized.
35
<PAGE>
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at 6/30/00 6/30/00
----------------------------- -------------------------
Shares
Acquired on Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James A. Egide (1) 0 $ 0 650,000 0 $ 284,375 $ 0
Kenneth M. Woolley 0 $ 0 237,500 0 $ 54,688 $ 0
Glen Hartman 0 $ 0 125,000 0 $ 54.688 $ 0
Becky Takeda 0 $ 0 20,000 380,000 $ 15,000 $ 369,300
Bobbie Downey 50,000 $ 303,166 46,500 58,500 $ 28,000 $ 27,000
Greg Duman 0 $ 0 20,000 40,000 $ 0 $ 0
</TABLE>
(1) Mr. Egide's options were cancelled in accordance with the Company's stock
options plan upon his resignation in July 2000.
Stock Option Plan
The Company has adopted the Second Amended and Restated Incentive Plan (the
"Option Plan") to assist the Company in securing and retaining key employees and
directors. The Option Plan provides that options to purchase a maximum of
6,000,000 shares of common stock may be granted to (i) directors and
consultants, and (ii) officers (whether or not a director) or key employees of
the Company ("Eligible Employees"). The Option Plan will terminate in 2014
unless sooner terminated by the Board of Directors.
The Option Plan is administered by a committee (the "Option Committee")
currently consisting of the Board of Directors. The total number of options
granted in any year to Eligible Employees, the number and selection of Eligible
Employees to receive options, the number of options granted to each and the
other terms and provisions of such options are wholly within the discretion of
the Option Committee, subject to the limitations set forth in the Option Plan.
The option exercise price for options granted under the Plan may not be less
than 100% of the fair market value of the underlying common stock on the date
the option is granted. Options granted under the Option Plan expire upon the
earlier of an expiration date fixed by the Option Committee or five years from
the date of grant.
Under the Option Plan, the Company may issue both qualified and non-qualified
stock options. As of June 30, 2000, options to purchase 3,574,750 shares of
common stock were outstanding under the Plan.
Compensation of Directors
The Company's non-employee Directors are not currently compensated for
attendance at Board of Director meetings. Non-employee directors may be granted,
on an ad hoc basis, stock options upon being appointed to the Board. The Company
may adopt a formal director compensation plan in the future. All of the
Directors are reimbursed for their expenses for each Board and committee meeting
attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The persons who served as members of the Compensation Committee of the Company's
Board of Directors during the Company's fiscal year ending on June 30, 2000
("Fiscal 2000") were Kenneth Woolley, Glenn Hartman and James Egide. Mr. Woolley
and Mr. Hartman are directors of the Company, and Mr. Egide was a director of
the Company until August 2000.
36
<PAGE>
During a portion of Fiscal 2000, Mr. Egide served as the Chief Executive Officer
of the Company. Mr. Egide was also an officer and a shareholder of MasterCoin,
Inc., a Nevada corporation to which the Company paid $1,200,000 in respect of a
purchase of certain equipment. In the course of closing the Fiscal 2000 books
and records, the Company reviewed the value of the equipment and determined that
its current fair market value was $300,000. The difference of $900,000 was
written off as an expense.
No current or former officer or employee of the Company participated in
deliberations of the Board of Directors concerning executive officer
compensation, other than Mr. Egide, Mr. Nagel, Mr. Marshall, and Ms. Takeda. It
is the Board's policy to exclude any employee whose compensation is being
discussed from participating in its deliberations over the compensation of such
employee.
No executive officer of the Company served as a director or member of (i) the
compensation committee of another entity which has an executive officer who is a
director of the Company or a member of the Compensation Committee of the
Company's Board of Directors, (ii) the board of directors of another entity in
which one of the executive officers of such entity served on the Compensation
Committee of the Company's Board of Directors, or (iii) the compensation
committee of any other entity in which one of the executive officers of such
entity served as a member of the Company's board of directors, during Fiscal
2000.
COMPENSATION COMMITTEE REPORT
The Company's executive compensation policies are administered by the
Compensation Committee. The Compensation Committee reviews and determines the
compensation of the Company's officers and evaluates management performance,
management succession and related matters.
The compensation policy of the Company is to provide competitive levels of
compensation that are influenced by performance, that reward individual
achievements, and that enable the Company to attract and retain qualified
executives. Compensation consists primarily of annual salary and long-term
incentive compensation in the form of stock options. Bonuses are awarded only in
circumstances when, in the Compensation Committee's subjective judgment, a
particular executive had exceptional performance during the prior year.
The Compensation Committee:
Kenneth M. Woolley
Glenn Hartman
PERFORMANCE GRAPH
The following chart shows how $100 invested as of June 30, 1995 in shares of the
Company's Common Stock would have grown during the two-year period ended June
30, 2000, as a result of changes in the Company's stock price, compared with
$100 invested in the Standard & Poor's 500 Stock Index and in the Standard &
Poor's Technology 500 Index.
37
<PAGE>
<TABLE>
<CAPTION>
Comparison of Five Year Cumulative Total Return
DCTI, S&P 500 Index, S&P Technology Index
[OBJECT OMITTED]
Company/Index Name 1995 1996 1997 1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DCTI $100.00 $3,400.00 $800.00 $2,500.00 $1,566.67 $1,700.00
--------------------------------------------------------------------------------------------------------------------
S&P 500 Index 100.00 123.11 162.49 208.14 251.99 267.02
--------------------------------------------------------------------------------------------------------------------
S&P Technology 100.00 118.29 179.06 239.68 394.31 568.93
--------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information regarding common stock of the Company
beneficially owned as of November 2, 2000 by: (i) each person known by the
Company to beneficially own 5% or more of the outstanding common stock, (ii)
each director and director nominee, (iii) each executive officer named in the
Summary Compensation Table, and (iv) all officers and directors as a group. As
of November 2, 2000, there were 40,044,444 shares of common stock outstanding
and 360 shares of Preferred Stock outstanding.
<TABLE>
<CAPTION>
Amount of Percentage
Names and Addresses of Common of Voting
Principal Stockholders Shares* Securities
---------------------- ------- ----------
<S> <C> <C>
Brown Simpson Strategic Growth Fund, Ltd. 1,337,741 (1) 3.3%
152 West 57th Street
New York, New York 10019
Brown Simpson Strategic Growth Fund, L.P. 646,102 (2) 1.6%
152 West 57th Street
New York, New York 10019
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Amathus Holdings 2,200,000 5.5%
Upper Ground Floor, Rockwood House, Haywards
Heath, 9-17 Perrymount Road
West Sussex, England RH16 3TW
Officers and Directors
Kenneth M. Woolley 237,500 (3) 0.6%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
Glenn Hartman 191,667 (4) 0.5%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
Donald Marshall 2,231,250 5.6%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
John Hanlon -- (5) 0.0%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
Becky Takeda 42,000 (6) 0.1%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
Greg Duman 30,000 (7) 0.1%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
Bobbie Downey 48,100 (8) 0.1%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
Ken Nagel 1,320,000 3.3%
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
All Directors and Executive Officers 4,100,517 10.1%
(8 persons)
* Assumes exercise of all exercisable options and warrants held by listed
security holders which can be exercised within 60 days from November 15, 2000.
</TABLE>
39
<PAGE>
(1) Includes 520,000 shares which Brown Simpson Ltd. may acquire upon exercise
of warrants. Does not include Series A Convertible Preferred Stock which is
convertible into 444,444 shares of common stock which are not currently
convertible.
(2) Includes 280,000 shares which Brown Simpson L.P. may acquire upon exercise
of warrants. Does not include Series A Convertible Preferred Stock which is
convertible into 355,556 shares of common stock which are not currently
convertible.
(3) Includes 237,500 shares which Mr. Woolley may acquire on exercise of
options. Does not include 300,000 shares which may be acquired on exercise
of options which are not currently exercisable.
(4) Includes 125,000 shares which Mr. Hartman may acquire on exercise of
options
(5) Does not include 409,641 shares which Mr. Hanlon may be acquired on
exercise of options which are not currently exercisable.
(6) Includes 42,000 shares which Ms. Takeda may acquire on exercise of options.
Does not include 358,000 shares which may be acquired on exercise of
options which are not currently exercisable.
(7) Includes 20,000 shares which Mr. Duman may acquire on exercise of options.
Does not include 40,000 shares which may be acquired on exercise of options
which are not currently exercisable.
(8) Includes 48,100 shares which Ms. Downey may acquire on exercise of options.
Does not include 56,900 shares which may be acquired on exercise of options
which are not currently exercisable.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In connection with the acquisition of SB.com in June 1999, the Company made cash
loans of $500,000 to each of four officers of SB.com. in exchange for promissory
notes. The notes accrue interest at a rate of six percent per annum and are due
in full June 30, 2001 or sooner if the makers receive proceeds from the sale of
Company stock.
During the year ended June 30, 2000, the Company purchased certain equipment for
$1,200,000 from a corporation in which an officer was a shareholder. In the
course of closing the fiscal 2000 books and records, the Company reviewed the
value of the equipment and determined that its current fair market value was
$300,000. The difference of $900,000 was written off as an expense.
During the year ended June 30, 1997, the Company negotiated services and
equipment purchase agreements with CasinoWorld Holdings, Ltd. and Barrons
Online, Inc., companies in which one of the Company's directors and shareholders
has an ownership interest. Under the agreements, the Company provided software
development services, configured hardware and other computer equipment and
related facilities amounting to $410,292. As of June 30, 1998, the Company had a
receivable from these companies in the amount of $148,576. The Company had
agreed to repurchase shares of its common stock as settlement for the
receivable. Accordingly, the receivable was reflected as contra equity in the
accompanying June 30, 1998 consolidated balance sheet and was settled as of June
30, 1999.
40
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) INDEX TO FINANCIAL STATEMENTS
Title of Documents Page No.
------------------ --------
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years
Ended June 30, 2000, 1999, and 1998 F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 2000, 1999, and 1998 F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2000, 1999, and 1998 F-10
Notes to Consolidated Financial Statements F-12
<TABLE>
<CAPTION>
(b) Exhibits
--------
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
-------- ------------------- ----------------
<S> <C> <C>
3.1 Amended and restated certificate of incorporation (1)
3.2 By-laws (1)
10.1 Lease Agreement (2)
10.2 Second Amended and restated Incentive Plan (3)
10.3 Stock Exchange Agreement with Digital Courier (4)
International, Inc.
10.4 Securities Purchase Agreement with Brown Simpson dated November
23, 1998 as amended December 2, 1998 (5)
10.5 Securities Purchase Agreement with Brown Simpson dated March 3,
1999 (6)
10.6 Agreement with Brown Simpson dated June 7, 1999 attached herewith
10.8 Stock Purchase Agreement with SB.Com, Inc. (7)
10.9 Securities Purchase Agreement with Transaction Systems
Architects, Inc. (7)
10.10 Settlement Services Agreement with St. Kitts Nevis Anguilla attached herewith
National Bank
10.11 Transaction Processing Services Agreement with Equifax Card attached herewith
Services, Inc.
10.12 Global Master Service Agreement with Global Payment Systems LLC attached herewith
10.13 Form of DataBank Settlement Agreement attached herewith
21.1 Subsidiaries of the Registrant attached herewith
23.0 Consent of Independent Public Accountants attached herewith
27.0 Financial Data Schedule attached herewith
</TABLE>
41
<PAGE>
(1) Incorporated by reference to the Company's Annual Report for the year ended
June 30, 1998.
(2) Incorporated by reference to the Company's Annual Report for the year ended
June 30, 1995.
(3) Incorporated by reference to the Company's Proxy Statement for the Annual
Meeting held on January 13, 2000.
(4) Incorporated by reference to the Company's Proxy statement filed on
September 1, 1998 for Special Stockholders meeting to be held on September
16, 1998.
(5) Incorporated by reference to the Company's Form 8-K filed on December 11,
1998.
(6) Incorporated by reference to the Company's Form 8-K filed on March 10,
1999.
(7) Incorporated by reference to the Company's Form 8-K filed on June 21, 1999.
42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Courier Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Digital Courier
Technologies, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Courier
Technologies, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from continuing operations of $34,867,900, $20,353,229 and $5,544,363 during the
years ended June 30, 2000, 1999 and 1998, respectively. The Company's operating
activities, excluding cash retained for merchant reserves, used $4,097,019,
$7,291,791 and $ 6,400,982 of cash during the years ended June 30, 2000, 1999,
and 1998, respectively. Additionally, the Company has a tangible working capital
deficit of $4,872,841 as of June 30, 2000. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
December 1, 2000
F-1
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND 1999
ASSETS
------
<TABLE>
<CAPTION>
2000 1999
------------- -------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 7,382,773 $ 2,381,356
Restricted cash 6,400,000 --
Receivable from payment processor 5,314,655 --
Deposit with payment processor 2,500,000 --
Trade accounts receivable, net of
allowance for doubtful accounts of
$681,000 and $0, respectively 2,693,663 548,046
Other receivables -- 856,000
Current portion of prepaid software license 2,153,856 903,456
Prepaid expenses and other current assets 325,478 193,167
Net current assets of discontinued operations -- 288,752
------------- -------------
Total current assets 26,770,425 5,170,777
------------- -------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 8,519,923 6,010,440
Furniture, fixtures and leasehold improvements 1,204,231 966,745
------------- -------------
9,724,154 6,977,185
Less accumulated depreciation and amortization (4,957,120) (3,378,528)
------------- -------------
Net property and equipment 4,767,034 3,598,657
------------- -------------
OODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$34,135,690 and $2,244,178, respectively 200,858,061 29,628,037
------------- -------------
PREPAID SOFTWARE LICENSE, net of current portion 5,923,104 3,387,960
------------- -------------
OTHER ASSETS 2,849,139 3,331,108
------------- -------------
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS
-- 1,985,647
------------- -------------
$ 241,167,763 $ 47,102,186
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND 1999 (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------- -------------
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable $ 1,150,000 $ 2,110,614
Current portion of capital lease obligations 347,156 1,090,507
Accounts payable 4,368,653 311,431
Merchant reserves 14,317,435 --
Software license payable 2,500,000 --
Accrued merchant payable 2,122,265 --
Settlements due to merchants 1,497,024 --
Accrued chargebacks 1,835,124 --
Deferred revenue 231,776 --
Other accrued liabilities 1,119,977 1,581,263
------------- -------------
Total current liabilities 29,489,410 5,093,815
------------- -------------
CAPITAL LEASE OBLIGATIONS, net of current portion 93,181 432,704
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 8 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $10,000 par value;
2,500,000 shares authorized, 360
shares outstanding 3,600,000 3,600,000
Common stock, $.0001 par value; 75,000,000
shares authorized, 47,682,066
and 18,557,390 shares outstanding,
respectively 4,768 1,856
Additional paid-in capital 277,018,140 72,759,439
Warrants outstanding 1,363,100 1,363,100
Stock subscription (12,000) (12,000)
Accumulated deficit (70,388,836) (36,136,728)
------------- -------------
Total stockholders' equity 211,585,172 41,575,667
------------- -------------
$ 241,167,763 $ 47,102,186
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE $ 25,819,883 $ 3,601,273 $ 773,883
COST OF REVENUE 16,509,887 2,562,371 745,871
------------ ------------ ------------
Gross margin 9,309,996 1,038,902 28,012
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative (exclusive of non-cash
expense of $1,537,443, $14,398, and $362,125,
respectively) 9,160,772 3,259,243 3,669,362
Selling (exclusive of non-cash expense of $61,500,
$1,051,558, and $0, respectively) 3,215,291 1,048,244 1,198,130
Research and development (exclusive of non-cash
expense of $397,426, $0, and $61,250, respectively)
2,078,184 1,906,893 1,432,006
Depreciation and amortization 33,687,849 4,157,201 1,522,078
Chargebacks 3,144,686 -- --
Non-cash expense related to the issuance of stock and
stock options 1,996,369 1,065,956 423,375
AOL agreement -- 5,558,137 --
Acquired in process research and development -- 3,700,000 --
------------ ------------ ------------
Total operating expenses 53,283,151 20,695,674 8,244,951
------------ ------------ ------------
OPERATING LOSS (43,973,155) (19,656,772) (8,216,939)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 500,941 63,846 178,354
Gain on sale of CommTouch stock 8,636,575 -- --
Loss on sale of assets -- (379,822) --
Interest expense (366,137) (371,203) (157,616)
Other expense (35,600) (9,278) --
------------ ------------ ------------
Net other income (expense) 8,735,779 (696,457) 20,738
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(35,237,376) (20,353,229) (8,196,201)
INCOME TAX BENEFIT 369,476 -- 2,651,838
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (34,867,900) (20,353,229) (5,544,363)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Continued)
2000 1999 1998
--------------- ------------- -----------
<S> <C> <C> <C>
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
WeatherLabs operations, net of income
tax benefit of $161,167, $0, and $32,162, respectively $ (268,612) $ (1,011,484) $ (53,604)
Gain on sale of WeatherLabs operations, net of income
tax provision of $530,643 884,404 -- --
Income from operations of discontinued direct mail
advertising operations, net of income tax provision
of $66,827 -- -- 111,377
Gain on sale of direct mail advertising operations,
net of income tax provision of $2,636,831 -- -- 4,394,717
Loss from operations of discontinued Internet service
provider subsidiary, net of income tax benefit of $159,404 -- -- (265,674)
Gain on sale of Internet service provider subsidiary,
net of income tax provision of $139,746
-- -- 232,911
--------------- ------------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 615,792 (1,011,484) 4,419,727
--------------- ------------- -----------
NET LOSS (34,252,108) (21,364,713) (1,124,636)
--------------- ------------- -----------
PREFERRED STOCK DIVIDEND -- (200,000) --
--------------- ------------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (34,252,108) $ (21,564,713) $(1,124,636)
=============== ============= ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted -
Loss from continuing operations $ $ $
(0.95) (1.56) (0.66)
=============== ============= ===========
Income (loss) from discontinued operations $ $ $
0.01 (0.08) 0.53
=============== ============= ===========
Net loss $ $ $
(0.94) (1.64) (0.13)
=============== ============= ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 36,582,662 13,130,216 8,422,345
=============== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
Receivable
Settled in
Additional Repurchased Stock
Preferred Stock Common Stock Paid-in Warrants Common Subscriptions Accumulated
Shares Amount Shares Amount Capital Outstanding Stock Receivable Deficit
---- ----- ------ ------ ------- ----------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1997 -- $ -- 8,560,932 $ 856 $ 23,272,606 $ -- $-- $-- $(13,447,379)
Exercise of stock options -- -- 424,815 42 539,093 -- -- -- --
Acquisition of
shares in cashless
exercise of
stock options -- -- (132,822) (13) (488,329) -- -- -- --
Issuance of common
stock for compensation -- -- 20,000 2 61,248 -- -- -- --
Compensation expense in
connection with
grant of stock
options -- -- -- -- 343,750 -- -- -- --
Issuance of common
stock to
acquire Books Now -- -- 100,000 10 312,490 -- -- -- --
Issuance of
common stock to
acquire WeatherLabs -- -- 253,260 26 762,478 -- -- -- --
Issuance of common
stock and
warrants in
connection with
AOL agreement -- -- 955,414 96 8,329,920 2,519,106 -- -- --
Purchase of common
stock from
officers for cash -- -- (1,866,110) (187) (1,699,813) -- -- -- --
Reacquisition and
retirement of
common stock
in connection
with sale of Sisna -- -- (35,000) (4) (141,090) -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(continued)
SPLIT TABLE
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reacquisition of
common stock
issued to purchase
computer software -- $ -- (12,000) $ 1 $ (95,499)
Receivable settled
through the
repurchase of
common shares -- -- -- -- --
Net loss -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 -- -- 8,268,489 827 31,196,354
Issuance of common
stock for cash -- -- 2,050,000 205 9,797,795
Issuance of Series
A preferred
stock for cash 360 3,600,000 -- -- (174,000)
Exercise of stock options -- -- 1,083,529 108 3,132,722
Acquisition of
shares in cashless
exercise of
stock options -- -- (335,833) (33) (2,174,655)
Issuance of
common stock to
acquire Digital
Courier
International -- -- 4,659,080 466 14,026,872
Issuance of
common stock to
acquire SecureBank -- -- 2,840,000 284 17,837,756
Issuance of
common stock and
warrants to
acquire Access
Services -- -- 300,000 30 1,631,370
</TABLE>
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(continued)
<TABLE>
<CAPTION>
Receivable
Settled in
Repurchased Stock
Warrants Common Subscriptions Accumulated
Outstanding Stock Receivable Deficit
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reacquisition of
common stock
issued to purchase
computer software $ -- $ -- $ -- $ --
Receivable settled
through the
repurchase of
common shares -- (148,576) -- --
Net loss -- -- -- (1,124,636)
--------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 2,519,106 (148,576) -- (14,572,015)
Issuance of common
stock for cash -- -- -- --
Issuance of Series
A preferred
stock for cash -- -- -- (200,000)
Exercise of stock options -- -- -- --
Acquisition of
shares in cashless
exercise of
stock options -- -- -- --
Issuance of
common stock to
acquire Digital
Courier
International -- -- (12,000) --
Issuance of
common stock to
acquire SecureBank -- -- -- --
Issuance of
common stock and
warrants to
acquire Access
Services 440,000 -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Continued)
SPLIT TABLE
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in
settlement with former owner
of Books Now -- $ -- 205,182 $ 20 $ 1,051,538
Issuance of contingent shares of
common stock related to
acquisition of WeatherLabs -- -- 101,035 10 593,570
Issuance of common stock and
warrants in connection with
@Home agreement -- -- 20,534 2 223,305
Reacquisition and retirement of
common stock and warrants in
connection with termination of
AOL agreement -- -- (601,610) (60) (4,234,615)
Repurchase of common shares as
settlement of receivable -- -- (33,016) (3) (148,573)
Issuance of warrants in
connection with loan agreement -- -- -- -- --
Net loss -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 360 3,600,0000 18,557,390 1,856 72,759,439
Issuance of common stock to
acquire DataBank
International, Ltd. -- -- 28,027,500 2,802 196,754,247
Issuance of common stock to
acquire CaribCommerce
International, Ltd. -- -- 600,000 60 4,837,740
Exercise of stock options -- -- 826,604 83 4,355,145
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Continued)
Receivable
Settled in
Repurchased Stock
Warrants Common Subscriptions Accumulated
Outstanding Stock Receivable Deficit
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock in
settlement with former owner
of Books Now $ -- $ -- $ -- $ --
Issuance of contingent shares of
common stock related to
acquisition of WeatherLabs -- -- -- --
Issuance of common stock and
warrants in connection with
@Home agreement 887,000 -- -- --
Reacquisition and retirement of
common stock and warrants in
connection with termination of
AOL agreement (2,519,106) -- -- --
Repurchase of common shares as
settlement of receivable -- 148,576 -- --
Issuance of warrants in
connection with loan agreement 36,100 -- -- --
Net loss -- -- -- (21,364,713)
-----------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 1,363,100 -- (12,000) (36,136,728)
Issuance of common stock to
acquire DataBank
International, Ltd. -- -- -- --
Issuance of common stock to
acquire CaribCommerce
International, Ltd. -- -- -- --
Exercise of stock options -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Continued)
SPLIT TABLE
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Warrants
Shares Amount Shares Amount Capital Outstanding
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Acquisition of shares in cashless
exercise of stock options -- $ -- (360,428) (36) $ (2,471,103) --
Compensation expense in
connection with outstanding
options -- -- -- 649,300 --
Issuance of common stock upon the
exercise of warrants -- -- 25,000 2 71,873 --
Issuance of common stock in
settlement with former employee -- -- 6,000 1 61,499 --
Net loss -- -- -- -- -- --
------------ ----------- ------------ ------------ ------------ ------------
BALANCE, June 30, 2000 360 $3,600,0000 47,682,066 $ 4,768 $277,018,140 $ 1,363,100
============ =========== ============ ============ ============ ============
</TABLE>
Receivable
Settled in Stock
Repurchased Subscriptions Accumulated
Common Stock Receivable Deficit
----------- ------------ ------------
Acquisition of shares in cashless
exercise of stock options $ -- $ -- $ --
Compensation expense in
connection with outstanding
options -- -- --
Issuance of common stock upon the
exercise of warrants -- -- --
Issuance of common stock in
settlement with former employee -- -- --
Net loss -- -- (34,252,108)
----------- ------------ ------------
BALANCE, June 30, 2000 $ -- $ (12,000) $(70,388,836)
=========== ============ ============
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(34,252,108) $(21,364,713) $ (1,124,636)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 33,687,849 4,157,201 1,522,078
Gain on sale of CommTouch stock (8,636,575) -- --
Gain of sale of WeatherLabs operations (1,415,047) -- --
Non-cash expense related to the issuance of stock and stock options 1,996,369 1,065,956 423,375
Loss related to MasterCoin assets 802,500 -- --
Amortization and write-off of AOL anchor tenant placement costs -- 5,558,137 --
Acquired in-process research and development -- 3,700,000 --
Issuance of common stock and warrants in connection with @Home
agreement -- 1,110,307 --
Loss on sale of assets -- 379,822 11,196
Gain on sale of direct mail marketing and Internet service operations -- -- (7,404,205)
Provision for reserve against CommTouch Ltd. investment -- -- 375,000
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Restricted cash (6,400,000) -- --
Receivable from payment processor (4,903,341) -- --
Trade accounts receivable (2,145,617) (421,118) 101,653
Deposit with payment processor (2,500,000)
Other receivables 856,000 (278,172) --
Prepaid advertising -- 675,000 --
Prepaid software license (1,596,544) 225,880 --
AOL anchor tenant placement costs -- -- (525,000)
Other current assets (135,556) 24,815 (514,641)
Net current assets of discontinued operations (550,947) (429,289) 40,537
Other assets 314,969 (266,667) (13,360)
Accounts payable 4,057,222 (1,310,659) 441,157
Accrued merchant payable 2,122,265 -- --
Software license payable 2,500,000 -- --
Merchant reserves 14,317,435 -- --
Settlements due to merchants 1,497,024 -- --
Accrued chargebacks 1,835,124 -- --
Deferred revenue 231,776 -- --
Accrued liabilities (362,382) (118,291) 265,864
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,320,416 (7,291,791) (6,400,982)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Continued)
Increase (Decrease) in Cash
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made in connection with SB.com acquisition and sale of Books Now
and Videos Now assets $ -- $ (2,300,000) $ --
Prepayment of software license (4,689,000) (4,517,296) --
Increase in receivable from Digital Courier International, Inc. -- (849,203) (810,215)
Purchase of property and equipment (3,461,969) (797,126) (780,418)
Purchase of intangible (700,000) -- --
Payments associated with acquisitions (150,000) -- --
Investment in CommTouch, Ltd. -- -- (750,000)
Proceeds from sale of CommTouch stock 9,386,575 -- --
Net proceeds from sale of WeatherLabs operations 3,570,093 -- --
Net proceeds from the sale of direct mail advertising operations -- -- 6,857,300
Net proceeds from sale of assets -- 362,642 20,938
Net cash acquired in acquisitions 428,096 87,671 --
Change in net long-term assets of discontinued operations 670,300 (520,827) 9,086
Cash of discontinued operations -- -- 13,870
------------ ------------ ------------
Net cash provided by (used in) investing activities 5,054,095 (8,534,139) 4,560,561
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common and preferred stock 71,876 13,024,000 32,417
Net proceeds from exercise of stock options 598,518 943,750 --
Proceeds from borrowings -- 2,350,000 86,000
Net proceeds from sale and lease back of equipment -- -- 2,650,000
Principal payments on capital lease obligations (1,082,874) (867,827) (690,183)
Principal payments on borrowings (960,614) (454,361) (264,493)
Purchase of common stock from officers -- -- (1,700,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,373,094) 14,995,562 113,741
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 5,001,417 (830,368) (1,726,680)
CASH AT BEGINNING OF YEAR 2,381,356 3,211,724 4,938,404
------------ ------------ ------------
CASH AT END OF YEAR $ 7,382,773 $ 2,381,356 $ 3,211,724
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 214,785 $ 347,139 $ 157,616
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Organization and Principles of Consolidation
Digital Courier Technologies, Inc.("DCTI"), a Delaware corporation, was
originally incorporated May 16, 1985. DCTI and its predecessor have acquired and
sold several companies during the last three fiscal years.
On January 8, 1997, the Company acquired the stock of Sisna, Inc. ("Sisna").
During fiscal 1998, the Company acquired the stock of DCTI, Books Now, Inc.
("Books Now") and the stock of WeatherLabs Technologies, Inc. ("WeatherLabs").
During fiscal 1999, the Company acquired the stock of Access Services, Inc.
("Access Services"), the stock of SB.com, Inc. ("SB.com") and acquired the stock
of Digital Courier International, Inc. ("DCII"). During fiscal 2000, the Company
acquired the stock of DataBank International, Ltd. ("DataBank"), the stock of
Carib Commerce, Ltd. ("Carib Commerce") and the assets of various entities
referred to jointly as "MasterCoin". These acquisitions have been accounted for
as purchases with the results of operations of the acquired entities being
included in the accompanying consolidated financial statements from the dates of
the acquisitions. In fiscal 1998, the Company sold its direct mail advertising
operations to Focus Direct, Inc. ("Focus Direct") and sold the stock of Sisna
acquired in January 1997 back to Sisna's former major shareholder. In fiscal
2000, the Company sold its WeatherLabs operations to Landmark Communications,
Inc. The accompanying consolidated financial statements have been retroactively
restated to present the direct mail advertising operations, Sisna's Internet
service operations and the WeatherLabs operations as discontinued operations.
In fiscal 1999, the Company sold a portion of the assets related to the
Company's Internet-related business branded under the "WorldNow" and "WorldNow
Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The assets
related primarily to the Company's national Internet-based network of local
television stations. Additionally, in May 1999 the Company sold certain assets
of Books Now and the Company's Videos Now operations to ClickSmart.com .
DCTI, DCII, Access Services, SB.com, DataBank and Carib Commerce are
collectively referred to herein as the "Company". All significant intercompany
accounts and transactions have been eliminated in consolidation.
Nature of Operations and Related Risks
The Company currently provides advanced e-payment services for businesses,
merchants, and financial institutions. The Company's services have introduced to
the marketplace a secure and cost-effective system for credit card processing
and merchant account management. In fiscal 2000, our revenues were derived
primarily from processing payments for the internet gaming and e-tailing
industries.
In fiscal 1994, the Company began developing an advertiser-funded national
Internet service ("WorldNow Online") which was launched in the last quarter of
fiscal year 1997. The Company's strategy for WorldNow Online included the
creation of a national Internet-based network of local television stations.
WorldNow was to provide free web hosting, web maintenance and other Internet
features, including national content and advertising, to the television
stations. In return, the stations would provide local content, ranging from
news, weather and sports to entertainment, recreational and cultural events, as
well as free television advertising and promotions, in order to drive local
F-12
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
users of the Internet to the WorldNow site. Both WorldNow and the stations'
revenues would be derived from local and national advertising as well as related
commerce conducted via the Internet. WorldNow Online went online in June 1997,
and began generating minimal advertising revenues in August 1997. In July 1998,
the Company agreed to sell substantially all of the WorldNow Online assets.
In January 1997, the Company acquired Sisna, which operated as an Internet
service provider allowing its customers access to the Internet. Through a
network of franchisees, Sisna offered Internet access in 12 states. The assets
acquired from Sisna were sold back to Sisna's former major shareholder in March
1998.
The Company's historical operations through most of fiscal 1998 primarily
consisted of providing highly targeted business to consumer advertising for its
clients. During fiscal 1998, the medium for such targeted advertising was direct
mail. The direct mail advertising operations were sold in March 1998.
During fiscal 1999, as a result of internal development and the acquisitions of
Access Services, SB.com and DCII, the Company began to provide credit card
processing solutions for merchants and financial institutions. The Company's
credit card processing services were expanded during fiscal 2000 with the
acquisitions of DataBank, Carib Commerce and MasterCoin.
As discussed above, in fiscal 1998 the Company acquired Books Now and
WeatherLabs. Certain assets and operations of Books Now and the Company's Videos
Now operations were sold in fiscal 1999 and the WeatherLabs operations were sold
in fiscal 2000.
The Company has a limited operating history upon which an evaluation of the
Company can be based, and its prospects are subject to, among others, the risks
and uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services. Specifically, such risks
include, without limitation, the dependence on continued growth in use of the
Internet, the ability of the Company to effectively integrate the technology and
operations of acquired businesses or technologies with its operations, the
ability to maintain continuing expertise in proprietary and third-party
technologies, the timing of introductions of new services, the pricing policies
of the Company's competitors and suppliers and the ability to identify, attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks or that the Company will
achieve or sustain profitability. The limited operating history of the Company
and the uncertain nature of the markets addressed by the Company make the
prediction of future results of operations difficult or impossible.
As reflected in the accompanying consolidated financial statements, the Company
has incurred losses from continuing operations of $34,867,900, $20,353,229 and
$5,544,363 in fiscal 2000, 1999 and 1998, respectively. The Company's operating
activities, excluding cash retained for merchant reserves, used $4,097,019,
$7,291,791 and $6,400,982 of cash during fiscal 2000, 1999 and 1998,
respectively. As of June 30, 2000, the Company has a tangible working capital
deficit of $4,872,841.
These matters raise substantial doubt about the Company's ability to continue as
a going concern.
Subsequent to June 30, 2000, warrants to purchase 1,000,000 shares of common
stock at $5.20 per share were exercised by Transaction Systems Architects, Inc.
("TSAI") providing the Company with $5,200,000 of cash (see Note 5). In
September 2000, the Company paid TSAI $2,500,000 due under the software license
agreement net of $1,200,000 due from TSAI under the distribution agreement
discussed in Note 5. With the growth of the Company's e-payment processing
services, the Company's negative cash flows from operations are expected to
decrease significantly. During the quarter ended September 30, 2000, the
Company's operations generated a loss from operations of approximately $220,000
(unaudited) after excluding non-cash expenses for amortization and depreciation
and excluding the non-cash income related to stock options. Management projects
that there will be sufficient cash flows from operating activities during the
next twelve months to provide capital for the Company to sustain its operations;
however, there can be no assurance that management's projections will be
achieved. Management may also be required to pursue sources of additional
funding to meet marketing and expansion objectives. There can be no assurance
that additional funding will be available or, if available, that it will be
available on acceptable terms or in required amounts.
F-13
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when
incurred. Depreciation and amortization of property and equipment are computed
using primarily an accelerated method over the estimated useful lives of the
related assets, which are as follows:
Computer and office equipment 3 - 5 years
Furniture, fixtures and leasehold
improvements 5 - 10 years
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net
income or loss.
Other Assets
<TABLE>
<CAPTION>
As of June 30, 2000 and 1999, other assets consist of the following:
2000 1999
------------------- -------------------
<S> <C> <C>
Notes receivable from prior shareholders of SB.com,
face value of 2,000,000 discounted at 10%
(see discussion below) $ 1,931,814 $ 1,851,240
Merchant portfolio acquired from MasterCoin, net of
$117,000 of accumulated amortization 583,000
Investment in CommTouch preferred stock - 750,000
Security deposit under capital lease arrangement (see Note 8) 250,000 350,000
Note receivable from ClickSmart.com - 300,000
Deposits and other 84,325 79,868
------------------- -------------------
$ 2,849,139 $ 3,331,108
=================== ===================
</TABLE>
As discussed in Note 3, in connection with the acquisition of SB.com, the
Company loaned $500,000 to each of four of SB.com's prior shareholders. The
notes receivable bear interest at 6 percent, are unsecured, and are due at the
earlier of June 30, 2001 or from the proceeds from the sale of DCTI common stock
F-14
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
held by the individuals. Since the stated interest rate on the notes of 6
percent was less than the current market interest rate at the inception of the
notes, the notes have been discounted using a 10 percent interest rate.
During fiscal 1999, in connection with the sale of certain assets of Books Now
and the Company's Videos Now operations, the Company loaned $300,000 to
ClickSmart.com. The $300,000 note receivable bore interest at 8 percent due
quarterly with the principal due on May 25, 2000. The note was determined to be
uncollectable during fiscal year 2000 and was written off.
During fiscal 1998, the Company entered into a Series C Preferred Share Purchase
Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli company,
whereby the Company agreed to invest $750,000 in CommTouch's Series C Preferred
Stock. CommTouch is a global provider of outsourced, integrated email and
messaging solutions. As of June 30, 1999, management of the Company determined
that the investment in CommTouch was partially impaired and recorded a reserve
of $375,000 against the investment. During fiscal 2000, CommTouch successfully
completed an initial public offering of its common stock and the Company sold
the investment for a pretax gain of $8,636,575.
Accounting for Impairment of Long-Lived Assets
The Company accounts for its property and equipment, goodwill and other long
lived assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the book value of the asset may not be recoverable. If the sum of
the expected future net cash flows (undiscounted and without interest charges)
from an asset to be held and used is less than the book value of the asset, an
impairment loss must be recognized in the amount of the difference between the
book value and fair value. As of June 30, 1999, management determined that the
Company's investment in ClickSmart.com of $551,407 was impaired and reduced this
investment to $0 due to the uncertainties related to future profitability of
ClickSmart. As of June 30, 2000, management does not consider any additional
long-lived assets to be impaired. During fiscal 2001 the Company expects to
analyze and consider a possible impairment loss related to the goodwill recorded
in the DataBank acquisition (see Note 12).
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated balance sheets
for cash, accounts receivable, and accounts payable approximate fair values
because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's notes payable also
approximate fair value based on current rates for similar debt. The carrying
amounts of the noncurrent notes receivable as of June 30, 2000 and 1999
approximate fair value.
Merchant Reserves and Restricted Cash
DCTI, in partnership with banks that are members of Visa and MasterCard ("Member
Banks") provides bankcard and processing services to merchants. Merchants enter
into an agreement which allows both DCTI and the Member Banks to 1) terminate
processing; 2) debit a merchant's bank account for chargebacks and fines without
notice; 3) require cash collateral or other deposits; 4) withhold merchant funds
to be held as reserves; 5) report to credit reporting agencies; and 6) increase
fees. A separate agreement between DCTI and the Member Banks provides that all
merchant funds are to be held in an account at the Member Banks to be released
at DCTI's direction. In addition, such agreement may require DCTI to post
collateral or deposits to cover any unfunded merchant liability. As of June 30,
F-15
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000, the Company has withheld $14,317,439 from merchant settlements to cover
potential charge backs and other adjustments which are reflected as merchant
reserves of the accompanying consolidated financial statements. As of June 30,
2000, $6,400,000 of the cash retained for merchant reserves was held as
collateral by Member Banks and is reflected as restricted cash in the
accompanying consolidated financial statements. An additional $2,500,000 was
held as a deposit at a credit card processor.
Credit Card Chargebacks
During fiscal 2000, the Company experienced $3,144,686 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 reserves. However, actual results could differ materially from these
estimates.
Revenue Recognition
Revenue is recognized as the Company provides processing services to merchants
or pro rata over the service period. The Company defers revenue paid in advance
relating to future services and products not yet shipped. In the case of
software related revenues the Company currently sells its software products
through a distributor, ACI (see Note 5).
The Company recognizes software license revenue in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position No.
97-2 as amended ("SOP 97-2"), "Software Revenue Recognition". Revenue from the
sale of software is recognized upon delivery of the product when persuasive
evidence of an arrangement exists, the price is fixed or determinable,
collection of the resulting receivable is probable, and product returns are
reasonably estimable. Certain of the Company's software license agreements
include post-contract maintenance and support ("PCS") services. If these PCS
services are to be provided for a period of one year or less, the estimated cost
of providing the PCS is insignificant and there is no commitment to provide
upgrades or enhancements, revenue is recognized upon delivery and the estimated
costs of providing the PCS services are accrued. If the PCS services are to be
provided for a period greater than one year, or if the PCS services include
upgrades or enhancements, the revenue is deferred and recognized over the PCS
period.
Significant Customers
During the year ended June 30, 2000, two customers accounted for 17% and 12% of
revenue, respectively. No other customer accounted for more than 10% of the
Company's revenue.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. These deferred tax assets
or liabilities are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
F-16
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the fiscal year. Diluted net loss per common share ("Diluted EPS")
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net loss per common share.
Options to purchase 3,583,550, 1,778,971 and 1,445,000 shares of common stock at
weighted average exercise prices of $6.19, $5.50 and $3.82 per share were
outstanding as of June 30, 2000, 1999, and 1998, respectively, warrants to
purchase 2,990,000, 3,015,000 and 656,942 shares of common stock at weighted
average exercise prices of $6.53, $6.50 and $9.37 per share as of June 30, 2000,
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 June 30,
2000 and 1999 were not included in the computation of Diluted EPS. The inclusion
of the options, warrants and preferred stock would have been antidilutive,
thereby decreasing net loss per common share. As of June 30, 2000, the Company
has agreed to issue up to an additional 187,600 shares of common stock in
connection with the acquisition of WeatherLabs. The issuance of the shares is
contingent on the future stock price of the Company's common stock. These
contingent shares have also been excluded from the computation of Diluted EPS.
Supplemental Cash Flow Information
Noncash investing and financing activities consist of the following:
During fiscal 2000, the Company issued 28,027,500 shares of common stock with a
fair value of $196,757,049 to acquire DataBank and 600,000 shares of common
stock with a fair value of $4,837,800 to acquire Carib Commerce (see Note 3).
During fiscal 1999, the Company issued 4,659,080 shares of common stock to
acquire DCII, 2,840,000 shares of common stock to acquire SB.com, and 300,000
shares of common stock (and warrants to purchase 100,000 shares of common stock)
to acquire Access Services. Additionally, the Company issued 101,035 shares of
common stock pursuant to the contingency provisions of the WeatherLabs
acquisition. The common shares and warrants issued were recorded at fair value.
During fiscal 1998, the Company issued 955,414 shares of common stock and
warrants to purchase 318,471 shares of common stock to America OnLine, Inc.
("AOL") in connection with an Interactive Marketing Agreement. The common shares
issued were recorded at the fair value of $8,330,016 and the warrants were
recorded at their fair value of $2,519,106 with the offset being recorded as AOL
anchor tenant placement costs. During fiscal 1999, 601,610 shares of common
stock and the warrants to purchase 318,471 shares of common stock were returned
to the Company by AOL in connection with termination of the Interactive
Marketing Agreement. In addition, during fiscal 1998 the Company acquired the
common stock of Books Now and WeatherLabs in exchange for 100,000 and 253,260
shares of common stock, respectively .
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at fair value and that changes in the derivative's fair value
F-17
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be recognized currently in earnings unless specific hedge accounting criteria
are met. SFAS No. 133 as amended by SFAS no. 137 is effective for quarters of
fiscal years beginning after June 15, 2000; accordingly, the Company will adopt
SFAS No. 133 in its fiscal year 2001 consolidated financial statements.
Management believes the adoption of SFAS No. 133 will not have a material impact
on the Company's consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of Accounting
Principles Board Opinion No. 25 ("APB No. 25"). This interpretation clarifies
the definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This interpretation was effective July 1, 2000, but
certain conclusions in this interpretation cover specific events that occurred
after either December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this interpretation are recognized on a prospective basis
from July 1, 2000. Management believes the adoption of the provisions of this
interpretation will not have a material impact on the Company's results of
operations, financial position or liquidity.
Reclassifications
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal 2000 presentation.
(3) ACQUISITIONS AND DISPOSITIONS
DataBank International, Ltd.
As approved by the shareholders of the Company at a Special Shareholders Meeting
on October 5, 1999, the Company acquired all of the outstanding stock of
DataBank, a credit card processing company organized under the laws of St.
Kitts. On that date the shareholders of DataBank were issued 16,600,000 shares
of the Company's common stock valued at $88,195,800 (based on the quoted market
price of the Company's common stock on the date the Company and DataBank entered
into the merger agreement). If DataBank met certain performance criteria, as
defined in the acquisition documents, the Company would be required to issue up
to an additional 13,060,000 shares of common stock to the former shareholders of
DataBank. The acquisition of DataBank has been accounted for as a purchase and
the results of operations of DataBank are included in the accompanying
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $515,674 of cash, $411,313 of receivables, and $185,000
of equipment. Expenses incurred in connection with the acquisition were $87,577.
Liabilities assumed consisted of $1,820,096 of accounts payable and accrued
liabilities.
The excess of the purchase price over the estimated fair market value of the
acquired net assets on October 5, 1999 of $88,991,486 has been recorded as
goodwill and is being amortized over a period of 5 years.
On January 13, 2000, the Board of Directors of the Company elected to issue the
13,060,000 contingent shares, in light of the achievement of performance
criteria, with an approximate 12.5% discount in the number of shares to the
former shareholders of DataBank. Therefore, the Company issued an additional
11,427,500 shares of the Company's common stock valued at $108,561,250 (based on
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
F-18
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is being written off over 57 months beginning January 2000 (see Note 12).
Subsequent to the acquisition of DataBank, the Company became aware of an
additional $581,000 of liabilities related to DataBank's operations prior to the
acquisition (see Note 8). This additional amount has been recorded as an
adjustment to goodwill and is being amortized over the remainder of the five
year period.
MasterCoin
In April, 2000, the Company entered into agreements to purchase certain
software, a merchant portfolio, and certain equipment from various entities
referred to jointly as MasterCoin. The Company's Board of Directors approved a
total purchase price of $2.9 million for all of the assets to be acquired with
the assumption that Mr. James Egide, the then CEO and Chairman of the Company,
would negotiate the acquisition and allocate the total price among the assets
acquired.
The software, which will allow the Company to address the "Server Wallet" market
opportunity, was acquired through a Software Purchase and Sales Agreement with
MasterCoin, International, Inc. ("MCII") in exchange for $1,000,000 in cash. The
Company acquired all rights to MCII's e-commerce and e-cash software.
The owners of MCII included Don Marshall, President and Director of the Company.
Mr. Marshall did not accept any remuneration from the Company as a result of the
transaction.
Since the acquisition, the Company has invested an additional $165,000 to
complete the development of the software. Management believes the potential
market for the software is significant and intends to begin marketing the
software during fiscal 2001. The cost of the software and additional development
costs will be amortized over the life of the software which is estimated to be
three years.
The merchant portfolio was acquired through a Portfolio Purchase and Sale
Agreement with the Sellers who had developed and acquired the merchant portfolio
of MasterCoin of Nevis, Inc. and MasterCoin Inc. in exchange for $700,000 in
cash. The Company acquired all right, title and interest in and to the
portfolio. The Company paid $400,000 at closing with the remaining $300,000
payable subject to the performance of the portfolio. The $300,000 is included in
accrued liabilities in the accompanying June 30, 2000 balance sheet. The
portfolio is currently generating revenues for the Company.
The Sellers included Don Marshall, President and Director of the Company, and a
person who was hired by the Company in July, 2000. Mr. Marshall did not accept
any remuneration from the Company as a result of the transaction.
The cost of the portfolio is being amortized over twelve months, the estimated
average service period for the merchants acquired.
The equipment was acquired through an Asset Purchase and Sale Agreement with
MasterCoin, Inc., a Nevada corporation (MC) in exchange for $1,200,000 in cash.
The Company acquired title to equipment located in St. Kitts, British West
Indies consisting of computers, a satellite system, phone systems and leasehold
improvements which the Company anticipated would be useful in exploiting the
Server Wallet market opportunity referred to above. At the date of the
transaction, Mr. James Egide, the former CEO and Chairman of the Company, was
an officer and a shareholder in MC.
In the course of closing fiscal 2000 , the Company reviewed the value of the
equipment and determined that through age and nonuse the book value of the
assets was impaired. Upon assessing a current realizable value of $300,000, the
Company wrote off the difference of $900,000 to expense. The remaining balance
is being depreciated over three years.
F-19
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carib Commerce, Ltd.
Effective January 1, 2000, the Company acquired all of the outstanding stock of
Carib Commerce, a sales and marketing organization. The shareholders of Carib
Commerce were issued 600,000 shares of the Company's common stock valued at
$4,837,800 (based on the quoted market price of the Company's common stock on
the date of the acquisition) and $150,000 in cash. The acquisition of Carib
Commerce has been accounted for as a purchase and the results of operations of
Carib Commerce are included in the accompanying consolidated financial
statements since the date of acquisition. The Company did not receive any
tangible assets and assumed no liabilities. The Company has employed two former
shareholders of Carib Commerce without employment agreements. The Company was
assigned a service agreement with a bank as a result of the acquisition. The
term of the agreement is four years dating from August, 1999.
The purchase price of $4,987,800 has been recorded as an intangible asset and is
being amortized over a period of 44 months, the remaining term of the service
agreement. The service agreement will allow the Company to develop a processing
program with the bank. As of the date of this report, the Company continues to
pursue a business relationship with the bank. To date, no business has been
conducted between the Company and the bank, however, management believes the
amount paid for the agreement will be realized.
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange Agreement
(the "Exchange Agreement") with DCII. Pursuant to the Exchange Agreement, the
Company agreed to issue 4,659,080 shares of its common stock valued at
$14,027,338 to the shareholders of DCII. The issuance of the common shares was
recorded at the quoted market price on the date of acquisition. The acquisition
was approved by the shareholders of the Company on September 16, 1998.
The acquisition of DCII has been accounted for as a purchase and the results of
operations of DCII are included in the accompanying consolidated financial
statements since the date of acquisition. The tangible assets and contra-equity
acquired included $250,000 of equipment, $20,500 of deposits and $12,000 of
stock subscriptions receivable. Liabilities assumed consisted of $219,495 of
accounts payable and accrued liabilities. After entering into the Exchange
Agreement, the Company made advances to DCII to fund its operations. The amount
loaned to DCII totaled $1,659,418 as of the date of acquisition. The excess of
the purchase price over the estimated fair market value of the acquired assets
was $15,623,750. Of this amount, $11,923,750 was recorded as goodwill and other
intangibles and is being amortized over a period of five years and $3,700,000
was expensed as acquired in-process research and development.
Upon consummation of the DCII acquisition, the Company immediately expensed
$3,700,000 representing purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use. The in-process
projects were focused on the continued development and evolution of internet
e-commerce solutions including: the Company's payment processing suite and two
virtual store projects (videos and books). The nature of these projects was to
provide full service credit card clearing and merchant banking services over the
Internet for businesses and financial institutions and to market software to
help customers develop virtual stores on the Internet. When completed, the
projects would enable the creation of any "virtual store" through a simplified
interface.
As of the date of acquisition, DCII had invested $1,300,000 in the in-process
projects identified above. The developmental projects at the time of the
acquisition were not technologically feasible and had no alternative future use.
This conclusion was attributable to the fact that DCII had not completed a
F-20
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
working model that had been tested and proven to work at performance levels
which were expected to be commercially viable, and that the technologies
constituting the projects had no alternative use other than their intended use.
Development of the acquired in-process technology into commercially viable
products and services required efforts principally related to the completion of
all planning, designing, coding, prototyping, scalability verification, and
testing activities necessary to establish that the proposed technologies would
meet their design specifications, including functional, technical, and economic
performance requirements.
During fiscal 2000 the Company incurred $2,078,184 of development expense. The
expense related to the completion of the development of aforementioned products
as well as to the integration of these products with the software acquired from
SB.Com, Inc.
Management estimated that the projects were approximately 50% complete at the
date of the acquisition given the nature of the achievements to date. These
estimates were subject to change, given the uncertainties of the development
process, and no assurance could be given that deviations from these estimates
would not occur.
The net cash flows resulting from the projects underway at DCII, which were used
to value the purchased research and development, were based on management's
estimates of revenues, cost of revenues, research and development costs,
selling, general, and administrative costs, and income taxes from such projects.
These estimates assume that the revenue projections are based on the potential
market size that the projects are addressing, the Company's ability to gain
market share in these segments, and the life cycle of in-process technology.
Estimated total revenues from the purchased in-process projects peak in the
fiscal years 2001 and 2002 and then decline rapidly in the fiscal years 2003 and
2004 as other new products are expected to enter the market. There can be no
assurances that these assumptions will prove accurate, or that the Company will
realize the anticipated benefit of the acquisition. The net cash flows generated
from the in-process technology are expected to reflect earnings before interest
and taxes, of approximately 35% to 48% for the sales generated from in-process
technology.
The discount of the net cash flows to their present value is based on the
weighted average cost of capital ("WACC"). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
the enterprise. The discount rates used to discount the net cash flows from the
purchased in-process technology were 45% for DCII. This discount rate reflects
the uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, if any, and the uncertainty of technological
advances, all of which were unknown at the time.
As evidenced by its continued support for these projects, management believes
the Company is well positioned to successfully complete the research and
development projects. However, there is risk associated with the completion of
the projects, and there is no steadfast assurance that each will meet with
either technological or commercial success. The substantial delay or outright
failure of these e-commerce solutions would negatively impact the Company's
financial condition. If these projects are not successfully developed, the
Company's business, operating results, and financial condition may be negatively
affected in future periods. In addition, the value of other intangible assets
acquired may become impaired.
To date, DCII results have not differed significantly from the forecast
assumptions. The Company's research and development expenditures since the DCII
acquisition have not differed materially from expectations. Revenue contribution
F-21
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. As
discussed in Note 2, in connection with the acquisition of SB.com, the Company
made loans of $500,000 each to four of SB.com's prior shareholders. The notes
receivable bear interest at 6 percent, which was less than the current market
interest rate. The notes have been discounted using a 10 percent interest rate
and the difference between the discounted value of $1,851,240 and the $2,000,000
face value of the notes amounting to $148,760 has been recorded as additional
purchase price.
Books Now, Inc.
In January 1998, the Company acquired all of the outstanding stock of Books Now,
a seller of books through advertisements in magazines and over the Internet. The
shareholders of Books Now received 100,000 shares of the Company's common stock
valued at $312,500 and an earn-out of up to 262,500 additional common shares.
The issuance of the common shares was recorded at the quoted market price on the
date of acquisition.
The acquisition was accounted for as a purchase and the results of operations of
Books Now are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $261 of
cash, $21,882 of inventory and $50,000 of equipment. Liabilities assumed
included $112,335 of notes payable, $24,404 of capital lease obligations and
$239,668 of accounts payable and accrued liabilities. The excess of the purchase
price over the estimated fair market value of the acquired assets of $616,764
was recorded as goodwill and was being amortized over a period of 5 years.
During fiscal 1999, the Company sold certain assets of Books Now to
ClickSmart.com (see additional discussion below).
F-22
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1998, the Company and Books Now's former owner reached a severance
agreement, wherein, the former owner was to receive severance payments equal to
one year's salary ($81,000). Additionally, the Company agreed to issue 205,182
shares of the Company's common stock valued at $1,051,558, based on the quoted
market price of the shares on the date of the severance agreement, to the former
shareholders of Books Now. Because the operations of Books Now were not
achieving the performance criteria set forth in the acquisition documents, both
the $81,000 of cash and the $1,051,558 of common stock were expensed as of the
date of the severance agreement.
WeatherLabs, Inc.
On March 17, 1998, the Company entered into a Stock Exchange Agreement to
acquire all of the outstanding stock of WeatherLabs, one of the leading
providers of weather and weather-related information on the Internet. The
acquisition was closed in May 1998. At closing the shareholders of WeatherLabs
were issued 253,260 shares of the Company's common stock valued at $762,503. The
issuance of the common shares was recorded at the quoted market price on the
date of acquisition. These shareholders were entitled to receive a total of
523,940 additional shares over the next 3 years based on the stock price of the
Company's common stock, as defined, at the end of the Company's next 3 fiscal
years. As of June 30, 1999, an additional 101,035 shares of common stock with a
fair market value of $593,580 were issuable pursuant to the contingency
provisions. As of June 30, 2000 no additional shares were issuable. Based on the
stock price of the Company's common stock, as defined, at the end of fiscal year
2001, the shareholders may be entitled to receive up to a total of 187,600
shares of the Company's common stock.
The acquisition has been accounted for as a purchase and the operations of
WeatherLabs are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $3,716 of
cash, $19,694 of accounts receivable, $115,745 of equipment and $13,300 of
deposits. Liabilities assumed included $100,000 of notes payable, $56,902 of
capital lease obligations and $134,444 of accounts payable and accrued
liabilities. The excess of the purchase price over the estimated fair value of
the acquired assets of $1,441,599 has been recorded as goodwill and is being
amortized over a period of 5 years.
Unaudited Pro Forma Data for Acquisitions of Continuing Operations
The unaudited pro forma results of operations of the Company for fiscal 2000,
1999 and 1998 (assuming the acquisitions of, DataBank and Carib Commerce had
occurred as of July 1, 1999, DCII, Access Services and SB.com had occurred as of
July 1, 1998, and the acquisitions of Books Now and WeatherLabs had occurred as
of July 1, 1997) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Revenues $ 29,362,355 $ 4,469,570 $ 1,197,451
Loss from continuing operations (33,273,587) (17,715,597) (5,704,701)
Loss from continuing operations per
share (0.70) (0.89) (0.48)
</TABLE>
Sisna, Inc.
On January 8, 1997, the Company completed the acquisition of Sisna pursuant to
an Amended and Restated Agreement and Plan of Reorganization. Pursuant to the
agreement, the Company issued 325,000 shares of its common stock valued at
$2,232,961 in exchange for all of the issued and outstanding shares of Sisna.
F-23
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The issuance of the common shares was recorded at the quoted market price on the
date of the acquisition. The excess of the purchase price over the estimated
fair market value of the acquired assets less liabilities assumed was
$2,232,961, which was allocated to acquired in-process research and development
and expensed at the date of the acquisition. Sisna had not been profitable since
its inception. The tangible assets acquired consisted of $32,212 of trade
accounts receivable, $124,151 of inventory and $500,000 of computer and office
equipment. The liabilities assumed consisted of $10,550 of bank overdrafts,
$278,227 of accounts payable, $233,142 of notes payable and $134,444 of other
accrued liabilities.
In connection with the acquisition, the Company entered into 3-year employment
agreements with four of Sisna's key employees and shareholders. The four
employment agreements provided for aggregate base annual compensation of
$280,000. The employment agreements also provided for aggregate bonuses of
$500,000, which were paid as of the date of the acquisition. These bonuses were
earned and expensed as the employees completed certain computer installations.
The employment agreements also included noncompetition provisions for periods
extending three years after the termination of employment with the Company.
In March 1998, the Company sold the operations of Sisna to Henry Smith, Sisna's
former owner (and a director of the Company at the time of the sale) and certain
other buyers in exchange for 35,000 shares of the Company's common stock at a
value of $141,904. Mr. Smith and the other buyers received tangible assets of
$55,547 of accounts receivable, $35,083 of prepaid expenses, $47,533 of computer
and office equipment, and $9,697 of other assets and assumed liabilities of
$33,342 of accounts payable, $101,951 of notes payable, and $243,320 of other
accrued liabilities. The sale resulted in a pretax gain on the sale of $372,657.
The sales price to Mr. Smith was determined by arms' length negotiations between
Mr. Smith and the independent Directors and was approved by the Board of
Directors with Mr. Smith abstaining.
The operations of Sisna have been reflected in the accompanying condensed
consolidated financial statements from the acquisition date in January 1997
through the sale date in March 1998 as discontinued operations. The Sisna
revenues were $555,686 during fiscal 1998.
Sale of Direct Mail Advertising Operations
In March 1998, the Company sold its direct mail advertising operations to Focus
Direct, a Texas corporation. Pursuant to the asset purchase agreement, Focus
Direct purchased all assets, properties, rights, claims and goodwill, of every
kind, character and description, tangible and intangible, real and personal
wherever located of the Company used in the Company's direct mail operations.
Focus Direct also agreed to assume certain liabilities of the Company related to
the direct mail advertising operations. Pursuant to the agreement, Focus Direct
agreed to pay the Company $7,700,000 for the above described net assets. Focus
Direct paid the Company $6,900,000 at closing and agreed to pay an additional
$700,000 by June 30, 1999. The total purchase price was adjusted for the
difference between the assets acquired and liabilities assumed at November 30,
1997 and those as of the date of closing. The remaining receivable of $700,000
was settled in full for $500,000.
This sale resulted in a pretax gain of $7,031,548. The purchaser acquired
tangible assets consisting of approximately $495,000 of accounts receivable,
$180,000 of inventory, $575,000 of furniture and equipment, and $10,000 of other
assets, and assumed liabilities of approximately $590,000 of accounts payable
and $320,000 of other accrued liabilities.
The direct mail advertising operations have been reflected as discontinued
operations in the accompanying consolidated financial statements. The direct
mail advertising revenues during fiscal 1998 were $7,493,061 .
F-24
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 purchased tangible assets of
approximately $100,000 consisting primarily of computer and office equipment and
assumed no liabilities. The operations of WorldNow through the date of the sale
of the assets are reflected in the accompanying condensed consolidated financial
statements in loss from continuing operations. The Company realized a pretax
gain of $308,245 on the sale. Subsequent to the sale through June 30, 2000, the
Company has not received any earn-out payments.
Sale of Certain Assets Related to Books Now and the Company's Videos Now
Operations
Effective May 28, 1999, the Company entered into an Asset Purchase Agreement
with ClickSmart, a new corporation formed for the purpose of combining the
assets acquired from the Company with certain assets contributed by Video Direct
Inc. Pursuant to the agreement, the Company exchanged certain assets for 19.9 %
of the common stock of ClickSmart.com. The assets exchanged by the Company
primarily related to the operations of Books Now and Videos Now and consisted of
$57,183 of equipment, $52,204 of prepaid advertising and certain intangibles
represented by goodwill of $442,020. ClickSmart did not assume any existing
liabilities related to Books Now and Videos Now. The operations of Books Now and
Videos Now were not generating positive cash flows prior to the exchange and the
operations of Video Direct did not have any history of profitability. Due to
these uncertainties with respect to the future cash flows and profitability of
ClickSmart.com, at the time of the exchange management determined that the
Company's investment in ClickSmart.com of $551,407 should be written off. Prior
to the exchange, management was considering the termination of the Books Now and
Videos Now operations.
As discussed in Note 2, in connection with the exchange the Company loaned
ClickSmart.com $300,000 under a promissory note bearing interest at 8 percent
and due in May of 2000.
In May 2000, Clicksmart.com was sold to Ubrandit.com ("UBI") for 300,000 shares
of UBI, of which the Company received 100,000 shares. The UBI shares will be
available for resale in May 2001. The Company has not recorded an asset relative
to the shares as their value remains uncertain.
F-25
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale of WeatherLabs Operations
Effective October 31, 1999, the Company entered into an Asset Purchase Agreement
with WL Acquisition Corporation, a wholly owned subsidiary of Landmark
Communications, Inc., formed for the purpose of acquiring assets from the
Company. Pursuant to the agreement, the Company exchanged certain
WeatherLabs-related assets for $3,383,000 in cash. The assets sold by the
Company consisted of $192,950 of accounts receivable, $879,305 of prepaid
advertising, $126,290 of equipment, and certain intangibles represented by
goodwill of $1,189,057. Liabilities including $132,556 of deferred income and
$100,000 of notes payable were assumed by the purchaser. The Company recorded
the resulting gain of $1,415,047 from this sale as discontinued operations
during the year ended June 30, 2000. The WeatherLabs operations have been
reclassified as discontinued operations for all periods presented in the
accompanying financial statements.
(4) MARKETING AGREEMENTS
Interactive Marketing Agreement with America Online, Inc.
On June 1, 1998, the Company entered into an interactive marketing agreement
with America Online, Inc. ("AOL") for an initial term of 39 months (the
"Marketing Agreement"). Under the Marketing Agreement, the Company agreed to pay
AOL $12,000,000 in cash and issue a seven-year warrant to purchase 318,471
shares of the Company's common stock at $12.57 per share (the "Performance
Warrant") in exchange for AOL providing the Company with certain permanent
anchor tenant placements for its Videos Now site on the AOL Network and
promotion of the Videos Now site. The Company agreed to make cash payments to
AOL of $1,200,000 upon execution of the agreement in June 1998, $4,000,000 prior
to January 1, 1999, $4,000,000 prior to July 1, 1999 and $2,800,000 prior to
January 1, 2000. The initial $1,200,000 payment was not actually made until July
6, 1998. During the initial term of the Marketing Agreement, AOL agreed to
deliver 500 million impressions to the Company's Videos Now site. The
Performance Warrant would vest quarterly over the term of the Marketing
Agreement as the specified quarterly impressions were delivered by AOL. During
the second through fifth quarters of the Marketing Agreement, AOL was to deliver
at least 25 million impressions each quarter and during the sixth through
thirteenth quarters AOL was to deliver at least 50 million impressions each
quarter.
The Marketing Agreement included an option whereby AOL elected to provide
additional permanent anchor tenant placements for Videos Now on AOL.com (a
separate and distinct website) in exchange for 955,414 shares of the Company's
common stock and a seven-year, fully vested warrant to purchase 318,471 shares
of the Company's common stock at a price of $6.28 per share (the "Option
Warrant").
The original $12,000,000 of cash payments and the estimated fair market value of
the Performance Warrant, to be determined as the warrant vests, were to be
accounted for as follows: (i) the estimated fair market value of the permanent
anchor tenant placements on the AOL Network of $1,750,000 per year, or
approximately $5,250,000 in total, would be charged to expense ratably over the
period from the launch of the Company's interactive site, which occurred in
November 1998, through the term of the agreement; and (ii) the remaining amount
would be treated as advertising costs and would be expensed as the advertising
services were received. The estimated fair market value of the permanent anchor
tenant placements on the AOL Network was determined based on information
obtained from AOL as to the amounts paid by other companies to AOL for
comparable placements.
The fair market value of the common shares issued of $8,330,016 and the
estimated fair market value of the Option Warrant of $2,519,106 represent the
value of the permanent anchor tenant placements on AOL.com (a separate and
distinct website from the AOL Network) and would be charged to expense ratably
over the period from the launch of the Company's interactive site on AOL.com,
F-26
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which occurred in November 1998, through the term of the Marketing Agreement. As
of June 30, 1999, the initial $1,200,000 payment obligation was allocated
$525,000 to AOL anchor tenant placement costs and $675,000 to prepaid
advertising expense. The fair market value of the common stock issued and the
Option Warrant was recorded as AOL anchor tenant placement costs in the
accompanying consolidated financial statements.
Effective January 1, 1999, the Company and AOL amended the Marketing Agreement
to: (1) reduce the previously required January 1, 1999 payment of $4,000,000 to
AOL to a payment of $315,000 on or prior to January 31, 1999, and (2) eliminate
any additional cash payments to AOL in the future under the Marketing Agreement.
On February 1, 1999, the Company entered into a second amendment with AOL, under
which AOL agreed to return to the Company (a) 636,942 warrants to purchase
common stock and (b) 601,610 of the 955,414 shares of its common stock
previously issued to AOL under the Marketing Agreement. All advertising was
ceased immediately; however, the Company continued to have a permanent location
or "button" on AOL's shopping channel until August 31, 1999. The Company has no
further financial obligations to AOL.
Under the original contract with AOL the Company was to be one of only two
predominantly displayed online stores ("permanent anchor tenant") for the sale
of videos on the AOL channels where subscribers would most likely go to purchase
videos. In addition to the predominant display on the AOL channels, AOL was
providing advertising on its other channels to send customers to the permanent
anchor tenant sites. The permanent anchor tenancy included "above the fold
placement" (no scrolling required to see the Company's video site) and an
oversized logo (larger than a banner or a button). Under the amended contract
with AOL the Company received "button" placement on the AOL shopping channel.
"Button" placement is not predominant on the AOL channels, is smaller, need not
be "above the fold" and is not the beneficiary of AOL advertising designed to
send customers to the site.
As a result of the February 1, 1999 amendment to the Marketing Agreement with
AOL, the Company determined that the remaining balance of the AOL anchor tenant
placement costs of $12,364,123, less $139,206 representing the fair market value
of the permanent location on the shopping channel for eight months, should be
written off. A portion of the write-off was offset by recording the return of
the 601,610 shares of common stock, which had a fair market value of $4,234,675
as of the date the agreement was terminated, and by recording the cancellation
of the warrants which had a recorded value of $2,519,106. This resulted in a net
write-off of $5,471,135 during fiscal 1999.
(5) SOFTWARE LICENSE AGREEMENT and Distribution 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 is
being used to enhance the Company's Internet-based platforms that offer secure
payments processing for business-to-consumer electronic commerce. Pursuant to
the agreement, the Company agreed to pay ACI $5,941,218 during the life of the
contract. The Company made a payment upon signing the contract of $591,218 and
was scheduled to make equal payments at the beginning of each quarter totaling
$1,000,000 for calendar year 2000, $1,200,000 for calendar year 2001, $1,400,000
for calendar year 2002, $1,400,000 for calendar year 2003 and a final payment of
$350,000 on January 1, 2004.
On June 14, 1999, Transactions Systems Architects, Inc. ("TSAI"), the parent of
ACI, purchased 1,250,000 shares of the Company's common stock and warrants to
purchase an additional 1,000,000 shares of the Company's common stock in
exchange for $6,500,000. As part of the securities purchase agreement, the
F-27
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated financial statements and are
being expensed ratably over the term of the agreement. In July, 2000, TSAI
exercised all of its warrants for a total exercise price of $5,200,000.
On March 31, 2000, the software license agreement was modified to grant the
Company a non-transferable and non-exclusive license to use ACI's Base24(R)
software in all international markets, as well as the United States, which was
granted in the original contract. In exchange for this agreement the Company
paid ACI $2,500,000 on April 15, 2000 and made a final payment of $2,500,000 on
September 30, 2000.
On June 3, 1999, the Company entered into a three year agreement with ACI to
distribute the Company's e-commerce products. As consideration for this
agreement ACI paid the Company a non-refundable deposit of $700,000. ACI will
pay the Company license fees of 40% of the fees paid ACI until the Company
receives $800,000, 35% of the fees paid ACI until the Company receives
$1,500,000; and 30% of the fees paid ACI thereafter. On April 1, 2000, the
distribution agreement was amended extending the term to six years and providing
a guarantee to the Company of an additional $6,000,000 payable in annual
installments of $1,200,000 on September 1, 2000 through September 1, 2004. The
Company is recognizing revenue from this agreement ratably over its term. At
June 30, 2000, the Company had recognized $468,224 of revenue under the
agreement.
(6) NOTES PAYABLE
Notes payable at June 30, 2000 and 1999 consist of an unsecured note due to a
partnership bearing interest at 10% with principal and interest due on demand.
(7) INCOME TAXES
The components of the net deferred income tax asset as of June 30, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------- ----------------------
<S> <C> <C>
Net operating loss carryforwards $ 7,821,000 $ 8,934,000
Accrued liabilities 1,519,000 180,000
Receivable reserves and other 255,000 108,000
---------------------- ----------------------
Total deferred income tax assets 9,595,000 9,222,000
Valuation allowance (9,595,000) (9,222,000)
---------------------- ----------------------
Net deferred income tax asset $ - $ -
====================== ======================
</TABLE>
As of June 30, 2000, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $20,860,000. For federal
income tax purposes, utilization of these carryforwards is limited if the
Company has had more than a 50 percent change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a change occurs in
the future. The tax net operating losses will expire begining in 2009.
F-28
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No benefit for income taxes was recorded during fiscal 1999 . The income tax
benefits recorded for fiscal 2000 and 1998 of $369,476 and $2,651,838,
respectively, were limited to the income tax provisions recorded on income from
discontinued operations. As discussed in Note 1, certain risks exist with
respect to the Company's future profitability, and accordingly, management has
recorded a valuation allowance against the entire net deferred income tax asset.
(8) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment used in its operations under
operating lease arrangements. Commitments for minimum rentals under
noncancelable leases as of June 30, 2000 are as follows, net of sublease
rentals:
<TABLE>
<CAPTION>
Minimum Minimum
Capital Operating
Lease Lease
Year Ending June 30, Payments Rentals
-------------------------------------------------- ----------------- ----------------
<S> <C> <C>
2001 $ 362,519 $ 622,836
2002 53,917 565,532
2003 49,235 263,069
2004 1,740 130,602
2005 - 25,817
----------------- ----------------
Total minimum lease payments 467,411 $ 1,607,856
================
Less amount representing interest (27,074)
-----------------
Present value of net minimum lease payments,
including current portion of $347,156
$ 440,337
=================
</TABLE>
The Company incurred rent expense of $816,242, $412,240 and $552,264 in
connection with its operating leases in fiscal 2000, 1999 and 1998,
respectively. Due to the sale of the Company's direct mail advertising
operations and the Sisna Internet service operations during fiscal 1998, the
Company vacated certain leased facilities. The Company accrued a liability for
an estimated $544,000 of future rental payments for vacated facilities that
would not be covered by subleases.
Purchase Commitment
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services. This agreement was terminated and superceded by an agreement effective
July 15, 1997. This agreement was amended further on February 28, 2000, reducing
the commitment for the first two years of the agreement to actual expenditures
and establishing the Company's commitment for the third and final year to a
minimum usage of at least $240,000.
Bank Commitment
On June 6, 2000, the Company agreed to process not less than $20,000,000 per
month of gross credit card transactions through the St. Kitts Nevis Anguilla
National Bank Limited ("SKNANB") and to make a minimum deposit with the bank in
the amount of $6,400,000, (see Note 2) maintain a 6 month rolling reserve of
five percent on the gross amount of credit card transactions processed through
F-29
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SKNANB and pay SKNANB 50 basis points for all credit card settlements processed
through SKNANB for the Company's merchants. This payment for basis points shall
not be less than $50,000 per month for the six month period ending November 30,
2000 and not less than $100,000 per month thereafter. In exchange, SKNANB
permits the Company's merchants to process their credit card transactions
through SKNANB using their VISA and Mastercard facilities.
Legal Matters
The Company is the subject of certain legal matters which it considers
incidental to its business activities. It is the opinion of management, after
consultation with independent legal counsel, that the ultimate disposition of
these legal matters will not individually or in the aggregate have a material
adverse effect on the consolidated financial position, liquidity or results of
operations of the Company. The following claims, if determined adversely to the
Company, could have a material adverse effect on the Company's financial
position, liquidity and results of operations.
ePayment Solutions ("EPS") was a processing client of DataBank. Unbeknownst to
present management of the Company, various non-EPS owned merchants were sending
credit card payments to EPS, who in turn processed the transactions with the
Company under the EPS name. EPS in turn was supposed to take its settlement
funds and disburse them to its various merchants. The Company began seeing large
chargebacks in EPS's account and therefore larger reserves were withheld in the
EPS account to cover expected chargebacks. As of November 27, 2000, reserves
held for EPS totaled approximately $5 million. The Company believes that
adequate reserves are being held for all remaining chargebacks.
On November 15, 2000, the Company received a letter from an attorney
representing EPS demanding payment of approximately $11 million which he claimed
is the amount withheld from EPS. The Company does not believe that there is any
validity to EPS's claim because all funds held are being held in reserve for
chargebacks and the amounts are reasonable based upon the chargebacks that have
been experienced to date.
Two additional merchants have made claims of approximately $600,000 to the
Company regarding amounts they believe are owed them due to processing errors.
The Company is working with these merchants to reconcile activity and resolve
differences. Management believes that any amount ultimately owed these merchants
will not be materially different than amounts currently recorded.
The Company processed a limited number of transactions through the Bank of
Nevis, located in the British West Indies ("the Bank") during fiscal 2000.
DataBank, acquired by the Company in October 1999, processed through the Bank
prior to the acquisition. In February 2000, the Bank informed the Company that
unspecified amounts were due the Bank for periods before and after the DataBank
acquisition due to processing errors. The Company responded that, in fact, it
believes the Bank owes the Company certain amounts that were never settled after
the Company ceased processing. The Bank engaged an audit firm to analyze the
matter and that audit continues today. The Bank claims the Company owes it
$581,000 for the period prior to the DataBank acquisition and $500,000 for the
period after the acquisition. The Company believes that the $581,000 was
incorrectly overpaid by the Bank to various merchants and that it is the
obligation of the Bank to recover these amounts from those merchants. The
Company is liable for any unrecovered overpayments as DataBank's liabilities
were assumed by the Company in the acquisition. During fiscal 2000 the Company
increased the liabilities assumed in the DataBank transaction by $581,000 and
increased acquired goodwill by the same amount. The Company believes that Bank's
F-30
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
claim regarding the $500,000 amount is erroneous as it includes one merchant
that was never a client of DataBank or the Company and another merchant whose
payments to the Bank have not been considered in the audit. The Company wrote
off a receivable due from the Bank of $255,531 in fiscal 2000. Management will
continue to work with the Bank and their auditors and believes the issues with
the Bank will be settled during fiscal 2001 and that no material adverse impact
will result.
The Company has been advised by the United States Securities and Exchange
Commission that it is conducting an informal review of the facts underlying the
Internal Investigation discussed in Note 12. The Company is cooperating in that
inquiry which, to the best of the Company's knowledge, is continuing.
(9) CAPITAL TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $10,000 par
value preferred stock. The Company's Board of Directors is authorized, without
shareholder approval, to fix the rights, preferences, privileges and
restrictions of one or more series of the authorized shares of preferred stock.
As of June 30, 2000 and 1999, 360 shares were designated as Series A convertible
preferred stock and 720 shares were designated as Series B convertible preferred
stock. The Company issued the 360 shares of Series A during the year ended June
30, 1999. The Series A and Series B preferred shares are identical and rank pari
passu with regard to liquidation, and other preferential rights, except that the
conversion price for the Series A is $4.50 per share of common stock and the
conversion price for the Series B is $7.00 per share of common stock. The Series
A and B preferred shares are senior in right of payment, whether upon
liquidation, dissolution or otherwise, to any other class of equity securities
of the Company.
Common Stock Issuances and Other Transactions
During the year ended June 30, 1997, the Company issued 325,000 shares of its
common stock to purchase Sisna. During the year ended June 30, 1998, the Company
sold the operations of Sisna back to Sisna's former major shareholder for 35,000
shares of the Company's common stock. In fiscal year 1997, the Company acquired
certain computer software in exchange for 12,000 shares of common stock. In
fiscal year 1998, the Company returned the computer software for the return of
the 12,000 shares of common stock.
During the year ended June 30, 1998, the Company issued 100,000 and 253,260
shares of its common stock to purchase Books Now and WeatherLabs, respectively.
The Company issued 955,414 shares of common stock and warrants to purchase
common stock to AOL in connection with the Interactive Marketing Agreement
described in Note 4.
On April 28, 1998, the Company entered into an Amended Stock Repurchase
Agreement (the "Repurchase Agreement") with Mr. Chad L. Evans, the former CEO
and Chairman of the Board of the Company. Pursuant to the Repurchase Agreement,
the Company agreed to repurchase 1,800,000 shares of the Company's common stock
held by Mr. Evans for $1,500,000. Additionally, the Company entered into a
Confidentiality and Noncompetition Agreement with Mr. Evans, pursuant to which
Mr. Evans, for consideration consisting of $25,000, agreed, among other things,
not to compete with the Company, solicit employees from the Company, or use
proprietary information of the Company for a period of three years. In addition,
the Company acquired 66,110 shares of common stock for $199,813 from the
president of the direct mail advertising operations that were sold during the
year.
F-31
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1999, the Company issued 4,659,080, 2,840,000,
and 300,000 shares of common stock to acquire DCII, Access Services, and SB.com,
respectively. The Company issued 101,035 shares of common stock in connection
with the acquisition of WeatherLabs and issued 205,182 shares of common stock in
settlement with the former owners of Books Now.
During the year ended June 30, 1999, the Company issued 20,534 shares of common
stock in connection with the @Home agreement and received back 601,610 shares of
common stock in connection with the termination of the AOL Interactive Marketing
Agreement.
During the year ended June 30, 2000, the Company issued 28,027,500 and 600,000
shares of common stock to acquire DataBank and Carib Commerce, respectively.
Stock Purchase Agreements with the Brown Simpson Strategic Growth Funds
On November 24, 1998, the Company raised $1,800,000 by selling its common stock
and warrants to purchase common stock to The Brown Simpson Strategic Growth
Funds (the "Purchasers") pursuant to a Securities Purchase Agreement between the
Company and the Purchasers (the "Purchase Agreement"). On December 2, 1998, the
Company sold an additional $1,800,000 of common stock to the Purchasers and
amended the Purchase Agreement and related documents (the "Amended Agreements").
Pursuant to the Purchase Agreement and Amended Agreements, the Purchasers
acquired 800,000 shares of the Company's common stock and five-year warrants to
purchase 800,000 additional shares ("Tranche A"). The exercise price for 400,000
of the warrants is $5.53 per share and the exercise price of the remaining
400,000 warrants is $9.49 per share. The exercise price of the warrants is
subject to adjustment on the six month anniversary of each respective closing to
the lesser of the initial exercise price and the average price of the Company's
common stock during any five consecutive business days during the 22 business
days ending on such anniversary of the closing. The warrants are callable by the
Company if for 15 consecutive trading days, the closing bid price of the
Company's stock is at least two times the then-current exercise price. Because
the shares acquired by the purchasers were priced at a 10% discount from the
quoted market price no value has been allocated to the warrants.
The Amended Agreements also required the Company to sell to the Purchasers, and
the Purchasers to purchase from the Company, an additional tranche of 800,000
units, each unit consisting of one share of the Company's common stock and a
warrant to purchase one share of common stock (the "Tranche B Units"), if
certain conditions are met. A condition to the sale of the Tranche B Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for 15 consecutive trading days. The price for the
Tranche B Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche B Unit will be equal to 110% of the closing bid price of the
Company's stock on the day of the sale of the Tranche B Units. The commitment to
purchase the Tranche B Units was subsequently terminated (see discussion below).
On March 3, 1999, the Company raised an additional $3,600,000 through the sale
of Series A Convertible Preferred Stock (the "Preferred Stock") and warrants to
purchase common stock to the Purchasers pursuant to a Securities Purchase
Agreement between the Company and the Purchasers (the "March Purchase
Agreement").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360 shares of
Series A Preferred Stock convertible into 800,000 shares of common stock and
five-year warrants to purchase an additional 800,000 shares of common stock. The
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
F-32
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 quoted market price of the Company's common stock on March 3, 1999 was $4.75
per share, which is greater than the $4.50 per share conversion price. The
intrinsic value of the beneficial conversion feature of $200,000 has been
reflected in the accompanying consolidated financial statements as a preferred
stock dividend
The March Purchase Agreement also requires the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 1,600,000 units, each unit consisting of Series B Convertible
Preferred Stock convertible into one share of the Company's common stock and a
five-year warrant to purchase one share of common stock (the "Tranche D Units"),
if certain conditions are met. A condition to the sale of the Tranche D Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for 130 consecutive trading days. The price for the
Tranche D Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche D Unit will be $7.70. The March Purchase Agreement terminates the
commitment for Tranche B Units previously disclosed.
Issuance of Common Stock to Transaction Systems Architects, Inc.
On June 14, 1999, TSAI purchased 1,250,000 shares of the Company common stock
and five- year warrants to purchase an additional 1,000,000 shares of the
Company's common stock in exchange for $6,500,000. The exercise price of the
warrants is the lower of $5.20 per share or the average per share market value
for the five consecutive trading days with the lowest per share market value
during the 22 trading days prior to December 14, 1999. On July 7, 2000 TSAI
exercised their warrants and purchased 1,000,000 shares of the Company's common
stock for $5.20 per share.
(10) STOCK OPTIONS
The Company has established the Second Amended and Restated Incentive Plan (the
"Option Plan") for employees and consultants. The Company's Board of Directors
has from time to time authorized the grant of stock options outside of the
Option Plan to directors, officers and key employees as compensation and in
connection with obtaining financing and guarantees of loans. The following table
summarizes the option activity outside of the Option Plan for the years ended
June 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------
Number of Weighted Average
Shares Price Range Exercise Price
-------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 585,592 $ 0.25-9.00 $ 5.38
Granted 365,000 2.75-5.00 3.06
Expired or cancelled (305,000) 3.25-7.75 6.43
Exercised (150,592) 0.25 0.25
-------------------- --------------------- ---------------------
Balance at June 30, 1998 495,000 2.75-9.00 4.58
Granted 210,000 5.75-5.85 5.79
Expired or cancelled (125,000) 9.00 9.00
Exercised (345,000) 2.75-5.00 2.95
-------------------- --------------------- ---------------------
F-33
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding
----------------------------------------------------------------
Number of Weighted Average
Shares Price Range Exercise Price
-------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1999 235,000 $5.00-5.85 $ 5.71
Granted 210,000 5.75-5.85 5.82
Expired or cancelled (235,000) 5.00-5.85 5.71
Exercised (101,200) 5.75-5.85 5.79
-------------------- --------------------- ---------------------
Balance at June 30, 2000 108,800 $5.85 $ 5.85
====================
</TABLE>
All of the above options have been granted with exercise prices equal to or
greater than the intrinsic fair value of the Company's common stock on the dates
of grant and accordingly no compensation expense has been recorded. During the
year ended June 30, 1998, the Company decreased the option price to $2.75 per
share for 315,000 of the options that had been previously granted at prices
ranging from $3.25 to $7.75 per share and extended the exercise periods for
certain of the options. As of June 30, 2000, the 108,800 outstanding options are
exercisable and will expire, if not exercised, on June 29, 2004.
The Option Plan provides for the issuance of a maximum of 6,000,000 shares of
common stock. The Option Plan is administered by the Board of Directors who
designate option grants as either incentive stock options or non-statutory stock
options. Incentive stock options are granted at not less than 100 percent of the
market value of the underlying common stock on the date of grant. Non-statutory
stock options are granted at prices determined by the Board of Directors. Both
types of options are exercisable for the period as defined by the Board of
Directors on the date granted; however, no incentive stock option is exercisable
after ten years from the date of grant. The following table summarizes the stock
option activity for the years ended June 30, 2000, 1999 and 1998 under the
Option Plan.
F-34
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------
Number of Weighted Average
Shares Price Range Exercise Price
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Balance at June 30, 1997 839,223 $ 0.50-9.00 $5.35
Granted 1,215,000 2.75-7.75 3.50
Expired or canceled (830,000) 0.50-7.75 6.02
Exercised (274,223) 0.50-3.38 1.83
-------------------- --------------------- ---------------------
Balance at June 30, 1998 950,000 2.75-9.00 2.42
Granted 1,462,500 4.00-7.38 5.42
Expired or canceled (130,000) 4.00-6.63 4.37
Exercised (738,529) 2.75-4.00 2.87
-------------------- --------------------- ---------------------
Balance at June 30, 1999 1,543,971 2.75-7.75 5.47
Granted 3,482,500 4.81-9.63 6.40
Expired or canceled (826,317) 2.75-9.50 6.52
Exercised (725,404) 2.75-9.50 5.24
-------------------- --------------------- ---------------------
Balance at June 30, 2000 3,474,750 $ 4.00-9.63 $6.20
==================== ===================== =====================
</TABLE>
The weighted average fair value of options granted during the years ended June
30, 2000, 1999 and 1998 was $6.38, $5.47 and $3.40, respectively. A summary of
the options outstanding and options exercisable at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted
Range of Exercise Remaining Weighted Average
Options Contractual Average Options Exercise
Prices Outstanding Life Exercise Price Exercisable Price
----------- --------- --------- ------ --------- -----
<S> <C> <C> <C> <C> <C>
4.00 - 5.00 654,250 4.6 years $ 4.71 109,250 $4.21
5.01 - 6.00 2,246,300 4.6 years 5.80 1,548,800 5.88
6.01 - 7.00 77,500 3.7 years 6.34 64,168 6.35
7.01 - 8.00 100,500 6.9 years 7.75 100,500 7.75
8.01 - 9.63 505,000 4.6 years 9.51 64,500 9.54
----------- --------- --------- ------ --------- -----
4.00 - 9.50 3,583,550 4.6 years $ 6.19 1,887,218 $6.02
========= =========
</TABLE>
F-35
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans as they relate to employees and directors. Historically, the
Company's stock options have been accounted for using fixed plan accounting. The
option grants permit various exercise alternatives, including certain cashless
exercise provisions. Through fiscal 1999, the Company's experience indicated
that substantially all cashless exercises could have been effected through the
use of mature shares and therefore fixed plan accounting was appropriate. Due to
the Company's recent acquisitions and growth, options have been granted to more
employees who do not hold mature shares of the Company's common stock and
therefore the Company has determined that these options should be accounted for
using variable plan accounting. Under variable plan accounting, changes, either
increases or decreases, in the market price of the Company's common stock
results in a change in the measurement of compensation. Compensation is measured
as the difference between the market price and the option exercise price and is
amortized to expense over the vesting period. During the year ended June 30,
2000, the Company recorded $649,300 of compensation expense related to these
variable awards.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma
information regarding net income (loss) as if the Company had accounted for its
stock options granted to employees and directors subsequent to June 30, 1995
under the fair value method of SFAS No. 123. The fair value of these stock
options was estimated at the grant date using the Black-Scholes option pricing
model with the following assumptions: average risk-free interest rates of 6.00,
5.50, and 5.50 percent in fiscal years 2000, 1999, and 1998, respectively, a
dividend yield of 0 percent, volatility factors of the expected common stock
price of 97.81, 187.91, and 88.91 percent, respectively, and weighted average
expected lives ranging from one to nine years for the stock options. For
purposes of the pro forma disclosures, the estimated fair value of the stock
options is amortized over the vesting periods of the respective stock options.
Following are the pro forma disclosures and the related impact on net loss for
the years ended June 30, 2000, 1999, and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Net loss:
As reported $ (34,252,108) $ (21,564,713) $ (1,124,636)
Pro forma $ (38,696,479) $ (22,817,835) $ (4,229,002)
Net loss per share (basic and diluted):
As reported $ (0.94) $ (1.64) $ (0.13)
Pro forma $ (1.06) $ (1.74) $ (0.50)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to June 30, 1995, and due to the nature and timing of option
grants, the resulting pro forma compensation cost may not be indicative of
future years.
(11) RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1997, the Company negotiated services and
equipment purchase agreements with CasinoWorld Holdings, Ltd. and Barrons
Online, Inc., companies in which one of the Company's directors and shareholders
has an ownership interest. Under the agreements, the Company provided software
development services, configured hardware and other computer equipment and
related facilities amounting to $410,292. As of June 30, 1998, the Company had a
receivable from these companies in the amount of $148,576. The Company had
F-36
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreed to repurchase shares of its common stock as settlement for the
receivable. The receivable was settled during fiscal 1999 in exchange for shares
of the Company's common stock.
During the year ended June 30, 2000, the Company acquired certain assets from
the MasterCoin entities (see Note 3). These entitites were partially owned by
shareholders and directors of the Company. Also as disclosed in Note 12, certain
of the Company's officers and shareholders may have had conflicting, undisclosed
interests in connection with the DataBank acquisition.
(12) SUBSEQUENT EVENT - INTERNAL INVESTIGATION
During fiscal 2000, the Company received information indicating that its Chief
Executive Officer and Chairman at the time, Mr. James Egide, may have had a
conflicting, undisclosed, interest in DataBank at the time the Company acquired
it. Specifically, there were two general allegations. First, it was alleged that
he had been a part of a group that had acquired 75% of the stock of DataBank
(the "Group DataBank Transaction") approximately 2 months before the Company
entered into a letter of intent to acquire it. That earlier purchase was for 75%
of DataBank at a purchase price of $6.2 million, while the Company's subsequent
acquisition deemed fair and equitable at the time, was priced at 28,027,500
shares of the Company's common stock. Second, it was alleged that Mr. Egide did
not adequately disclose to the Company his ownership position in DataBank at or
prior to the time of the Company's acquisition of DataBank. The Company's Board
of Directors formed a special committee of directors, each of whom had no
involvement in the transaction themselves, to investigate these allegations; as
finally constituted, that committee consisted of Mr. Ken Woolley and Mr. Greg
Duman (the "Special Committee"). The Special Committee, in turn, retained
Munger, Tolles & Olson LLP, as outside counsel to conduct an investigation into
this matter (the "Internal Investigation").
During this period, Mr. Egide resigned first as Chief Executive Officer and,
later, as a director and as Chairman of the Board of Directors. Additionally,
some DataBank shareholders who had received shares of the Company pursuant to
the DataBank acquisition returned some or all of the DCTI shares they had
received, although they did not present the Company with any signed agreement or
otherwise document any right of the Company to take action with respect to the
returned shares. (Approximately 7.7 million DCTI shares were received by the
Company in this fashion.) All of these facts were promptly disclosed by the
Company in press releases as they occurred.
The investigation was conducted between August and October of 2000. In the
process of conducting its investigation, the Special Committee's counsel
retained private investigators, reviewed all relevant documents in the Company's
possession and conducted interviews of some 11 individuals. On October 25, 2000,
they released the "Summary and Conclusions" of their final report. (The Summary
and Conclusions were released while the remainder of the report was in technical
preparation and review in order to facilitate certain corporate plans, including
consummation of settlement negotiations with certain individuals, and to permit
the preparation of annual financial statements for submission to the Company's
independent auditors, both of which were dependent to some degree upon the
results of the report.)
The results of the investigation were inconclusive. Conflicting testimony was
received as to the ownership of certain offshore entities, and dispositive
evidence was not found. As to certain other factual questions, more subtle
differences of interpretation were identified that could have had legal
significance. For example, there were conflicting views as to whether the
initial purchase of DataBank shares was made available to the Company. Moreover,
there were significant uncertainties as to the legal effect of the different
possible factual interpretations. In the view of counsel to the Special
Committee, it was not fairly predictable what version of the facts a court would
F-37
<PAGE>
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
find credible. Also, it was not clear what legal conclusions a court would
reach, or what remedies it would find to be available and appropriate, even if
the factual questions were not in dispute.
At approximately the time that the investigation was being completed, Mr.
Woolley entered into discussions with certain of the stockholders who received
DCTI shares in the DataBank acquisition. Ultimately, 7 stockholders agreed to
return to the Company 8,637,622 DCTI shares in settlement of any claims by the
Company of impropriety against them in connection with the transaction. These
shares included the DCTI shares that had earlier been returned to the Company,
but this time the Company's right to accept and cancel the shares was made
clear. Also included in the returned shares were 1,120,000 shares returned by
Mr. Don Marshall, the Company's President, and a former controlling shareholder
of DataBank (before the Group DataBank Transaction). The Special Committee
agreed that Mr. Marshall had no responsibility or liability with respect to any
of the alleged improprieties, but he also agreed that, as the Company's
President, and a former DataBank stockholder, he should not benefit through an
increased percentage ownership in the Company from the return of stock by others
from the DataBank transaction. Accordingly, his return of shares was designed to
preserve, after the return of all the shares involved, his percentage interest
in the Company at a level equal to what it was immediately before any such share
returns. In the view of counsel to the Special Committee who had conducted the
investigation, the settlement of claims in exchange for the return of shares was
a favorable settlement for the Company in comparison to the certain expenses,
and uncertain recoveries, that would have attended any litigation of the matter.
After careful consideration of the final report of the Special Committee's
counsel, the Company's Board of Directors continues to believe that the Company
paid a fair price for DataBank.
The shares returned to the Company will be accounted for as a settlement of
claims and credited to income at the time of settlement. Accordingly, during the
second quarter of fiscal 2001, the Company will record a gain from settlement of
approximately $ 25 million.
Additionally, as a result of the settlement and other factors, during the second
quarter of fiscal 2001 (one year from the date of acquisition), the Company will
assess the realizability of the goodwill recorded in connection with the
DataBank acquisition. The potential impairment will be evaluated as discussed in
Note 2 by analyzing the future net cash flows to be generated by the acquired
operations as compared to the net book value of the assets. Management currently
expects that a significant impairment loss will be recorded in the second
quarter of fiscal 2001.
F-38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Dated: December 7, 2000 By /s/ Kenneth M. Woolley
----------------------
Kenneth M. Woolley
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kenneth Woolley Chairman of the December 7, 2000
------------------- Board of Directors
Kenneth Woolley
/s/ Donald Marshall Director and President December 7, 2000
-------------------
Donald Marshall
/s/ Becky Takeda Director and Chief December 7, 2000
---------------- Operating Officer
Becky Takeda
/s/ John Hanlon Chief Financial Officer December 7, 2000
---------------
John Hanlon
39
<PAGE>
/s/ Ken Nagel Director December 7, 2000
-------------
Ken Nagel
/s/ Greg Duman Director December 7, 2000
--------------
Greg Duman
/s/ Glenn Hartman Director December 7, 2000
-----------------
Glenn Hartman
40
