SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
----------------------------------
(exact name of registrant as specified in its charter)
Delaware 87-0461856
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
348 East 6400 South
Suite 220
Salt Lake City, UT 84107
- ------------------ -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(801) 266-5390
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The Registrant has
two classes of stock issued and outstanding, Common Stock with $.0001 par value,
of which 40,044,444 shares were issued and outstanding and Series A Convertible
Preferred Stock with a stated value of $10,000 per share, of which 360 shares
were issued and outstanding as of February 10, 2000.
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
December 31, June 30,
2000 2000
------------- -------------
CURRENT ASSETS:
Cash $ 15,032,517 $ 7,382,773
Restricted Cash 6,400,000 6,400,000
Receivable from payment services processor 1,421,938 5,314,655
Deposit with payment processor 2,022,065 2,500,000
Trade accounts receivable, net of allowance for doubtful accounts of
$681,000 and $681,000 respectively 3,844,661 2,693,663
Prepaid software license 2,153,856 2,153,856
Prepaid expenses and other current assets 857,173 325,478
------------- -------------
Total current assets 31,732,210 26,770,425
------------- -------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 9,281,870 8,519,923
Furniture, fixtures and leasehold improvements 1,268,943 1,204,231
------------- -------------
10,550,813 9,724,154
Less accumulated depreciation and amortization (6,276,285) (4,957,120)
------------- -------------
Net property and equipment 4,274,528 4,767,034
------------- -------------
GOODWILL, net of accumulated amortization of $58,346,245 and
$34,135,690, respectively 34,647,506 200,858,061
------------- -------------
PREPAID SOFTWARE LICENSE, net of current portion 4,846,176 5,923,104
------------- -------------
OTHER ASSETS 2,202,202 2,849,139
------------- -------------
$ 77,702,622 $ 241,167,763
============= =============
See accompanying notes to consolidated financial statements.
2
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2000 2000
------------- -------------
CURRENT LIABILITIES:
Notes payable $ 1,150,000 $ 1,150,000
Current portion of capital lease obligations 59,608 347,156
Accounts payable 2,703,031 4,368,653
Settlements due to merchants 3,959,513 1,497,024
Merchant reserves 16,528,945 14,317,435
Software license payable -- 2,500,000
Accrued merchant payable 1,065,633 2,122,265
Accrued chargebacks 1,262,648 1,835,124
Due to processor 1,322,798 --
Deferred revenue 801,776 231,776
Other accrued liabilities 1,788,925 1,119,977
------------- -------------
Total current liabilities 30,642,877 29,489,410
------------- -------------
CAPITAL LEASE OBLIGATIONS, net of current portion 65,204 93,181
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares authorized;
360 shares of Series A convertible issued and
outstanding 3,600,000 3,600,000
Common stock, $.0001 par value; 75,000,000 shares
authorized, 40,044,444 and 47,682,066 shares
outstanding, respectively 4,005 4,768
Additional paid-in capital 278,460,060 277,018,140
Warrants outstanding 1,363,100 1,363,100
Stock subscription receivable (12,000) (12,000)
Accumulated deficit (236,420,624) (70,388,836)
------------- -------------
Total stockholders' equity 46,994,541 211,585,172
------------- -------------
$ 77,702,622 $ 241,167,763
============= =============
See accompanying notes to consolidated financial statements.
3
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
------------- -------------
REVENUE $ 9,137,924 $ 6,157,954
COST OF REVENUE 6,198,506 3,434,725
------------- -------------
Gross margin 2,939,418 2,723,229
------------- -------------
OPERATING EXPENSES:
Depreciation and amortization 13,489,448 6,478,108
Impairment writedown of goodwill 142,000,000 --
General and administrative 2,824,216 1,720,019
Non-cash expense related to the issuance of stock
and stock options -- 181,475
Selling 548,798 916,969
Research and development 513,257 696,839
Chargebacks 249,000 2,884,247
------------- -------------
Total operating expenses 159,624,719 12,877,657
------------- -------------
OPERATING LOSS (156,685,301) (10,154,428)
------------- -------------
OTHER INCOME (EXPENSE):
Gain on return of common shares 3,109,544 --
Interest and other income 91,726 70,209
Interest and other expense (34,749) (111,197)
------------- -------------
Net other income (expense) 3,166,521 (40,988)
------------- -------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (153,518,780) (10,195,416)
INCOME TAX BENEFIT -- 413,957
------------- -------------
LOSS FROM CONTINUING OPERATIONS (153,518,780) (9,781,459)
------------- -------------
See accompanying notes to consolidated financial statements.
4
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999 (Continued)
(Unaudited)
2000 1999
------------- -------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued WeatherLabs
operations, net of income tax benefit of $46,526 $ -- $ (77,542)
Gain on sale of WeatherLabs operations, net of
income tax provision of $460,483 -- 767,472
------------- -------------
INCOME FROM DISCONTINUED OPERATIONS -- 689,930
------------- -------------
NET LOSS (153,518,780) $ (9,091,529)
============= =============
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (3.64) $ (0.26)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 42,164,840 35,183,224
============= =============
See accompanying notes to consolidated financial statements.
5
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
------------- -------------
NET LOSS $(153,518,780) $ (9,091,529)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gains arising during the
period on available securities -- 7,001,714
------------- -------------
COMPREHENSIVE LOSS $(153,518,780) $ (2,089,815)
============= =============
See accompanying notes to consolidated financial statements.
6
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
------------- -------------
REVENUE $ 18,633,834 $ 8,990,883
COST OF REVENUE 12,352,131 4,781,519
------------- -------------
Gross margin 6,281,703 4,209,364
------------- -------------
OPERATING EXPENSES:
Depreciation and amortization 26,935,446 8,449,620
Impairment writedown of goodwill 142,000,000 --
General and administrative 5,040,654 2,596,492
Non-cash (income) expense related to the
issuance of stock and stock options (649,300) 188,768
Selling 986,931 1,519,686
Research and development 958,205 1,273,058
Chargebacks 249,000 2,884,247
------------- -------------
Total operating expenses 175,520,936 16,911,871
------------- -------------
OPERATING LOSS (169,239,233) (12,702,507)
------------- -------------
OTHER INCOME (EXPENSE):
Gain on return of common shares 3,109,544 --
Interest and other income 174,188 146,043
Net loss on sale of assets (15,383) --
Interest and other expense (60,904) (250,371)
------------- -------------
Net other income (expense) 3,207,445 (104,328)
------------- -------------
LOSS BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS (166,031,788) (12,806,834)
INCOME TAX BENEFIT -- 299,316
------------- -------------
LOSS FROM CONTINUING OPERATIONS (166,031,788) (12,507,519)
------------- -------------
See accompanying notes to consolidated financial statements.
7
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (Continued)
(Unaudited)
2000 1999
----------------- ------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued WeatherLabs
operations, net of income tax benefit of $161,167 $ -- $ (268,612)
Gain on sale of WeatherLabs operations, net of
income tax provision of $460,483 -- 767,472
----------------- ------------
INCOME FROM DISCONTINUED OPERATIONS -- 498,860
----------------- ------------
NET LOSS $ (166,031,788) $(12,008,659)
================= ============
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (3.67) $ (0.45)
================= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 45,282,149 26,509,492
================= ============
See accompanying notes to consolidated financial statements.
8
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
------------- -------------
NET LOSS $(166,031,788) $ (12,008,659)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gains arising during the
period on available securities -- 9,343,334
------------- -------------
COMPREHENSIVE LOSS $(166,031,788) $ (2,665,325)
============= =============
See accompanying notes to consolidated financial statements.
9
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
Increase (Decrease) in Cash
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(166,031,788) $ (12,008,659)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 26,935,446 8,449,620
Loss from impairment writedown of goodwill 142,000,000 --
Gain on return of common shares (3,109,544) --
Compensation (income) expense related to cashless exercise of
stock options (649,300) 188,768
Gain on sale of Weatherlabs operations -- (1,227,954)
Loss on disposition of equipment 15,383 --
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (1,150,998) (330,813)
Receivable from payment services processor 3,892,717 (2,385,072)
Other receivables 477,935 300,000
Receivable from officer -- 56,000
Deferred revenue 570,000 --
Prepaid software license -- 451,728
Prepaid expenses and other current assets (531,695) 71,273
Net current assets of discontinued operations -- (550,947)
Other assets 329,356 (84,981)
Accounts payable (1,665,621) (1,043,534)
Settlements due to merchants 2,462,489 6,383,062
Merchant reserves 2,211,510 2,165,255
Due to payment processor 1,322,798 --
Accrued chargebacks (572,476) 1,797,906
Accrued liabilities (2,887,684) --
Other liabilities -- 717,940
------------- -------------
Net cash provided by operating activities 3,618,528 2,949,592
------------- -------------
See accompanying notes to consolidated financial statements.
10
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (Continued)
(Unaudited)
Increase (Decrease) in Cash
2000 1999
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of WeatherLabs operations $ -- $ 3,383,000
Net cash acquired in acquisition -- 428,096
Purchase of property and equipment (855,802) (403,737)
Decrease in net long-term assets of discontinued operations -- 670,300
Proceeds from sale of equipment 2,543 --
------------ ------------
Net cash provided by (used in) investing activities (853,259) 4,077,659
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock upon exercise of warrants 5,200,000 23,952
Principal payments on capital lease obligations (315,525) (531,197)
Principal payments on borrowings -- (207,272)
------------ ------------
Net cash provided by (used in) financing activities 4,884,475 (714,517)
------------ ------------
NET INCREASE IN CASH 7,649,744 6,312,732
CASH AT BEGINNING OF PERIOD 7,382,773 2,381,356
------------ ------------
CASH AT END OF PERIOD $ 15,032,517 $ 8,694,090
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 76,287 $ 180,102
See accompanying notes to consolidated financial statements.
11
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of December 31, 2000
and for the three and six months ended December 31, 2000 and 1999 are unaudited.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation have been included. The
financial statements are condensed and, therefore, do not include all
disclosures normally required by generally accepted accounting principles. These
financial statements should be read in conjunction with the Company's annual
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000. The results of operations for the three
months and six months ended December 31, 2000 are not necessarily indicative of
the results to be expected for the entire fiscal year ending June 30, 2001.
Certain previously reported amounts have been reclassified to conform to the
current period presentation. These reclassifications had no affect on the
previously reported net income (loss).
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
DataBank International, Ltd.
As approved by the shareholders of the Company at a Special Shareholders Meeting
on October 5, 1999, the Company acquired all of the outstanding stock of
DataBank, a credit card processing company organized under the laws of St.
Kitts. On that date the shareholders of DataBank were issued 16,600,000 shares
of the Company's common stock valued at $88,195,800 (based on the quoted market
price of the Company's common stock on the date the Company and DataBank entered
into the merger agreement). If DataBank met certain performance criteria, as
defined in the acquisition documents, the Company would be required to issue up
to an additional 13,060,000 shares of common stock to the former shareholders of
DataBank. The acquisition of DataBank has been accounted for as a purchase and
the results of operations of DataBank are included in the accompanying condensed
consolidated financial statements since the date of acquisition. The tangible
assets acquired included $515,674 of cash, $411,313 of receivables, and $185,000
of equipment. Expenses incurred in connection with the acquisition were $87,577.
Liabilities assumed consisted of $1,820,096 of accounts payable and accrued
liabilities.
The excess of the purchase price over the estimated fair market value of the
acquired net assets on October 5, 1999 of $88,991,486 was recorded as goodwill
and was 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
12
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 was recorded as goodwill and was
being amortized over 57 months beginning January 2000 (see Note 5).
Subsequent to the acquisition of DataBank, the Company became aware of an
additional $581,000 of liabilities related to DataBank's operations prior to the
acquisition (see Note 4). This additional amount has been recorded as an
adjustment to goodwill and is being amortized over the remainder of the five
year period.
During the quarter ended December 31, 2000, the Company assessed the
realizability of the recorded goodwill and, as described further in Note 8,
$142,000,000 of goodwill was written off as impaired.
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.
13
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 a
shareholder in MC.
In the course of closing fiscal 2000 , the Company reviewed the value of the
equipment and determined that through age and non-use the book value of the
assets was impaired. Upon assessing a current realizable value of $300,000, the
Company wrote off the difference of $900,000 to expense. The remaining balance
is being depreciated over three years.
Carib Commerce, Ltd.
Effective January 1, 2000, the Company acquired all of the outstanding stock of
Carib Commerce, a sales and marketing organization. The shareholders of Carib
Commerce were issued 600,000 shares of the Company's common stock valued at
$4,837,800 (based on the quoted market price of the Company's common stock on
the date of the acquisition) and $150,000 in cash. The acquisition of Carib
Commerce has been accounted for as a purchase and the results of operations of
Carib Commerce are included in the accompanying condensed consolidated financial
statements since the date of acquisition. The Company did not receive any
tangible assets and assumed no liabilities. The Company has employed two former
shareholders of Carib Commerce without employment agreements. The Company was
assigned a service agreement with a bank as a result of the acquisition. The
term of the agreement is four years dating from August, 1999.
The purchase price of $4,987,800 has been recorded as an intangible asset and is
being amortized over a period of 44 months, the remaining term of the service
agreement. The service agreement will allow the Company to develop a processing
program with the bank. As of the date of this report, the Company continues to
pursue a business relationship with the bank. To date, no business has been
conducted between the Company and the bank, however, management believes the
amount paid for the agreement will be realized.
14
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 pretax gain of $1,415,047 from this sale as discontinued
operations during the year ended June 30, 2000. The WeatherLabs operations have
been reclassified as discontinued operations for all periods presented in the
accompanying financial statements.
NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted EPS") reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised or converted into common stock. The
computation of Diluted EPS does not assume exercise or conversion of securities
that would have an antidilutive effect on net loss per common share.
Options to purchase 4,047,691 and 1,646,305 shares of common stock at weighted
average exercise prices of $5.75 and $5.56 per share as of December 31, 2000 and
1999, respectively, warrants to purchase 1,990,000 and 3,015,000 shares of
common stock at weighted average exercise prices of $7.20 and $6.50 per share as
of December 31, 2000 and 1999, respectively, and 360 shares of Series A
preferred stock convertible to 800,000 shares of common stock at $4.50 per share
at December 31, 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 December 31,
2000, the Company has agreed to issue up to an additional 187,600 shares of
common stock in connection with the acquisition of WeatherLabs, contingent on
the future price of the Company's common stock. These contingent shares have
also been excluded from the computation of diluted EPS.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Bank Commitment
On June 6, 2000, the Company entered into an agreement with the St. Kitts Nevis
Anguilla National Bank Limited ("SKNANB") whereby the Company would provide
SKNANB with services relating to credit card processing. These services include
fraud screening, pre- and post- authorization, fraud and loss prevention,
technical services and the right to refer merchants to be considered by SKNANB
for inclusion in their processing program. The Company is required to maintain a
15
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
security deposit with SKNANB in the amount of $6,400,000. SKNANB collects 50
basis points for all credit card settlements processed through SKNANB. This
payment for basis points shall not be less than $50,000 per month for the six
month period ended November 30, 2000 and not less than $100,000 per month
thereafter.
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. When the present management
began reviewing its merchants for risk assessment purposes, it discovered that
EPS was indeed factoring, a violation of Visa/MasterCard regulations. It also
began seeing large chargebacks in EPS's account and therefore larger reserves
were withheld in the EPS account to cover expected chargebacks and in
preparation for merchant termination should EPS be unwilling to sign the
merchants directly with DCTI. As of February 5, 2001, 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.
During the quarter ended December 31, 2000, certain shareholders initiated
discussions with the Company regarding alleged violations of registration rights
for shares issued in the course of acquisitions made by the Company during
fiscal 1999 and 2000. No claim has been made against the Company, however, the
possibility exists that a court would find that the Company should have filed
registration statements with the Securities and Exchange Commission at various
times during fiscal 2000 to allow specific shareholders to market their
otherwise restricted common shares in the Company. The Company is researching
the matter and will continue to discuss the matter with the shareholders
involved.
16
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the
Bank's claim regarding the $500,000 amount is erroneous as it includes one
merchant that was never a client of DataBank or the Company and another merchant
whose payments to the Bank have not been considered in the audit. The Company
wrote off a receivable due from the Bank of $255,531 in fiscal 2000. Management
will continue to work with the Bank and their auditors and believes the issues
with the Bank will be settled during fiscal 2001 and that no material adverse
impact will result.
The Company has been advised by the United States Securities and Exchange
Commission that it is conducting an informal review of the facts underlying the
Internal Investigation discussed in Note 5. The Company is cooperating in that
inquiry which, to the best of the Company's knowledge, is continuing.
NOTE 5 - 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").
17
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
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, seven 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
18
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were accounted for as a settlement of claims
and credited to income at the time of settlement. Accordingly, during the
quarter ended December 31, 2000 the Company recorded a gain from settlement of
$3,109,544 based on the quoted market price of the Company's common stock at the
time trading was allowed to resume on the OTC.
NOTE 6 - ISSUANCE OF COMMON STOCK TO TRANSACTION SYSTEMS ARCHITECTS, INC.
On June 14, 1999, TSAI purchased 1,250,000 shares of the Company's common stock
and five- year warrants to purchase an additional 1,000,000 shares of the
Company's common stock in exchange for $6,500,000. The exercise price of the
warrants is the lower of $5.20 per share or the average per share market value
for the five consecutive trading days with the lowest per share market value
during the 22 trading days prior to December 14, 1999. On July 7, 2000 TSAI
exercised their warrants and purchased 1,000,000 shares of the Company's common
stock for $5.20 per share.
NOTE 7 - STOCK-BASED COMPENSATION
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans as they relate to employees and directors. Historically, the
Company's stock options have been accounted for using fixed plan accounting. The
option grants permit various exercise alternatives, including certain cashless
exercise provisions. Through fiscal 1999, the Company's experience indicated
that substantially all cashless exercises could have been effected through the
use of mature shares and therefore fixed plan accounting was appropriate. Due to
the Company's recent acquisitions and growth, options have been granted to more
employees who do not hold mature shares of the Company's common stock and
therefore during fiscal 2000 the Company determined that these options should be
19
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 quarter ended September 30, 2000, the Company recorded $649,300 of non-cash
income related to these variable awards as a result of a decrease in the price
of the Company's common stock since June 30, 2000.
NOTE 8 - IMPAIRMENT WRITEDOWN OF GOODWILL
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
establishes guidance for recognizing and measuring impairment losses and
requires that the carrying amount of impaired assets be reduced to fair value.
Accordingly, during the quarter ended December 31, 2000 the Company evaluated
the realizability of the goodwill recorded in connection with the acquisitions
discussed previously. The Company projected net cash flows (undiscounted and
without interest charges) to be generated by the acquired operations and
compared those to the net book value of the assets acquired. The analysis
resulted in a non-cash impairment writedown of goodwill of $142,000,000. The
writedown will have no impact on the Company's future cash flows. Remaining
goodwill will continue to be amortized over the remaining life originally
assigned, which is approximately four years. As a result of the writedown, the
remaining net goodwill of approximately $34 million will be amortized at a rate
of approximately $710 thousand per month beginning in January, 2001.
20
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.
WeatherLabs Acquisition and Divestiture. In May 1998, the Company acquired all
of the outstanding stock of WeatherLabs, Inc. ("WeatherLabs"), a provider of
weather and weather-related information and products on the Internet, in
exchange for up to 777,220 shares of the Company's common stock. At closing
253,260 shares of the Company's common stock were issued valued at $762,503, and
an additional 523,960 shares of the Company's common stock were issuable based
upon the price of the Company's common stock over the next three years. The fair
market value of the shares of the Company's common stock issued was determined
to be the quoted market price on the date of acquisition. The acquisition was
accounted for as a purchase. The results of operations of WeatherLabs prior to
its divestiture are included in the accompanying condensed consolidated
financial statements from the date of acquisition.
Effective October 31, 1999, the Company entered into an Asset Purchase Agreement
with WL Acquisition Corporation, a wholly owned subsidiary of Landmark
Communications, Inc., formed for the purpose of acquiring and combining the
WeatherLabs assets acquired from the Company. Pursuant to the agreement, the
Company exchanged certain net WeatherLabs assets for $3,383,000 in cash. The
assets exchanged by the Company consisted of $192,950 of accounts receivable,
$879,305 of prepaid advertising, $126,290 of net equipment, and certain
intangibles represented by net goodwill of $1,189,057 and liabilities consisting
of $132,556 of deferred income and $100,000 of notes payable were assumed by the
purchaser. The Company recorded the resulting gain of $1,415,047 from this sale
as discontinued operations during fiscal 2000.
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%.
21
The Company recently completed an Internal Investigation related to the
Company's acquisition of DataBank. As a result of the investigation,
negotiations with certain individuals resulted in the return of 8,637,622 shares
of the Company's common stock (see Note 5 to the Consolidated Financial
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
Three months ended December 31, 2000 compared with three months ended December
31, 1999, and six months ended December 31, 2000 compared with six months ended
December 31, 1999.
Revenue
Revenue for the three months ended December 31, 2000 was $9,137,924 as compared
to $6,157,954 for the three months ended Decmber 31,1999. The increase reflects
the growth in the portfolio of merchants utilizing the Company's products and
services. Payment processing revenues were $8,179,514, chargeback fees were
$643,410 and revenue from a software distribution agreement was $315,000 in the
quarter ended December 1, 2000. Revenues in the quarter ended December 31, 1999
were all related to payment processing.
Revenues for the six months ended December 31, 2000 were $18,633,834 as compared
to $8,990,883 for the six months ended December 31,1999. In the current six
month period processing revenues were $16,650,804, chargeback fees were
$1,353,030 and revenue from a software distribution agreement wer $630,000. In
the six months ended December 31, 1999 the majority of revenues were related to
payment processing. The growth in revenues reflects the growth in the merchant
portfolio.
22
Cost of Revenue
Cost of revenue for the three months ended December 31, 2000 were $6,198,506 or
67.8% of revenue. Cost of revenue for the three months ended December 31, 1999
were $3,434,725 or 55.8% of revenue. Cost of revenue as a percent of revenue has
increased due to increased banking fees and processing errors. The Company
expects future cost of revenue to remain at about 68% to 69% of revenue.
Cost of revenue for the six months ended December 31, 2000 were $12,352,131 or
66.3% of revenue. Cost of revenue for the six months ended December 31, 1999
were $4,781,519 or 53.2% of net revenue. The same factors discussed above
generated the increase.
Operating Expenses
Depreciation and amortization expense was $13,489,448 in the three months ended
December 31, 2000 compared to $6,478,108 during the three months ended December
31, 1999. The increase in depreciation and amortization expense was principally
due to the amortization of goodwill related to acquired companies and to the
acquisition of computers and other equipment in the current quarter.
Depreciation and amortization expense was $26,935,446 in the six months ended
December 31, 2000 compared to $8,449,620 during the six months ended December
31, 1999. The increase in depreciation and amortization expense was due to the
same factors discussed above.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
establishes guidance for recognizing and measuring impairment losses and
requires that the carrying amount of impaired assets be reduced to fair value.
Accordingly, during the quarter ended December 31, 2000 the Company evaluated
the realizability of the goodwill recorded in connection with the acquisitions
discussed previously. The Company projected net cash flows (undiscounted and
without interest charges) to be generated by the acquired operations and
compared those to the net book value of the assets acquired. The analysis
resulted in a non-cash impairment writedown of goodwill of $142,000,000. The
writedown will have no impact on the Company's future cash flows. Remaining
goodwill will continue to be amortized over the remaining life originally
assigned, which is approximately four years. As a result of the writedown, the
remaining net goodwill of approximately $34 million will be amortized at a rate
of approximately $710 thousand per month beginning in January, 2001.
General and administrative expense increased to $2,824,216 in the three months
ended December 31, 2000 from $1,720,019 during the three months ended December
31, 1999.
General and administrative expense increased to $5,040,654 in the six months
ended December 31, 2000 from $2,596,492 during the six months ended December 31,
1999. The increase in general and administrative expense in both the current
quarter and half year was due to the addition of administrative and support
staff and facilities costs associated with various acquisitions.
Selling expense decreased to $548,798 in the three months ended December 31,
2000 from $916,969 in the three months ended December 31, 1999. Selling expense
23
decreased to $986,931 in the six months ended December 31, 2000 from $1,519,686
in the six months ended December 31, 1999. The decrease in selling expense in
both periods is attributable to the movement of personnel from sales to
operations.
Research and development expense decreased to $513,257 in the three months ended
December 31, 2000 from $696,839 in the three months ended December 31, 1999 and
to $958,205 in the six months ended December 31, 2000 from $1,273,058 in the six
months ended December 31, 1999. Research and development expense decreased due
to the reduction in the level of support required in the development of the
Company's payment processing software.
Credit card chargeback expense was $249,000 for the three and six month periods
ended December 31, 2000. Credit card chargeback expense during the three and six
months ended December 31, 1999 was $2,884,247. These chargebacks resulted
primarily from fraudulent merchant transactions from the Company's "brick and
mortar" merchants. The Company's contracts with the merchants and the agents for
these merchants permits the Company to recover chargebacks from the merchants
and/or the agents. The Company will pursue all available avenues to recover
these chargebacks.
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.
24
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
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, seven 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.
25
The shares returned to the Company were accounted for as a settlement of claims
and credited to income at the time of settlement. Accordingly, during the
quarter ended December 31, 2000 the Company recorded a gain from settlement of
$3,109,544 based on the quoted market price of the Company's common stock at the
time trading was allowed to resume on the OTC.
Discontinued operations
During the three months ended December 31, 1999, the Company sold substantially
all of its assets related to WeatherLabs. The results of the WeatherLabs
operations are presented as discontinued operations. During the three months
ended December 31, 1999, the pretax loss from this operation was $124,068. Also
during the three months ended December 31, 1999, the Company recorded a pretax
gain from the sale of the WeatherLabs assets of $1,227,954
During the six months ended December 31, 1999, the pretax loss from the
WeatherLabs operations was $429,779. Also during the six months ended December
31, 1999, the Company recorded a pretax gain from the sale of the WeatherLabs
assets of $1,227,954.
Liquidity and Capital Resources
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.
26
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.
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
27
the agreement, the Company agreed to pay ACI $5,941,218 during the life of the
contract. The Company made a payment upon signing the contract of $591,218 and
was scheduled to make equal payments at the beginning of each quarter totaling
$1,000,000 for calendar year 2000, $1,200,000 for calendar year 2001, $1,400,000
for calendar year 2002, $1,400,000 for calendar year 2003 and a final payment of
$350,000 on January 1, 2004.
On June 14, 1999, Transactions Systems Architects, Inc. ("TSAI"), the parent of
ACI, purchased 1,250,000 shares of the Company's common stock and warrants to
purchase an additional 1,000,000 shares of the Company's common stock in
exchange for $6,500,000. As part of the securities purchase agreement, the
Company agreed to immediately pay ACI the discounted future payments under the
original agreement, which amounted to $3,888,453. The amounts paid under the
agreement have been recorded as prepaid software license in the accompanying
condensed consolidated financial statements and are being expensed ratably over
the term of the agreement. In July, 2000, TSAI exercised all of its warrants for
a total exercise price of $5,200,000.
On March 31, 2000, the software license agreement was modified to grant the
Company a non-transferable and non-exclusive license to use ACI's Base24(R)
software in all international markets, as well as the United States, which was
granted in the original contract. In exchange for this agreement the Company
paid ACI $2,500,000 on April 15, 2000 and made a final payment of $2,500,000 on
September 30, 2000.
On June 3, 1999, the Company entered into a three year agreement with ACI to
distribute the Company's e-commerce products. As consideration for this
agreement, ACI paid the Company a non-refundable deposit of $700,000. ACI will
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. During
the six months ended December 31, 2000 the Company recognized an additional
$630,000 of revenue under these agreements.
During the six months ended December 31, 2000, the Company provided $3,618,528
of cash in its operating activities. The Company's net loss included the
non-cash gain of $3,109,544 relating to the return of shares described above and
the non-cash writedown of goodwill of $142,000,000 described in Note 8, as well
as $26,935,446 of depreciation and amortization. Other sources of cash included
increases in merchant-related liabilities and a reduction in a receivable due
from a payment services processor.
28
Net cash used in investing activities was $853,259 as the Company purchased
property and equipment to upgrade and build redundancy into its computer
facilities in the six months ended December 31, 2000.
The Company generated $4,884,475 in cash from financing activities in the six
months ended December 31, 2000, as TSAI exercised its option to purchase
1,000,000 shares of the Company's common stock at $5.20 and the Company paid
$315,525 under capital lease obligations.
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 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27
(b) Report on Form 8-K
A Report on Form *-K was filed on November 20, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Date: February 14, 2001 By /s/ John J. Hanlon
- ----------------------- ---------------------
John J. Hanlon
Chief Financial Officer