SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
[ ] 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 May 10, 2001.
1
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, June 30,
2001 2000
-------------------- --------------------
CURRENT ASSETS:
Cash $ 21,535,817 $ 7,382,773
Restricted Cash 6,400,000 6,400,000
Receivable from payment services processor 942,487 5,314,655
Deposit with payment processor 2,049,548 2,500,000
Trade accounts receivable, net of allowance for doubtful accounts of
$681,000 and $681,000, respectively 3,657,300 2,693,663
Current Portion of Prepaid software license 2,153,856 2,153,856
Prepaid expenses and other current assets 433,203 325,478
-------------------- --------------------
Total current assets 37,172,211 26,770,425
-------------------- --------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 9,264,453 8,519,923
Furniture, fixtures and leasehold improvements 1,281,922 1,204,231
-------------------- --------------------
10,546,375 9,724,154
Less accumulated depreciation and amortization (6,930,983) (4,957,120)
-------------------- --------------------
Net property and equipment 3,615,392 4,767,034
-------------------- --------------------
GOODWILL, net of accumulated amortization of $60,798,097 and
$34,135,690, respectively 28,766,541 200,858,061
-------------------- --------------------
PREPAID SOFTWARE LICENSE, net of current portion 4,307,712 5,923,104
-------------------- --------------------
OTHER ASSETS 2,255,896 2,849,139
-------------------- --------------------
$ 76,117,752 $ 241,167,763
==================== ====================
See accompanying notes to condensed consolidated financial statements
2
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2001 2000
------------------ ---------------------
CURRENT LIABILITIES:
Notes payable $ 1,663,897 $ 1,150,000
Current portion of capital lease obligations 59,608 347,156
Accounts payable 1,093,101 4,368,653
Settlements due to merchants 582,822 1,497,024
Merchant reserves 25,061,845 14,317,435
Software license payable - 2,500,000
Accrued merchant payable 1,120,093 2,122,265
Accrued chargebacks 1,509,058 1,835,124
Due to processor 2,281,010 -
Deferred revenue 486,776 231,776
Other accrued liabilities 1,509,936 1,119,977
------------------ ---------------------
Total current liabilities 35,368,146 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 (242,730,763) (70,388,836)
------------------ ---------------------
Total stockholders' equity 40,684,402 211,585,172
------------------ ---------------------
$ 76,117,752 $ 241,167,763
================== =====================
See accompanying notes to condensed consolidated financial statements
3
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
------------------ ------------------
NET REVENUES $ 8,529,137 $ 8,799,382
COST OF REVENUES 5,167,762 4,401,878
------------------ ------------------
Gross margin 3,361,375 4,397,504
------------------ ------------------
OPERATING EXPENSES:
Depreciation and amortization 3,829,824 12,402,103
Impairment writedown of goodwill 3,429,113 -
General and administrative 2,236,971 2,034,013
Non-cash compensation related to issuance of stock and stock options 1,158,301
Selling 93,773 757,959
Research and development 55,876 338,105
Credit card chargebacks 250,000 260,439
------------------ ------------------
Total operating expenses 9,895,557 16,950,920
------------------ ------------------
OPERATING LOSS $ (6,534,182) $ (12,553,416)
------------------ ------------------
OTHER INCOME (EXPENSE):
Gain on sale of CommTouch stock - 8,331,427
Interest and other income 307,105 150,173
Loss on dispositions of equipment (11,335) -
Interest and other expense (80,771) (97,708)
------------------ ------------------
Other income, net 214,999 8,383,892
------------------ ------------------
See accompanying notes to condensed consolidated financial statements
4
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Continued)
(Unaudited)
2001 2000
------------------ ------------------
NET LOSS $ (6,319,183) $ (4,169,524)
================== ==================
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.16) $ (0.09)
================== ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 40,044,444 45,954,213
================== ==================
See accompanying notes to condensed consolidated financial statements
5
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
------------------ ------------------
NET LOSS $ (6,319,183) $ (4,169,524)
OTHER COMPREHENSIVE LOSS, net of tax
Unrealized holding loss arising during the period on
available- for- sale security - 8,316,427
Less reclassification adjustment for gains included in net loss - (8,331,427)
------------------ ------------------
NET LOSS RECOGNIZED IN OTHER COMPREHENSIVE LOSS - (15,000)
------------------ ------------------
COMPREHENSIVE LOSS $ (6,319,183) $ (4,184,524)
================== ==================
See accompanying notes to condensed consolidated financial statements
6
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
------------------ ------------------
NET REVENUES $ 27,162,971 $ 17,790,265
COST OF REVENUES 17,519,894 9,183,397
------------------ ------------------
Gross margin 9,643,077 8,606,868
------------------ ------------------
OPERATING EXPENSES:
Depreciation and amortization 30,765,272 20,851,723
Impairment writedown of goodwill 145,429,113 -
General and administrative 7,277,627 4,630,504
Credit card chargebacks 499,000 3,144,686
Selling 1,080,703 2,277,645
Research and development 1,014,081 1,611,163
Non-cash (income) expense related to the issuance of stock and
stock options
(649,300) 1,347,069
------------------ ------------------
Total operating expenses 185,416,496 33,862,790
------------------ ------------------
OPERATING LOSS (175,773,419) (25,255,922)
------------------ ------------------
OTHER INCOME (EXPENSE):
Gain on return of common shares 3,109,544 -
Gain on sale of CommTouch stock - 8,331,427
Interest and other income 496,676 296,216
Net loss on sale of assets (26,718) -
Interest and other expense (157,058) (348,079)
------------------ ------------------
Other income, net 3,422,444 8,279,564
------------------ ------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(172,350,975) (16,976,358)
INCOME TAX BENEFIT - 299,316
------------------ ------------------
LOSS FROM CONTINUING OPERATIONS $ (172,350,975) $ (16,677,042)
------------------ ------------------
see accompanying notes to condensed consolidated financial statements
7
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (Continued)
(Unaudited)
2001 2000
------------------ ------------------
DISCONTINUED OPERATIONS:
Loss from operations of WeatherLabs, net of income tax benefit of $161,167
in 2000 - $ (268,612)
Gain on sale of WeatherLabs operations, net of income tax provision of
$460,482 in 2000
- 767,471
------------------ ------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - 498,859
------------------ ------------------
NET LOSS (172,350,975) (16,178,183)
------------------ ------------------
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (3.96) $ (0.49)
================== ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 43,561,735 32,896,111
================== ==================
See accompanying notes to condensed consolidated financial statements
8
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
------------------ ------------------
NET LOSS $ (172,350,975) $ (16,178,183)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding gain arising during the period on
available- for- sale securities - 8,765,972
Less reclassification adjustment for gains included in net loss - (8,331,427)
------------------ ------------------
NET GAIN RECOGNIZED IN OTHER COMPREHENSIVE INCOME - 434,545
------------------ ------------------
COMPREHENSIVE LOSS $(172,350,975) $ (15,743,638)
================== ==================
See accompanying notes to condensed consolidated statements
9
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
Increase (Decrease) in Cash
2001 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (172,350,975) $ (16,178,183)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 30,765,272 20,851,723
Loss from impairment writedown of goodwill 145,429,113 -
Gain on return of common shares (3,109,544) -
Compensation expense (income) related to cashless exercise of
stock options and issuance of stock (649,300) 1,347,069
Gain on sale of CommTouch stock - (8,331,427)
Gain on sale of Weatherlabs operations (1,227,954)
Loss on disposition of equipment 26,718 -
Changes in operating assets and liabilities, net of effect of acquisitions:
Trade accounts receivable (963,637) 395,156
Receivable from payment processor 4,372,168 (7,518,737)
Deposit with payment services processor 450,452 -
Other receivables - 800,000
Receivable from officer - 56,000
Prepaid software license - (4,322,408)
Prepaid expenses and other current assets (107,725) (603,412)
Net current assets of discontinued operations - (550,947)
Other assets 101,947 (90,419)
Accounts payable (2,433,550) (915,575)
Settlements due to merchants (1,916,374) 5,486,188
Merchant reserves 10,744,410 8,562,672
Due to processor 2,281,010 -
Accrued chargebacks (326,066) 159,236
Accrued liabilities 389,959 -
Deferred revenue 255,000 460,380
Other liabilities (2,500,000) 5,702,420
----------------- -----------------
Net cash provided by operating activities $ 10,458,878 $ 4,074,786
----------------- -----------------
See accompanying notes to condensed consolidated statements
10
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (Continued)
(Unaudited)
Increase (Decrease) in Cash
2001 2000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of CommTouch stock $ - $ 9,045,341
Net proceeds from the sale of WeatherLabs operations - 3,383,000
Net cash acquired in acquisition - 428,096
Purchase of property and equipment (882,059) (661,562)
Cash paid in acquisition of CaribCommerce SKB, Ltd - (150,000)
Decrease in net long-term assets of discontinued operations - 670,300
Proceeds from disposition of equipment 19,853 -
----------------- -----------------
Net cash (used in) provided by investing activities (862,206) 12,715,175
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock upon exercise of stock options
- 590,520
Net proceeds from issuance of common stock upon exercise of warrants 5,200,000 71,876
Principal payments on capital lease obligations (315,525) (811,097)
Principal payments on borrowings (328,103) (960,614)
----------------- -----------------
Net cash provided by (used in) financing activities 4,556,372 (1,109,315)
----------------- -----------------
NET INCREASE IN CASH 14,153,044 15,680,646
CASH AT BEGINNING OF PERIOD 13,782,773 2,381,356
----------------- -----------------
CASH AT END OF PERIOD $ 27,935,817 $ 18,062,002
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 143,858 $ 259,274
================= =================
See accompanying notes to condensed 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 March 31, 2001 and
for the three and nine months ended March 31, 2001 and 2000 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 nine months
ended March 31, 2001 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
12
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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. Of this total,
$134,228,591 applied to the DataBank acquisition.
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. At March 31,2001 the
Company has paid $150,000 of the original $300,000 leaving a balance of $150,000
to be paid during the remainder of fiscal 2001.
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 was recorded as an intangible asset and was
being amortized over a period of 44 months, the remaining term of the service
agreement. The service agreement would have allowed the Company to develop a
processing program with the bank. During the quarter ended March 31,2001, the
Company completed an investigation of the bank and has concluded that it would
not be in the best interest of the Company to pursue a business relationship
with the bank. The Company then assessed the realizability of the recorded
goodwill noted above and wrote off $3,429,113, representing the unamortized
balance at March 31, 2001 as impaired.
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
14
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 4,447,224 and 2,746,050 shares of common stock at weighted
average exercise prices of $2.79 and $7.16 per share as of March 31, 2001 and
2000, respectively, warrants to purchase 1,990,000 and 2,990,000 shares of
common stock at weighted average exercise prices of $7.20 and $6.53 per share as
of March 31, 2001 and 2000, respectively, and 360 shares of Series A preferred
stock convertible to 800,000 shares of common stock at $4.50 per share at March
31, 2001 and 2000 were not included in the computation of Diluted EPS. The
inclusion of the options, warrants and preferred stock would have been
antidilutive, thereby decreasing net loss per common share. As of March 31,
2001, 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
security deposit with SKNANB in the amount of $6,400,000. SKNANB collects 60
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.
15
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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/SKNANB. As of April 30, 2001, funds held for EPS
totaled approximately $4.2 million. The Company believes that adequate reserves
are being held for all remaining chargebacks and fees.
The Company has been served with injunctions issued by the High Court of
Justice, Federation of St. Christopher and Nevis on behalf of several merchants
which were doing business with EPS prohibiting the Company from disbursing the
funds held for EPS's account until further court order. The Company is complying
with these injunctions.
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 worked with EPS to reconcile the
account and jointly agreed that as of February 4, 2001, there was approximately
$4.25 million remaining.
During the quarter ended March 31, 2001 certain shareholders made claims against
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. 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
continuing to work to resolve the matter. An adverse outcome could have a
material adverse effect on the Company's financial position, liquidity and
results of operations.
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
16
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the results of that audit are being discussed with the Bank 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 (SEC) 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. The Company has not received any request for information nor any
other communication with the SEC since December 2000.
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
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
18
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 subsequent acquisitions and growth, options have been granted to
more employees who do not hold mature shares of the Company's common stock and
therefore during fiscal 2000 the Company determined that these options should be
accounted for using variable plan accounting. Under variable plan accounting,
changes, either increases or decreases, in the market price of the Company's
common stock results in a change in the measurement of compensation.
Compensation is measured as the difference between the market price and the
option exercise price and is amortized to expense over the vesting period.
During the 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.
19
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 discussed in Note 2, during the quarter ended March 31, 2001, the Company
completed an investigation the Carib Commerce, Ltd. Acquisition relative to a
potential business relationship with a bank that would be of potential benefit
to the Company. Upon determining that such a relationship would not be
beneficial, the Company assessed the realizability of the recorded goodwill
associated with the acquisition and determined that the remaining asset was
impaired. As a result $ was written off .
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 conducted an Internal Investigation related to the Company's
acquisition of DataBank. As a result of the investigation, negotiations with
certain individuals resulted in the return of 8,637,622 shares of the Company's
common stock (see Note 5).
CaribCommerce Acquisition. In January 2000, the Company acquired all of the
outstanding stock of CaribCommerce SKB, Ltd., a sales and marketing company
organized under the laws of St. Christopher and Nevis ("CaribCommerce"), in
exchange for 600,000 shares of the Company's common stock valued at $4,837,800,
the quoted market price of the common shares issued on the date of acquisition,
and $150,000 in cash.( See Notes 2 and 8).
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 March 31, 2001 compared with three months ended March 31,
2000, and nine months ended March 31, 2001 compared with nine months ended March
31, 2000.
Revenue
Revenue for the three months ended March 31, 2001 was $8,529,137 as compared to
$8,799,382 for the three months ended March 31, 2000. In the quarter ended March
31, 2000 the Company was in the process of building its payment processing
business and readily accepted merchants into the program. While revenues for the
quarter ended March 31, 2001 are less than revenues for the quarter ended March
31, 2000, management believes the portfolio of merchants in the current quarter
that have been retained or admitted to the program under more stringent
standards and are less likely to generate chargeback and fraud problems in the
future. The decrease reflects a decline in the total dollar volume of merchant
gross sales year over year. Revenue from a software distribution agreement was
$315,000 in the quarter ended March 31, 2001.
Revenue for the nine months ended March 31, 2001 was $27,162,971 as compared to
$17,790,265 for the nine months ended March 31, 2000. In the current nine month
period processing revenue was $24,407,921, chargeback fees were $1,810,050 and
revenue from a software distribution agreement was $945,000. In the nine months
ended March 31, 2000 the majority of revenues were related to payment
processing. The growth in revenue reflects the growth in the merchant portfolio
as a result of signing on new merchants and the acquisitions discussed
throughout this report.
22
Cost of Revenue
Cost of revenue for the three months ended March 31, 2001 was $5,167,762 or 61%
of revenue. Cost of revenue for the three months ended March 31, 2000 was
$4,401,878 or 50% of revenue. In the quarter ended March 31, 2000 the Company
had not formalized an agreement with a sponsoring bank, and as a result the
Company realized a gross margin which was not sustainable. Management believes
that the current gross margin more accurately reflects the future potential of
the Company's performance. The Company expects future cost of revenue to remain
at about 61% to 64% of revenue.
Cost of revenue for the nine months ended March 31, 2001 was $17,519,894 or 64%
of revenue. Cost of revenue for the nine months ended March 31, 2000 was
$9,183,397 or 52% of net revenue. The acquisitions discussed throughout this
report reflect the differences in the Company's business from the periods March
31, 2000 to March 31, 2001. The same factors discussed above generated the
differences noted.
Operating Expenses
Depreciation and amortization expense was $3,829,824 in the three months ended
March 31, 2001 compared to $12,402,103 during the three months ended March 31,
2000. The decrease in depreciation and amortization expense was due to the
impairment writedown of goodwill recorded in the quarter ended December 31, 2000
as discussed below.
Depreciation and amortization expense was $30,765,272 in the nine months ended
March 31, 2001 compared to $20,851,723 during the nine months ended March 31,
2000. The increase in depreciation and amortization expense was due to the cost
and timing of the acquisitions discussed throughout this report offset by the
impairment writedown of goodwill recorded in the quarter ended December 31, 2000
as discussed below.
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. During
the quarter ended March 31, 2001 the Company completed a third party evaluation
of the bank involved in the Company's acquisition of Carib Commerce, Ltd. (see
Notes 2 and 8). Upon a determination that no agreement would be consummated with
the bank, the Company assessed the realizability of the recorded goodwill
associated with the acquisition and concluded that the unamortized balance of
$3,429,113 should be written off at March 31, 2001. The writedowns will have no
impact on the Company's future cash flows. As a result of the writedowns, the
remaining net goodwill of approximately $29 million will be amortized at a rate
of approximately $713 thousand per month beginning in April , 2001.
23
Total operating expenses, including general and administration, selling, and
research and development expenses decreased from $3,130,077 in the three months
ended March 31, 2000 to $2,386,620 in the three months ended March 31, 2001. The
decrease was attributed to the reduction in the workforce in December, 2000 and
the concurrent closure of offices in the U. K. and Park City, Utah, as well as a
reduction in the number of consultants employed by the Company. In the nine
months ended March 31, 2001, total operating expenses, as described above,
increased from $8,519,312 in the nine months ended March 31, 2000 to $9,372,411
as the Company redefined itself through the acquisitions described throughout
this report.
General and administrative expense increased to $2,236,971 in the three months
ended March 31, 2001 from $2,034,013 during the three months ended March 31,
2000.
General and administrative expense increased to $7,277,627 in the nine months
ended March 31, 2001 from $4,630,504 during the nine months ended March 31,
2000. The increases in general and administrative expense in both the current
quarter and nine month period were due to the addition of administrative and
support staff and facilities costs associated with various acquisitions.
Selling expense decreased to $93,773 in the three months ended March 31, 2001
from $757,959 in the three months ended March 31, 2000. Selling expense
decreased to $1,080,703 in the nine months ended March 31, 2001 from $2,277,645
in the nine months ended March 31, 2000. The decrease in selling expense in both
periods is attributable to the movement of personnel from sales to operations
and the reduction in the Company's workforce in December, 2000.
Research and development expense decreased to $55,876 in the three months ended
March 31, 2001 from $338,105 in the three months ended March 31, 2000 and to
$1,014,081 in the nine months ended March 31, 2001 from $1,611,163 in the nine
months ended March 31, 2000. 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 is defined as the amount of chargebacks that the
Company is unable to collect from merchants. While the Company continues to
pursue collection from the merchants and principals associated with the
merchants, it recognizes an expense based on the Company's assessment of
collection success. For the three month period ended March 31, 2001 chargeback
expense was $250,000 compared to $260,439 for the equivalent period ended March
31, 2000. For the nine months ended March 31, 2001 chargeback expense was
$499,000 compared to $3,144,686 for the same period ended March 31, 2000.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.
24
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,
25
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.
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.
26
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.
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.
27
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 is $7.70.
On March 25, 1999, the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for all of ACI's software products
which are being utilized to provide the Company's Internet-based platforms that
offer secure payment processing for business-to-consumer electronic commerce.
Pursuant to the agreement, the Company agreed to pay ACI $5,941,218 during the
life of the contract. The Company made a payment upon signing the contract of
$591,218 and was scheduled to make equal payments at the beginning of each
quarter totaling $1,000,000 for calendar year 2000, $1,200,000 for calendar year
2001, $1,400,000 for calendar year 2002, $1,400,000 for calendar year 2003 and a
final payment of $350,000 on January 1, 2004.
On June 14, 1999, Transactions Systems Architects, Inc. ("TSAI"), the parent of
ACI, purchased 1,250,000 shares of the Company's common stock and warrants to
purchase an additional 1,000,000 shares of the Company's common stock in
exchange for $6,500,000. As part of the securities purchase agreement, the
Company agreed to immediately pay ACI the discounted future payments under the
original agreement, which amounted to $3,888,453. The amounts paid under the
agreement have been recorded as prepaid software license in the accompanying
condensed consolidated financial statements and are being expensed ratably over
the term of the agreement.
In July 2000, TSAI exercised all of its warrants for a total exercise price of
$5,200,000.
On March 31, 2000, the software license agreement was modified to grant the
Company a non-transferable and non-exclusive license to use ACI's software
products in all international markets, as well as the United States. In exchange
for this agreement the Company paid ACI $2,500,000 on April 15, 2000 and
$2,500,000 on September 30, 2000.
On June 3, 1999, the Company entered into a three year exclusive 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. The
agreement provided that 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
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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 nine months ended March 31, 2001 the Company recognized
an additional $945,000 of revenue under these agreements. On May 1, 2001, the
agreement was modified to remove the exclusivity and the remaining guaranteed
payments totaling $4,800,000 and to reduce the license fees to 10% of the fee
paid ACI.
During the nine months ended March 31, 2001, the Company generated $10,458,878
of cash from its operating activities principally from an increase in merchant
reserves. 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 $145,429,113 described in Note 8, as well as $30,765,270 of
depreciation and amortization. Earnings before interest, taxes, depreciation and
amortization (EBITDA), for the nine month period ended March 31, 2001 was a loss
of $228,000 compared to an EBITDA loss of $3,057,000 for the comparable period
ended March 31, 2000. The improvement in EBITDA was attributed to the reduction
in operating expenses associated with the closure of the Company's facilities in
the U.K. and Park City, Utah and the elimination of 25 positions within the
Company during the quarter ended December 31, 2001.
Other sources of cash included increases in merchant-related liabilities and a
reduction in a receivable due from a payment services processor.
Net cash used in investing activities was $862,000 as the Company purchased
property and equipment to upgrade and build redundancy into its computer
facilities in the nine months ended March 31, 2001.
The Company generated $4,556,000 in cash from financing activities in the nine
months ended March 31, 2001, as TSAI exercised its option to purchase 1,000,000
shares of the Company's common stock at $5.20 in July, 2001, the Company paid
$315,000 under capital lease obligations and the Company paid $328,000 on
outstanding borrowings.
Forward-Looking Information
Statements regarding the Company's expectations as to future revenue from its
business strategy, and certain other statements presented herein, constitute
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to risks
relating to the Company's continued ability to create or acquire products and
services that customers will find attractive and the potential for increased
competition which could affect pricing and profitability.
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Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
None
(b) Report on Form 8-K
Reports on Form 8-K were filed on January 18, 2001 and April
19,2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Date: May 14, 2001 By /s/ John J. Hanlon
-------------------
John J. Hanlon
Chief Financial Officer
30