SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
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(exact name of registrant as specified in its charter)
Delaware 87-0461856
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(801) 266-5390
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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 [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's common stock as
of November 19, 2002 was 75,000,000.
DIGITAL COURIER TECHNOLOGIES, INC.
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FORM 10-Q
For the Quarterly Period Ended September 30, 2002
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed and Consolidated Balance Sheets ..................................................... 4
Consolidated Statements of Operations - Quarter Ended........................................... 5
Consolidated Statements of Cash Flows ......................................................... 6
Notes to Consolidated Financial Statements .................................................... 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ............20
Item 4 Controls and Procedures ..........................................................................25
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..................................................................................25
Item 2 Changes in Securities and Use of Proceeds..........................................................29
Item 5 Other Information .................................................................................29
Item 6 Exhibits and Reports on Form 8-K .................................................................30
Signatures ......................................................................................................32
Certifications ..................................................................................................33
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2002 2002
(unaudited)
------------- ------------
CURRENT ASSETS:
Cash $ 6,916 $ 47,492
Restricted cash 5,574,202 10,507,453
Receivable from payment processor 336,303 146,820
Prepaid expenses and other current assets 192,063 366,680
------------ ------------
Total current assets 6,109,484 11,068,445
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PROPERTY AND EQUIPMENT:
Computer and office equipment 7,471,563 7,471,563
Furniture, fixtures and leasehold improvements 391,756 391,756
------------ ------------
7,863,319 7,863,319
Less accumulated depreciation and amortization (7,159,941) (6,921,417)
------------ ------------
Net property and equipment 703,378 941,902
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$ 6,812,862 $ 12,010,347
============ ============
See accompanying notes to condensed consolidated financial statements.
4
DIGITIAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 30, June 30,
2002 2002
(unaudited)
------------- -------------
CURRENT LIABILITIES:
Notes payable (including related party notes payable of
$389,191 and $98,665) $ 897,245 $ 606,719
Current portion of capital lease obligations 39,385 44,674
Accounts payable 1,643,636 1,673,507
Merchant reserves 6,090,603 10,726,219
Accrued merchant payable 667,414 692,246
Settlements due to merchants 60,515 28,572
Accrued chargebacks 1,877,759 1,882,195
Other accrued liabilities 1,219,309 2,025,516
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Total current liabilities 12,495,866 17,679,648
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CAPITAL LEASE OBLIGATIONS, net of current portion -- 5,165
------------- -------------
COMMITMENTS AND CONTINGENCIES:
Redeemable Preferred Stock, $10,000 par value;
2,500,000 shares authorized, 360 shares
outstanding (liquidation preference of $3,600,000) 3,600,000 3,600,000
------------- -------------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value; 75,000,000 shares authorized, 75,000,000 and
46,043,019 shares outstanding, respectively
7,500 4,604
Additional paid-in capital 280,485,392 279,980,244
Warrants outstanding 1,363,100 1,363,100
Stock subscription (12,000) (12,000)
Accumulated deficit (291,126,996) (290,610,414)
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Total stockholders' deficit (9,283,004) (9,274,466)
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$ 6,812,862 $ 12,010,347
============= =============
See accompanying notes to condensed consolidated financial statements.
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
REVENUE $ 2,844,981 $ 4,642,895
COST OF REVENUE 2,209,602 2,996,205
------------ ------------
Gross margin 635,379 1,646,690
------------ ------------
OPERATING EXPENSES:
Depreciation and amortization 238,524 2,363,635
Selling, general and administrative 810,480 1,608,625
Research and development 91,843 133,391
Chargebacks and Fines -- 310,000
------------ ------------
Total operating expenses 1,140,847 4,415,651
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OPERATING LOSS (505,468) (2,768,961)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 980 41,597
Interest and other expense (12,094) (51,888)
------------ ------------
Other income (expense), net (11,114) (10,291)
------------ ------------
LOSS BEFORE INCOME TAXES (516,582) (2,779,252)
INCOME TAX -- --
------------ ------------
NET LOSS $ (516,582) $ (2,779,252)
------------ ------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE: $ (0.01) $ (0.07)
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 51,715,395 40,044,444
------------ ------------
See accompanying notes to condensed consolidated financial statements.
5
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
Increase (Decrease) in Cash
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (516,582) $(2,779,252)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 238,524 2,363,636
Changes in operating assets and liabilities:
Restricted Cash 4,933,251 7,794,688
Receivable from payment processors (189,483) 597,129
Receivable from settlement bank -- (1,221,503)
Deposit with payment processor -- (30,617)
Prepaid expenses and other current assets 174,617 48,665
Accounts payable (29,871) 700,703
Settlements due to merchants 31,943 (595,817)
Merchant reserves (4,635,616) (5,999,976)
Accrued merchant payable (24,832) (1,467,382)
Accrued chargebacks (4,436) 478,750
Other accrued liabilities (7,637) (106,857)
----------- -----------
Net cash used in operating activities (30,122) (217,833)
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CASH FLOWS FROM INVESTING ACTIVITIES: -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (10,454) (12,076)
Principal payments on borrowings -- (404,948)
----------- -----------
Net cash (used in) provided by financing activities (10,454) (417,024)
----------- -----------
NET DECREASE IN CASH (40,576) (634,857)
CASH AT BEGINNING OF PERIOD 47,492 712,264
----------- -----------
CASH AT END OF PERIOD $ 6,916 $ 77,407
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,085 $ 51,890
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
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 September 30, 2002
and for the three months ended September 30, 2002 and 2001 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, 2002. The results of operations for the three months ended September
30, 2002 are not necessarily indicative of the results to be expected for the
entire fiscal year ending June 30, 2003. Certain previously reported amounts
have been reclassified to conform to the current period presentation. These
reclassifications had no effect on the previously reported net loss.
During the three months ended September 30, 2002 the Company's operations
generated a loss of $516,582 including non-cash expense for depreciation. Since
its inception, our business has incurred significant losses, and as of September
30, 2002 had negative working capital of $6,386,382. As a result, there is
uncertainty about the Company's ability to continue as a going concern, which
was stated in our auditor's report on the Company's financial statements for the
2002 fiscal year. While management projects improved cash flows from operating
activities, there can be no assurance that management's projections will be
achieved. Management may also be required to pursue sources of additional
funding to meet marketing and expansion objectives. There can be no assurance
that additional funding will be available or, if available, that it will be
available on acceptable terms or in required amounts.
NOTE 2 - 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 anti-dilutive effect on net loss per common share.
Options to purchase 4,142,222 and 4,839,724 shares of common stock at weighted
average exercise prices of $0.14 and $2.59 per share as of September 30, 2002
and 2001, respectively; warrants to purchase 490,000 and 1,990,000 shares of
common stock at weighted average exercise prices of $10.02 and $7.20 per share
as of September 30, 2002 and 2001 respectively; 360 shares of Series D preferred
stock convertible to 11,999,880 shares of common stock at $3.33 per share at
September 30 2002, and 360 shares of Series A preferred stock convertible to
800,000 shares of common stock at $4.50 per share at September 30, 2001 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.
7
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to the options issued, 9,600,398 additional options to purchase
shares at weighted average exercise prices of $.06 have been approved but have
not been granted because of insufficient share capital as discussed in Note 5
below. The inclusion of these options would have been antidilutive, thereby
decreasing net loss per common share.
NOTE 3 - 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. During the fourth quarter of fiscal
2002 this agreement was amended. As amended, the agreement with SKNANB now
provides for the Company to receive a "buy rate" from SKNANB for all settlement
services. The Company negotiates with its merchants as to the rate it charges
for processing services, and is charged a "buy rate" by SKNANB for the
settlement services required. As amended, the agreement does not contain any
minimum purchase or processing commitment. The amended understanding is
documented in a letter from SKNANB outlining the details of the "buy rate".
Legal Matters
On October 8, 2002, Carib Venture Partners Ltd. a St. Kitts corporation
("Carib") filed suit against the Company in the Eastern Caribbean Supreme Court
located in St. Kitts. Carib's statement of claim alleges that the Company has
defaulted on a promissory note payable by the Company and in favor of Carib in
the face amount of $592,107, of which the outstanding amount allegedly due to
Carib is U.S. $105,571. The Company intends to vigorously defend this lawsuit.
On October 8, 2002, Cyber Consultants, Ltd., a St. Kitts corporation ("Cyber
Consultants") filed a lawsuit against the Company in the Eastern Caribbean
Supreme Court located in St. Kitts. Cyber Consultants' statement of claim
alleges that the Company is in breach of a contract between the Company and
Cyber Consultants and seeks an accounting under the contract and damages in an
unspecified amount. The Company intends to vigorously defend this lawsuit.
On September 23, 2002, Allstate Communications Holdings, Inc. ("Allstate"), of
Los Angeles, California, filed suit against DCTI in the California Superior
Court in Los Angeles. Allstate's complaint contains three separate claims
aggregating to approximately $392,000 plus interest, costs, and punitive damages
in unspecified amounts. Allstate's claims are based on theories of breach of
contract, conversion, and money had and received, and arise out of alleged
8
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
transactions between Allstate and DCTI, SecureBank and Cyber Clearing. The
Company believes the lawsuit is without merit and intends to answer the Allstate
complaint and otherwise vigorously defend the litigation.
On April 22, 2002, Cybernet Ventures, Inc. ("Cybernet") filed a complaint
against the Company in Los Angeles County Superior Court alleging that the
Company failed to provide certain information in response to requests for
information and, as a result, Equifax labeled Cybernet an excessive chargeback
merchant and listed it on the MasterCard International's Terminated Merchant
File, making card-acquiring banks, credit card processors, as well as Visa and
MasterCard, reluctant to do business with Cybernet. Cybernet also alleges that
in September 2001, Visa fined it for excessive chargebacks, despite an agreement
with the Company that it was to get a three-month grace period during which Visa
would not impose any fines. Cybernet further alleges that the Company
erroneously processed through the MasterCard and Visa systems credit card
transactions originated by other Internet merchants not affiliated with Cybernet
and that, as a result, MasterCard fined it $1.2 million and St. Kitts Bank
placed a hold on its merchant account. Finally, Cybernet alleges that the
Company improperly collected certain transaction fees. Cybernet's complaint
purports to state claims for fraud, intentional misrepresentation, negligent
misrepresentation, conversion, unjust enrichment and interference with economic
relations. In July 2002, the Company answered Cybernet's complaint. The Company
intends to vigorously defend this action.
On April 15, 2002, the Bank of Nevis International Limited ("Bank") filed a
claim against the Company and DataBank International Ltd. ("DataBank") in the
Eastern Caribbean Supreme Court in the High Court of Justice, Federation of
Saint Christopher and Nevis containing various allegations against the Company
and DataBank arising from a credit card transaction processing agreement
("Agreement"). In particular, the Bank of Nevis alleges that DataBank, which the
Company acquired in October 1999, and/or the Company breached the Agreement by
(1) failing to pay processing fees due under the Agreement (2) negligently
instructing the Bank to make refunds to merchants; (3) instructing the Bank to
pay merchants who were not its customers; (4) failing to ensure that the reserve
fund of each merchant was sufficient to cover any loss the Bank may suffer; (5)
not having proper or effective software to manage credit card transactions; (6)
delaying in instructing the Bank to make payments; (7) not carrying out proper
bookkeeping; (8) failing to maintain sufficient information for merchant
accounts; (9) providing inaccurate instructions to the Bank; and (10) failing to
provide timely instructions to the Bank. The claim also alleges that the Company
and DataBank breached an agreement with the Bank to be bound by the findings of
PricewaterhouseCoopers regarding the amounts owed by each party under the
Agreement. Finally, the Bank also alleges that DataBank had an obligation to
indemnify it against any losses associated with merchant processing. The claim
seeks $1.9 million in damages. The Company has responded to the Bank's
complaint. The Company intends to vigorously defend this action, although no
assurance can be given as to the ultimate outcome or resolution of this action.
On April 8, 2002, Next Generation Ltd., Prospect Creek, Ltd., Oxford Partners,
Ltd., and Carib Venture Partners, Ltd. ("Next Generation plaintiffs") filed a
complaint against the Company in the United States District Court for the
9
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Northern District of California alleging that the Company failed to register
restricted shares of the Company's common stock. The Next Generation plaintiffs
received the shares in the course of the Company's acquisition of DataBank in
October 1999 and claim that the Company was obligated to periodically register a
portion of those restricted shares with the SEC following the DataBank
transaction, but failed to do so. The Next Generation plaintiffs' complaint
purports to state claims for breach of contract, breach of the implied covenant
of good faith and fair dealing, unjust enrichment, negligent misrepresentation,
declaratory judgment, negligence and constructive fraud. The Company has filed
an answer in response to the Next Generation plaintiffs' complaint. The Company
intends to vigorously defend this action, although no assurance can be given as
to the ultimate outcome or resolution of this action.
In July 2001, Jim Thompson and Kenneth Nagel, both former owners of shares of
SecureBank.com, filed a complaint against the Company, SB.com and Bobbie Downey,
the Company's former Corporate Secretary and General Counsel, in the Circuit
Court of the Sixth Judicial Circuit in and for Pinellas County, State of Florida
Civil Division, alleging that the Company failed to register 500,000 shares of
the Company's stock pursuant to the parties' June 1, 1999 Registration Rights
Agreement. The complaint asserts claims for breach of contract, fraudulent
inducement, declaratory judgment and rescission. The Company removed the action
to the United States District Court for the Northern District of Florida. The
Company also filed a counterclaim for breach of contract against Thompson and
Nagel arising from promissory notes they made in favor of the Company and for
breach of fiduciary duty against Nagel for conduct he engaged in as a director
of the Company. In July 2002, the parties participated in a mediation, that lead
to settlement negotiations among the parties which have not resulted in any
settlement. In the event settlement negotiations are not successful, the Company
intends to vigorously defend this action. No assurance can be given, however, as
to the ultimate outcome or resolution of this action.
In November 2000, Ameropa Ltd. ("Ameropa") filed suit in the California Superior
Court in Los Angeles against the Company and Don Marshall, a former President
and director of the Company, alleging that Ameropa is the assignee of several
persons and entities which owned interests in DataBank. Ameropa claims that Mr.
Marshall breached a contract with its assignors to pay them their alleged share
of the DataBank purchase price. Ameropa has recently added as a defendant James
Egide, a former Chief Executive Officer and Chairman of the Company. On June 13,
2002, the court overruled the Company's demurrer to Ameropa's second cause of
action sustained the Company's demurrer to the twelfth cause of action in the
Third Amended Complaint. In July 2002, Ameropa filed its Fourth Amended
Complaint. The Company intends to answer the complaint and otherwise vigorously
defend the Ameropa Litigation. No assurance, however, can be given as to the
ultimate outcome or resolution of the Ameropa Litigation.
On July 10, 2000, American Credit Card Processing Corp. filed a lawsuit against
the Company in the United States District Court for the Southern District of New
York. The complaint in that matter includes claims for breach of contract, fraud
and negligent representation in connection with a merchant bankcard services
agreement. The Company filed and prevailed on a motion to dismiss for lack of
10
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
jurisdiction. American Credit Card subsequently has re-filed the complaint in
the United District Court for the District of Utah. The Company intends to
vigorously defend the claim, but will consider settlement opportunities. The
claim for damages is for approximately $422,720. The court in that matter has
order the Company to mediate the dispute, but no date has been set for the
mediation. No assurance can be given as to the ultimate outcome or resolution of
the American Credit Card Processing litigation.
On December 7, 2001, McGlen Micro, Inc. filed suit against the Company and
American Credit Card Processing Co. in the California Superior Court in Los
Angeles for breach of contract conversion, money had and received, and unfair
and deceptive business practices. The complaint seeks money damages of a minimum
of $164,323 plus interest arising out of allegedly unauthorized chargebacks. The
court has scheduled the matter for trial starting on August 28, 2003. The
Company intends to vigorously defend this matter and is preparing for trial.
On November 8, 2000, NetPro, Ltd. filed a lawsuit against the Company in Circuit
Court for Pinellas County, Florida. NetPro's complaint for injunctive relief
against DCTI seeks a temporary and permanent injunction enjoining the Company
from releasing NetPro's funds to ePayment Solutions, Inc. until an accounting
can be done, and then ordering the Company to release the funds directly to
NetPro. The amount in controversy is unspecified. Currently, NetPro has granted
DCTI an indefinite extension to file an answer to see if the case can be
settled. If it is not settled, the Company intends to vigorously defend itself
in the matter.
ePayment Solutions ("EPS") was a processing client of DataBank at the time of
the DataBank acquisition in 1999. Unknown to management of the Company, various
non-EPS owned merchants were sending credit card payments to EPS, which in turn
processed the transactions with the Company under the EPS name. EPS then
ostensibly was supposed to take its settlement funds and disburse them to its
various merchants. When DCTI management began reviewing its merchants for risk
assessment purposes, it discovered that EPS appeared to be engaging in the
conduct described above, which would constitute "factoring," a violation of
Visa/MasterCard regulations. DCTI also experienced relatively large chargebacks
in EPS's account and therefore larger reserves were withheld in anticipation of
future chargebacks and in preparation for merchant termination if EPS refused to
sign the merchants directly with DCTI/SKNANB and discontinue factoring. In
October 2000, the Company discontinued processing EPS transactions and froze all
held settlement funds and reserves. The Company was served with a number of
separate injunctions issued by the High Court of Justice, Federation of St.
Christopher and Nevis on behalf of several merchants that were doing business
with EPS, which injunctions prohibited the Company from disbursing the funds
held for EPS's account until further court order. The Company complied with
these injunctions. During the year ended June 30, 2002, several of the EPS
merchants applied to the St. Kitts court for reimbursement of funds held, most
of which petitions were granted. The Company has complied with all court orders
it has received to date pertaining to these funds. In May 2002, the last of the
funds were disbursed by court order to EPS merchants and the St. Kitts court
lifted the freeze and garnishment orders against the funds. The Company
anticipates no further involvement with respect to this matter.
11
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to the above matters, the Company is and has been 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. These claims, if determined adversely to the Company, could have a
material adverse effect on the Company's financial position, liquidity and
results of operations.
Other Contingencies
On July 23, 2002, Evan M. Levine resigned as the Company's interim Chief
Executive Officer and a member of its board of directors. Simultaneously with
his written notice of resignation, Mr. Levine submitted to the Company a claim
in writing for $240,000 in severance payments pursuant to an executive
employment agreement Mr. Levine alleges he had with the Company. Mr. Levine
asserted that the severance payment was triggered, notwithstanding his voluntary
resignation, because a change of control, as defined under the alleged
agreement, occurred in July 2002. Mr. Levine also threatened litigation if the
amounts he alleged owed to him were not paid. The Company, through counsel, has
disputed in writing any claim by Mr. Levine to severance payments under the
alleged agreement. Mr. Levine has responded further in writing, but has not, to
the Company's knowledge, taken legal action as of the date of this report. If
Mr. Levine pursues litigation in this matter, the Company would vigorously
defend.
The Company believes that it has adequately provided for all known financial
exposures, which are probable and reasonably estimatable.
NOTE 4 - Under funded Merchant Reserves
At September 30, 2002 and June 30, 2002, the Company has withheld $6,090,603 and
$10,726,219, respectively, from merchant settlements to cover potential
chargebacks and other adjustments that are reflected as merchant reserves in the
accompanying consolidated financial statements at September 30, 2002 and June
30, 2002, respectively. The decrease in reserves is a direct result of a
decrease in transaction volume. The Company maintains restricted cash balances
to fund the reserve liabilities. At September 30, 2002, the liabilities were
under funded by $345,668.
NOTE 5 - CAPITAL TRANSACTIONS.
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $0.0001 par
value preferred stock. The Company's Board of Directors is authorized, without
shareholder approval, to fix the rights, preferences, privileges and
restrictions of one or more series of the authorized shares of preferred stock.
12
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 3, 1999, the Company sold 360 shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock") and warrants to purchase a total of
800,000 shares of common stock for total consideration of $3,600,000 pursuant to
a Securities Purchase Agreement between the Company and the Purchasers (the
"Series A Purchase Agreement"). On January 22, 2002, as a result of a settlement
agreement, all series A Preferred Stock was surrendered, as described below.
Pursuant to the Series A Purchase Agreement, the Purchasers acquired 360 shares
of Series A Preferred Stock convertible into 800,000 shares of common stock and
five-year warrants to purchase an additional 800,000 shares of common stock. The
Preferred Stock was convertible into common stock at a price of $4.50 per share
of common stock. The initial exercise price for the warrants was $5.23 per
share, subject to adjustment on the six month anniversary of the closing, to the
lesser of the initial exercise price and the average price of the Company's
common stock during any five consecutive business days during the 22 business
days ending on such anniversary of the closing. The warrants are callable by the
Company if for 30 consecutive trading days the closing bid price of the
Company's common stock is at least two times the then-current exercise price.
The quoted market price of the Company's common stock on March 3, 1999 was $4.75
per share, which is greater than the $4.50 per share conversion price. The
intrinsic value of the beneficial conversion feature of $200,000 has been
reflected in the accompanying consolidated financial statements as a preferred
stock dividend.
On December 31, 2001, the Company issued one share of Series B Preferred Stock
to each current member of the Board of Directors. The issuance of the Series B
Preferred Stock was intended to create a mechanism whereby the Company's
shareholders were assured a fair process for electing members to the Company's
Board, including an opportunity to review accurate and fair proxy solicitations.
The terms of the Series B Preferred Stock allowed the holders, voting as one
class, to elect 4 directors at each annual or special meeting at which directors
are elected, or pursuant to any election of directors by written consent of the
shareholders. On January 15, 2002, all outstanding shares of Series B Preferred
Stock issued on December 31, 2001 were converted into four shares of common
stock.
On January 22, 2002, the Company entered into an agreement with Brown Simpson
Partners I, Ltd. ("Brown Simpson"), the holder of all of the then outstanding
Series A Preferred Stock, pursuant to which Brown Simpson whereby, in exchange
for 360 shares of Series D Preferred Stock, Brown Simpson agreed to exchange the
Series A Preferred Stock , all common stock purchase warrants issued to it, and
all registration, anti-dilution or participation rights it had under any
agreements for 360 shares of the Company's Series D Preferred Stock. In
addition, Brown Simpson agreed to release the Company from any liability arising
from claims it had asserted against the Company in connection with the
acquisition of DataBank International Ltd. and the delisting of the Company's
stock by Nasdaq. Each share of Series D Preferred Stock issued to Brown Simpson
has a stated value of $10,000, and is presently convertible into 33,333 shares
of common stock. There was no intrinsic value associated with the conversion
feature at the commitment date, which was January 22, 2002.
13
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company does not presently have authorized and unissued common stock to
enable conversions of preferred stock, warrants, options or other instruments
convertible into or exercisable for common stock.
Common Stock Issuances and Other Transactions
In October 2001, the Company issued 3,500,000 shares of its common stock, in
connection with the settlement of a registration rights lawsuit.
In October 2001, the Company issued 1,000,000 shares of its common stock to
Brown Simpson as inducement for its exchange of Series A Preferred Stock for
Series D Preferred Stock.
In January 2002, the Company issued four shares of its common stock, one share
to each of its then current board of directors, in connection with their
conversion of Series B preferred stock.
In April 2002 the Company issued 1,428,571 shares of its common stock to settle
a claim for breach of a settlement agreement executed in March 2002.
Marshall Settlement and Conversion
On October 16, 2001, the Company entered into a Settlement and Release Agreement
(the "Settlement Agreement") with Don Marshall, a shareholder of DataBank and a
former President and director of the Company. By the Settlement Agreement, Mr.
Marshall and the Company settled claims Mr. Marshall had asserted against the
Company for breach of a registration rights agreement executed in connection
with the DataBank acquisition and for breach of a prior consulting agreement
between Mr. Marshall and the Company. As part of that settlement, the Company
issued to Mr. Marshall 3,500,000 shares of common stock and agreed to pay Mr.
Marshall $800,000 in quarterly installments (the Cash Payment"), beginning with
the quarter ending December 31, 2001, based upon a percentage of the Company's
earnings before taxes, depreciation and amortization, if any, during each
quarter. The Company agreed to make all payments by October 2004 with annual
interest at 15% accruing beginning in 2003. To assure payment, the Company also
executed a confession of judgment that could be entered upon default under the
Settlement Agreement, in the amount of $7,500,000.
In February 2002, Mr. Marshall asserted that the Company had defaulted with
respect to its obligation to pay the Cash Payment because the Company failed to
remit to him the required quarterly payment after due notice and after the
expiration of the cure period specified in the Settlement Agreement. In order to
resolve that dispute, the Company and Mr. Marshall entered into Amendment No. 1
to Settlement Agreement, dated March 18, 2002, pursuant to which, among other
things, (i) Mr. Marshall waived any prior default by the Company with respect to
the Cash Payment obligation under the Settlement Agreement, (ii) the Company
paid to Mr. Marshall a concession fee of $136,000, of which $36,000 was paid on
March 20, 2002 and $100,000 was paid by delivery to Mr. Marshall of 1,428,571
additional shares of the Company's common stock, (iii) the Company and Mr.
Marshall agreed to restructure the payment of the Cash Payment so it was payable
without interest at the rate of $3,500 on the fifth day and twentieth day of
14
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
each month (for an aggregate monthly payment of $7,000) commencing with May 5,
2002 and until March 31, 2006, when the balance would be payable in full, (iv)
the Company agreed that upon an event of default as defined in the Amendment,
including any default in the payment by the Company of the Cash Payment
according to the modified schedule, any unpaid balance of the Cash Payment would
begin to accrue simple interest at the rate of 1.5% per month until paid in
full, and Mr. Marshall would be able to convert all or any portion of the then
unpaid balance of the Cash Payment plus any accrued and unpaid interest into the
Company's common stock at the lesser of (A) $0.07 per share, or (B) the average
closing bid price of the Company's common stock for the 20 trading days
immediately preceding the date of such conversion.
The Company failed to pay Mr. Marshall as required on May 5, May 20 and June 5,
2002. Mr. Marshall provided written notice as required by the Amendment
Agreement on June 19, 2002, and DCTI failed to cure such default with the time
allowed. On June 25, 2002, therefore, an Event of Default occurred. On July 8,
2002, Mr. Marshall notified DCTI that he had converted a total of $525,569.52 of
the outstanding cash amount under the Amendment Agreement into 29,946,981 shares
of DCTI's common stock. The Company subsequently notified Mr. Marshall that it
had understated the number of shares of common stock issued and outstanding as
of the date of his conversion, and therefore he was allowed to convert only
$508,044.91 into 28,948,428 shares of common stock. Certificates representing
these shares were issued to Nautilus Management Ltd., a company wholly owned by
Mr. Marshall, on September 12, 2002.
Since the conversion, the Company has paid a total of $ 10,500 of the Cash
Payment to Mr. Marshall $1,429 of which applied to principal and $9,071 paid as
interest, leaving an unpaid balance as of the date of this report of $290,526,
which amount continues to be convertible into common stock at Mr. Marshall's
option, subject to the availability of sufficient authorized and unissued shares
of common stock.
As a result of his conversion, coupled with his acquisition of certain proxy
rights, Mr. Marshall acquired actual ownership or voting control of a total of
37,426,802 shares of the Company's 75,000,000 issued and outstanding shares of
common stock, representing 49.9% of the total voting power.
NOTE 6 - STOCK-BASED COMPENSATION
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans as they relate to employees and directors. Historically, the
Company's stock options have been accounted for using fixed plan accounting. The
option grants permit various exercise alternatives, including certain cashless
exercise provisions. Through fiscal 1999, the Company's experience indicated
that substantially all cashless exercises could have been effected through the
use of mature shares and therefore fixed plan accounting was appropriate. Due to
the Company's recent acquisitions and growth, options have been granted to more
employees who do not hold mature shares of the Company's common stock and
therefore the Company has determined that these options should be accounted for
using variable plan accounting. Under variable plan accounting, changes, either
increases or decreases, in the market price of the Company's common stock
results in a change in the measurement of compensation. Compensation is measured
as the difference between the market price and the option exercise price and is
15
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
amortized to expense over the vesting period. During the year ended June 30,
2000, the Company recorded $649,300 of compensation expense related to these
variable awards. During the year ended June 30, 2001, as a result of a decrease
in the Company's stock price, the $649,300 recorded during the year ended June
30, 2000 was reversed. During the three months ended September 30, 2002, the
company did not record any expense associated with these awards as their
intrinsic value was zero.
In February 2001, the Company repriced approximately 1,069,000 employee options
from an exercise price of $2.91 to $0.49. These options were already accounted
for using variable plan accounting.
In October 2001, the Company repriced approximately 2,760,000 employee options
to $0.096. These options were already accounted for using variable plan
accounting.
During fiscal 2001, the Company granted the then Chairman of the Board of
Directors 300,000 options with an exercise price of $4.50, which was the market
price of the stock on the date of the grant. Since this grant exceeded the
typical grant for other Board members, the Company has recorded compensation
expense determined using the Black Scholes Method. Accordingly a non-cash
expense in the amount of $895,776 has been recorded.
During fiscal 2002, the Company recorded $160,000 of expense related to the
vested portion of 12,392,153 options granted to non-employee directors for
services rendered in addition to those rendered as directors. As of June 30,
2002 and September 30, 2002 5,519,653 options had been approved for granting but
not granted because of insufficient authorized common stock. During the three
month period ended September 30, 2002, no additional expense was recognized for
these grants.
During the three months ended September 30, 2002, the Company granted options to
purchase 2,000,000 shares to the Company's directors. The grant of these options
is specifically conditioned on a future increase in the Company's authorized
capital.
NOTE 7 - AGREEMENT WITH M2, INC.
On September 30, 2002, the Company entered into an agreement (the "Provider
Agreement") with M2, Inc., a Florida corporation ("M2") pursuant to which the
Company engaged M2 to manage the Company's portfolio payment processing and
technology business operations on an outsourced basis. Under the Provider
Agreement, M2 is responsible for the operation of substantially all of the
Company's ongoing business operations, exclusive of administrative, financial
and executive functions, which will continue to be located at the Company's Salt
Lake City, Utah offices. The term of the Provider Agreement is five years. M2's
services under the Provider Agreement are to be subject at all times to the
oversight and approval of the Company's Chief Executive Officer, who, in turn,
is subject to the oversight of the Company's board of directors.
In return for its services under the Provider Agreement, the Company is required
to pay M2 a monthly fee (the "Monthly Fee") equal to 115% of M2's actual costs
and expenses incurred in connection with its performance under the Provider
Agreement, provided that the Company shall not be required to pay, in cash, all
or any portion of the Monthly Fee if the Company does not have Free Cash Flow,
16
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
as defined in the Provider Agreement sufficient to make such payments. Free Cash
Flow is defined as total cash receipts from the Company's business for a given
month, less Operating Outlays. Operating Outlays are defined as ordinary
expenses actually paid by the Company plus payables paid, plus expenses accrued
in the ordinary course of the Company's business, but excluding (i) any Monthly
Fees paid to M2, (ii) any payments of Monthly Fees due to M2 but deferred
because of insufficient Free Cash Flow, and interest thereon, (iii) any interest
payments relating to any loans entered into by the Company or any of its
subsidiaries prior to the date of the Provider Agreement, (iv) any interest
payments relating to any payables or accrued expenses incurred by the Company or
any of its subsidiaries prior to the beginning of such month, (v) the payment of
any liabilities other than payables or accrued expenses incurred in the ordinary
course of business, (vi) payments made to any officer or director of the Company
or any of its subsidiaries or any of their affiliates for anything other than
(a) normal salary in amount equal to that in effect for the month prior to the
date hereof and (b) reimbursement of ordinary business expenses in a manner
consistent with prior practice, and (vii) payments for the acquisition of
capital equipment. If Monthly Fees are not paid because of insufficient Free
Cash Flow, the remaining unpaid portion of the Monthly Fee shall be paid by the
Company (A) in cash within 30 days, or (B) by delivery of a demand note in the
unpaid amount and bearing interest at 8% per annum, which demand note must be
paid out of future Free Cash Flow in excess of amounts necessary to pay current
Monthly Fees.
In addition to Monthly Fees, under the Provider Agreement, M2 is entitled to
monthly payments of "Bonus Compensation" equal to 90% of "Adjusted Free Cash
Flow" which is equal to Free Cash Flow less Monthly Fees paid to M2 or payments
of deferred Monthly Fees. All of the Company's payment obligations to M2 under
the Provider Agreement are secured by a grant of a security interest in favor of
M2 covering all of the Company's tangible and intangible assets, including its
software. Moreover, although the Company has the right to terminate the Provider
Agreement at any time, if the Company terminates it without cause, as defined
therein, at any time during the initial five year term, the Company thereby
would grant to M2 a perpetual, nonexclusive license to sell and sublicense any
of the Company's proprietary software products.
As additional consideration for the execution of the Provider Agreement, M2 has
agreed to provide $500,000 of debt financing, which is anticipated to involve
the issuance by the Company of debentures to M2, although definitive
documentation for such financing is not complete as of the date of this report,
and the financing is not therefore available.
NOTE 8 - SUBSEQUENT EVENTS
On October 8, 2002, Tom Tesmer resigned as interim Chief Executive Officer, and
Lynn J. Langford was named Chief Executive Officer and Chief Financial Officer.
On October 24, 2002 Mr. Langford resigned as Chief Executive Officer, and Mr.
Don Marshall was named Chief Executive Officer. Mr. Langford continues as Chief
Financial Officer. On November 4, 2002, Mr. Tesmer resigned as a director of the
Company.
During October 2002, a disagreement arose between the Company's European
processing partner and two of the Company's customers. As a result of the
disagreement, those customers discontinued processing at the end of October
2002, which is likely to negatively impact the Company's revenue. The Company is
working to provide an alternative processing solution to those customers.
17
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that an entity recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that entities reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that entities no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires entities to complete a transitional
goodwill impairment test six months from the date of adoption. Entities are also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2002, all goodwill had been written down to
zero. As the carrying value of goodwill is zero, the adoption of the new
standard will not have a material impact on the results of the Company's
operations or financial position.
In August 2001, the FASB issued SFAS No.144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement, which is effective for fiscal
years beginning after December 15, 2001, superseded SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The statement retains the previously existing accounting requirements related to
the recognition and measurement of the impairment of long-lived assets to be
held and used while expanding the measurement requirements of long-lived assets
to be disposed of by sale to include discontinued operations. It also expands
the previous reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is classified as held
for sale. The Company does not expect this statement to have a material impact
on its financial position or results of operations upon adoption.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
18
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
No. 145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. Adoption of this standard will not have any immediate effect on the
Company's consolidated financial statements. The Company will apply this
guidance prospectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized.
19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from expectations. In addition to matters affecting the
Company's industry generally, factors which could cause actual results to differ
from expectations include, but are not limited to, the risks that are described
in the Company's report on form 10-K for the fiscal year ended June 30, 2002,
under the heading "Forward Looking Statements and Certain Risks".
Overview
Because of changes to the Company's business and operations resulting from
mergers during recent years, the Company has a limited operating history upon
which an evaluation of the Company can be based, and its prospects are subject
to, among others, the risks and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products and
services. Specifically, such risks include, without limitation, the dependence
on continued growth in use of the Internet as a reliable medium for commercial
transactions, the ability of the Company to effectively integrate the technology
and operations of acquired businesses or technologies with its operations, the
ability to maintain continuing expertise in proprietary and third-party
technologies, the timing of introductions of new services, the pricing policies
of the Company's competitors and suppliers and the ability to identify, attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks or that the Company will
achieve or sustain profitability. The limited operating history of the Company
and the uncertain nature of the markets addressed by the Company make the
prediction of future results of operations difficult or impossible.
During the three months ended September 30, 2002 the Company's operations
generated a loss of $516,582 including non-cash expense for depreciation. Since
its inception, our business has incurred significant losses, and as of September
30, 2002 had negative working capital of $6,386,382. As a result, there is
uncertainty about the Company's ability to continue as a going concern, which
was stated in our auditor's report on the Company's financial statement for the
2002 fiscal year.
Management projects that there will be sufficient cash flows from operating and
financing activities during the next twelve months to provide capital for the
Company to sustain its operations; however, there can be no assurance that
management's projections will be achieved or that capital from financing through
private or commercial credit or through sale of the Company's securities will be
available when, and in the amounts required by the Company. If additional
required capital is not available when in the amounts required, the Company will
have to curtail some operations or seek protections under bankruptcy laws.
20
Critical Accounting Policies
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make estimates and
assumptions. We believe that the following are some of the more critical
judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operations.
Revenue Recognition. Substantially all of our revenues are derived from
processing credit card transactions. Our revenue is earned and recognized as
each transaction is processed.
Goodwill, Intangibles and Other Long-Lived Assets. Property, plant and
equipment, intangibles and certain other long-lived assets are depreciated or
amortized over their useful lives. Useful lives are based on management's
estimates of the period that the assets will generate revenue. Intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company's
evaluation considers non-financial data such as changes in the operating
environment and business strategy, competitive information, market trends and
operating performance. The Company recorded write-offs of goodwill of
$12,135,383, and $156,123,113 during the years ended June 30, 2002 and June 30,
2001, respectively. In addition, the Company recorded a write-off of prepaid
software license of $3,933,447 during the year ended June 30, 2002.
DCTI, DCII, Access Services, SB.com, DataBank and CaribCommerce are collectively
referred to herein as the "Company". All significant intercompany accounts and
transactions have been eliminated in consolidation.
Results of Operations
Three months ended September 30, 2002 compared with three months ended September
30, 2001.
Revenue
Revenue for the three months ended September 30, 2002 was $2,844,981 as compared
to $4,642,895 for the three months ended September 30, 2001. During the three
months ended September 30, 2002, substantially all revenues were derived from
payment processing activities, including $81,262 of revenues related to fees
earned on the processing of chargebacks. During the three months ended September
30, 2001, substantially all revenues were derived from payment processing
activities, including $477,893 of revenues related to fees earned on the
processing of chargebacks. The decrease in revenues is primarily due to fewer
merchants utilizing the Company's processing services.
21
Cost of Revenue
Cost of revenue includes amounts paid to banks and processors. Cost of revenue
for the three months ended September 30, 2002 was $2,209,602 or 77.7% of
revenue. For the three months ended September 30, 2001, cost of revenue was
$2,996,205 or 64.5% of revenue. The increase of cost of revenue as a percentage
of revenue is due an increase in the percentage of our merchant's transaction
dollar volume paid to banks and processors.
Operating Expenses
Depreciation and amortization expense decreased 89.9% to $238,524 during the
three months ended September 30, 2002 from $2,363,635 during the three months
ended September 30, 2001. The decrease in depreciation and amortization expense
was due to the decrease in amortization of goodwill as a result of the
$12,135,383 of goodwill impairment write-down during fiscal 2002.
Selling, general and administrative expense decreased 49.6% to $810,481 during
the three months ended September 30, 2002 from $1,608,625 during the three
months ended September 30, 2001. The decrease in selling, general and
administrative expense was primarily due to the reductions in work force during
fiscal 2002.
Research and development expense decreased 31.1% to $91,843 during the three
months ended September 30, 2002 from $133,391 during the three months ended
September 30, 2001. The decrease in research and development expense was due to
the reduction of development staff during fiscal 2002.
The Company's variable option plan did not create any non-cash compensation
adjustment during the three months ended September 30, 2002 or September 2001 as
all outstanding options maintained exercise prices greater than the quoted stock
price during the three months ended and as of September 30, 2002 and September
30, 2001 respectively.
Our income tax benefit is zero as we fully provide for our deferred tax assets
as realization of these benefits is not deemed to be more likely than not.
During three months ended September 30, 2001, the Company incurred fines and
added to the reserve for uncollectible chargebacks. No such fines or additions
to reserves were incurred or deemed necessary during the three months ended
September 30, 2002.
Liquidity and Capital Resources
The Company likely will need to raise additional capital to finance ongoing
operations during the next fiscal year, research and development and future
plans for expansion. Adequate funds for these and other purposes on terms
acceptable to the Company, whether through additional equity financing
commercial or private debt or other sources, may not be available when needed or
may result in significant dilution to existing stockholders. Furthermore, the
Company's losses and lack of tangible assets to pledge as security for debt
financing could prevent the Company from obtaining traditional bank or similar
22
debt financing. Failure to obtain adequate financing when and in the amounts
required would have a material adverse effect on the Company and could result in
cessation of the Company's business and could force the Company to seek
protection under bankruptcy laws. Since its inception, our business has incurred
significant losses, and as of September 30, 2002, had an accumulated deficit of
$291,126,996. As a result, there is substantial uncertainty about the Company's
ability to continue as a going concern, which was stated in our auditor's report
on the Company's financial statements for the 2002 fiscal year. The Company
expects to incur operating losses for the foreseeable future. We cannot be sure
that the Company will generate sufficient revenues to ever achieve or sustain
profitability.
On September 30, 2002, the Company entered into an agreement (the "Provider
Agreement") with M2, Inc., a Florida corporation ("M2"), pursuant to which the
Company engaged M2 to manage the Company's portfolio payment processing and
technology business operations on an outsourced basis. Under the Provider
Agreement, M2 is responsible for the operation of substantially all of the
Company's ongoing business operations, exclusive of administrative, financial
and executive functions, which will continue to be located at DCTI's Salt Lake
City, Utah offices. The initial term of the Provider Agreement is five years.
M2's services under the Provider Agreement are to be subject at all times to the
oversight and approval of the Company's Chief Executive Officer, who, in turn,
is subject to the oversight of the Company's board of directors.
In return for its services under the Provider Agreement, the Company is required
to pay M2 a monthly fee (the "Monthly Fee") equal to 115% of M2's actual costs
and expenses incurred in connection with its performance under the Provider
Agreement, provided that the Company shall not be required to pay, in cash, all
or any portion of the Monthly Fee if the Company does not have "Free Cash Flow",
as defined in the Provider Agreement sufficient to make such payments. Free Cash
Flow is defined as total cash receipts from the Company's business for a given
month, less Operating Outlays. Operating Outlays are defined as ordinary
expenses actually paid by the Company plus payables paid, plus expenses accrued
in the ordinary course of the Company's business, but excluding (i) any Monthly
Fees paid to M2, (ii) any payments of Monthly Fees due to M2 but deferred
because of insufficient Free Cash Flow, and interest thereon, (iii) any interest
payments relating to any loans entered into by the Company or any of its
subsidiaries prior to the date of the Provider Agreement, (iv) any interest
payments relating to any payables or accrued expenses incurred by the Company or
any of its subsidiaries prior to the beginning of such month, (v) the payment of
any liabilities other than payables or accrued expenses incurred in the ordinary
course of business, (vi) payments made to any officer or director of the Company
or any of its subsidiaries or any of their affiliates for anything other than
(a) normal salary in amount equal to that in effect for the month prior to the
date hereof and (b) reimbursement of ordinary business expenses in a manner
consistent with prior practice, and (vii) payments for the acquisition of
capital equipment. If Monthly Fees are not paid because of insufficient Free
Cash Flow, the remaining unpaid portion of the Monthly Fee shall be paid by the
Company (A) in cash within 30 days, or (B) by delivery of a demand note for the
unpaid amount and bearing interest at 8% per annum, which demand note must be
paid out of future Free Cash Flow in excess of amounts necessary to pay current
Monthly Fees.
23
In addition to Monthly Fees, under the Provider Agreement, M2 is entitled to
monthly payments of "Bonus Compensation" equal to 90% of "Adjusted Free Cash
Flow" which is equal to Free Cash Flow less Monthly Fees paid to M2 or payments
of deferred Monthly Fees. All of the Company's payment obligations to M2 under
the Provider Agreement are secured by a grant of a security interest in favor of
M2 covering all of the Company's tangible and intangible assets, including its
software and the data centers. Moreover, although the Company has the right to
terminate the Provider Agreement at any time, if the Company terminates it
without cause, as defined therein, at any time during the initial five year
term, the Company thereby would grant to M2 a perpetual, nonexclusive license to
sell and sublicense any of the Company's proprietary technologies.
As additional consideration for the execution of the Provider Agreement, M2 has
agreed to provide $500,000 of debt financing, which is anticipated to involve
the issuance by the Company of debentures to M2, although definitive
documentation for such financing is not complete as of the date of this report,
and the financing is not therefore available. There can be no assurance when
such financing will be available or whether it will be available at all.
The Company believes that the Provider Agreement may affect liquidity positively
by (i) increasing sales volume by introducing new payment processing and
portfolio business; (ii) reducing expenses by streamlining and outsourcing some
management, sales, marketing and technology functions; and (iii) allowing the
Company essentially to defer the payment of general operating expenses until
Free Cash Flow is sufficient to make payments. There can be no assurance that
any of these benefits will materialize.
At September 30, 2002 and June 30 2002, the Company has withheld $6,090,603 and
$10,726,219, respectively, from merchant settlements to cover potential
chargebacks and other adjustments that are reflected as merchant reserves in the
accompanying consolidated financial statements at September 30, 2002 and June
30, 2002, respectively. The decrease in reserves is a direct result of a
decrease in transaction volume. The Company maintains restricted cash balances
to fund the reserve liabilities. At September 30, 2002, the liabilities were
under funded by $345,668.
Operating activities used $30,122 in cash during the three months ended
September 30, 2002 compared to $217,833 during the three months ended September
30, 2001. The net loss of $516,582 incurred in during the three months ended
2002 was offset, in part, by non-cash depreciation of $238,523. Increase from
the decrease in restricted cash was offset, in large part, by decrease in the
merchant reserve liability.
During the three months ended September 30, 2001, the net loss of $2,779,252 was
offset, in large part, by non-cash depreciation, and amortization of $2,363,636.
The decrease in operating cash flows is primarily due to the increase in
restricted cash, partially offset by a decrease in the merchant reserve
liability.
During the three months ended September 30, 2002, $10,454 was paid as principal
repayment of capital lease obligations. During the three months ended September
30, 2001, $404,948 and $12,076 was paid as principal repayment of notes payable
and capital lease obligations, respectively
24
Item 4. Controls and Procedures.
Based on their evaluation, as of a date within 90 days of the filing
date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 8, 2002, Carib Venture Partners Ltd. a St. Kitts corporation
("Carib") filed suit against the Company in the Eastern Caribbean Supreme Court
located in St. Kitts. Carib's statement of claim alleges that the Company has
defaulted on a promissory note payable by the Company and in favor of Carib in
the face amount of $592,107, of which the outstanding amount allegedly due to
Carib is U.S. $105,571. The Company intends to vigorously defend this lawsuit.
On October 8, 2002, Cyber Consultants, Ltd., a St. Kitts corporation ("Cyber
Consultants") filed a lawsuit against the Company in the Eastern Caribbean
Supreme Court located in St. Kitts. Cyber Consultants' statement of claim
alleges that the Company is in breach of a contract between the Company and
Cyber Consultants and seeks an accounting under the contract and damages in an
unspecified amount. The Company intends to vigorously defend this lawsuit.
On September 23, 2002, Allstate Communications Holdings, Inc. ("Allstate"), of
Los Angeles, California, filed suit against DCTI in the California Superior
Court in Los Angeles. Allstate's complaint contains three separate claims
aggregating to approximately $392,000 plus interest, costs, and punitive damages
in unspecified amounts. Allstate's claims are based on theories of breach of
contract, conversion, and money had and received, and arise out of alleged
transactions between Allstate and DCTI, SecureBank and Cyber Clearing. The
Company believes the lawsuit is without merit and intends to answer the Allstate
complaint and otherwise vigorously defend the litigation.
On April 22, 2002, Cybernet Ventures, Inc. ("Cybernet") filed a complaint
against the Company in Los Angeles County Superior Court alleging that the
Company failed to provide certain information in response to requests for
information and, as a result, Equifax labeled Cybernet an excessive chargeback
merchant and listed it on the MasterCard International's Terminated Merchant
File, making card-acquiring banks, credit card processors, as well as Visa and
MasterCard, reluctant to do business with Cybernet. Cybernet also alleges that
in September 2001, Visa fined it for excessive chargebacks, despite an agreement
25
with the Company that it was to get a three-month grace period during which Visa
would not impose any fines. Cybernet further alleges that the Company
erroneously processed through the MasterCard and Visa systems credit card
transactions originated by other Internet merchants not affiliated with Cybernet
and that, as a result, MasterCard fined it $1.2 million and St. Kitts Bank
placed a hold on its merchant account. Finally, Cybernet alleges that the
Company improperly collected certain transaction fees. Cybernet's complaint
purports to state claims for fraud, intentional misrepresentation, negligent
misrepresentation, conversion, unjust enrichment and interference with economic
relations. In July 2002, the Company answered Cybernet's complaint. The Company
intends to vigorously defend this action.
On April 15, 2002, the Bank of Nevis International Limited ("Bank") filed a
claim against the Company and DataBank International Ltd. ("DataBank") in the
Eastern Caribbean Supreme Court in the High Court of Justice, Federation of
Saint Christopher and Nevis containing various allegations against the Company
and DataBank arising from a credit card transaction processing agreement
("Agreement"). In particular, the Bank of Nevis alleges that DataBank, which the
Company acquired in October 1999, and/or the Company breached the Agreement by
(1) failing to pay processing fees due under the Agreement (2) negligently
instructing the Bank to make refunds to merchants; (3) instructing the Bank to
pay merchants who were not its customers; (4) failing to ensure that the reserve
fund of each merchant was sufficient to cover any loss the Bank may suffer; (5)
not having proper or effective software to manage credit card transactions; (6)
delaying in instructing the Bank to make payments; (7) not carrying out proper
bookkeeping; (8) failing to maintain sufficient information for merchant
accounts; (9) providing inaccurate instructions to the Bank; and (10) failing to
provide timely instructions to the Bank. The claim also alleges that the Company
and DataBank breached an agreement with the Bank to be bound by the findings of
PricewaterhouseCoopers regarding the amounts owed by each party under the
Agreement. Finally, the Bank also alleges that DataBank had an obligation to
indemnify it against any losses associated with merchant processing. The claim
seeks $1.9 million in damages. The Company has responded to the Bank's
complaint. The Company intends to vigorously defend this action, although no
assurance can be given as to the ultimate outcome or resolution of this action.
On April 8, 2002, Next Generation Ltd., Prospect Creek, Ltd., Oxford Partners,
Ltd., and Carib Venture Partners, Ltd. ("Next Generation plaintiffs") filed a
complaint against the Company in the United States District Court for the
Northern District of California alleging that the Company failed to register
restricted shares of the Company's common stock. The Next Generation plaintiffs
received the shares in the course of the Company's acquisition of DataBank in
October 1999 and claim that the Company was obligated to periodically register a
portion of those restricted shares with the SEC following the DataBank
transaction, but failed to do so. The Next Generation plaintiffs' complaint
purports to state claims for breach of contract, breach of the implied covenant
of good faith and fair dealing, unjust enrichment, negligent misrepresentation,
declaratory judgment, negligence and constructive fraud. The Company has filed
an answer in response to the Next Generation plaintiffs' complaint. The Company
intends to vigorously defend this action, although no assurance can be given as
to the ultimate outcome or resolution of this action.
26
In July 2001, Jim Thompson and Kenneth Nagel, both former owners of shares of
SecureBank.com, filed a complaint against the Company, SB.com and Bobbie Downey,
the Company's former Corporate Secretary and General Counsel, in the Circuit
Court of the Sixth Judicial Circuit in and for Pinellas County, State of Florida
Civil Division, alleging that the Company failed to register 500,000 shares of
the Company's stock pursuant to the parties' June 1, 1999 Registration Rights
Agreement. The complaint asserts claims for breach of contract, fraudulent
inducement, declaratory judgment and rescission. The Company removed the action
to the United States District Court for the Northern District of Florida. The
Company also filed a counterclaim for breach of contract against Thompson and
Nagel arising from promissory notes they made in favor of the Company and for
breach of fiduciary duty against Nagel for conduct he engaged in as a director
of the Company. In July 2002, the parties participated in a mediation, that lead
to settlement negotiations among the parties which have not resulted in any
settlement. In the event settlement negotiations are not successful, the Company
intends to vigorously defend this action. No assurance can be given, however, as
to the ultimate outcome or resolution of this action.
In November 2000, Ameropa Ltd. ("Ameropa") filed suit in the California Superior
Court in Los Angeles against the Company and Don Marshall, a former President
and director of the Company, alleging that Ameropa is the assignee of several
persons and entities which owned interests in DataBank. Ameropa claims that Mr.
Marshall breached a contract with its assignors to pay them their alleged share
of the DataBank purchase price. Ameropa has recently added as a defendant James
Egide, a former Chief Executive Officer and Chairman of the Company. On June 13,
2002, the court overruled the Company's demurrer to Ameropa's second cause of
action sustained the Company's demurrer to the twelfth cause of action in the
Third Amended Complaint. In July 2002, Ameropa filed its Fourth Amended
Complaint. The Company intends to answer the complaint and otherwise vigorously
defend the Ameropa Litigation. No assurance, however, can be given as to the
ultimate outcome or resolution of the Ameropa Litigation.
On July 10, 2000, American Credit Card Processing Corp. filed a lawsuit against
the Company in the United States District Court for the Southern District of New
York. The complaint in that matter includes claims for breach of contract, fraud
and negligent representation in connection with a merchant bankcard services
agreement. The Company filed and prevailed on a motion to dismiss for lack of
jurisdiction. American Credit Card subsequently has re-filed the complaint in
the United District Court for the District of Utah. The Company intends to
vigorously defend the claim, but will consider settlement opportunities. The
claim for damages is for approximately $422,720. The court in that matter has
order the Company to mediate the dispute, but no date has been set for the
mediation. No assurance can be given as to the ultimate outcome or resolution of
the American Credit Card Processing litigation.
On December 7, 2001, McGlen Micro, Inc. filed suit against the Company and
American Credit Card Processing Co. in the California Superior Court in Los
Angeles for breach of contract conversion, money had and received, and unfair
and deceptive business practices. The complaint seeks money damages of a minimum
of $164,323 plus interest arising out of allegedly unauthorized chargebacks. The
court has scheduled the matter for trial starting on August 28, 2003. The
Company intends to vigorously defend this matter and is preparing for trial.
27
On November 8, 2000, NetPro, Ltd. filed a lawsuit against the Company in Circuit
Court for Pinellas County, Florida. NetPro's complaint for injunctive relief
against DCTI seeks a temporary and permanent injunction enjoining the Company
from releasing NetPro's funds to ePayment Solutions, Inc. until an accounting
can be done, and then ordering the Company to release the funds directly to
NetPro. The amount in controversy is unspecified. Currently, NetPro has granted
DCTI an indefinite extension to file an answer to see if the case can be
settled. If it is not settled, the Company intends to vigorously defend itself
in the matter.
ePayment Solutions ("EPS") was a processing client of DataBank at the time of
the DataBank acquisition in 1999. Unknown to management of the Company, various
non-EPS owned merchants were sending credit card payments to EPS, which in turn
processed the transactions with the Company under the EPS name. EPS then
ostensibly was supposed to take its settlement funds and disburse them to its
various merchants. When DCTI management began reviewing its merchants for risk
assessment purposes, it discovered that EPS appeared to be engaging in the
conduct described above, which would constitute "factoring," a violation of
Visa/MasterCard regulations. DCTI also experienced relatively large chargebacks
in EPS's account and therefore larger reserves were withheld in anticipation of
future chargebacks and in preparation for merchant termination if EPS refused to
sign the merchants directly with DCTI/SKNANB and discontinue factoring. In
October 2000, the Company discontinued processing EPS transactions and froze all
held settlement funds and reserves. The Company was served with a number of
separate injunctions issued by the High Court of Justice, Federation of St.
Christopher and Nevis on behalf of several merchants that were doing business
with EPS, which injunctions prohibitied the Company from disbursing the funds
held for EPS's account until further court order. The Company complied with
these injunctions. During the year ended June 30, 2002, several of the EPS
merchants applied to the St. Kitts court for reimbursement of funds held, most
of which petitions were granted. The Company has complied with all court orders
it has received to date pertaining to these funds. In May 2002, the last of the
funds were disbursed by court order to EPS merchants and the St. Kitts court
lifted the freeze and garnishment orders against the funds. The Company
anticipates no further involvement with respect to this matter.
In addition to the above matters, the Company is and has been 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. These claims, if determined adversely to the Company, could have a
material adverse effect on the Company's financial position, liquidity and
results of operations.
28
Item 2. Changes in Securities and Use of Proceeds
Item 2(c) Equity Securities Issued or Sold by the Registrant without
Registration.
During the quarter ended September 30, 2002, the Company issued the
following securities without registration under the Securities Act of 1933, as
amended (the "Securities Act"):
On June 19, 2002, the holder of a payment obligation convertible into
common stock upon a payment default by the Company notified the Company that it
was delinquent with respect to two overdue payments, and advised the Company of
the applicable cure period. Subsequently, on July 8, 2002, the holder of the
convertible payment notified the Company that, because the delinquency referred
to in the June 19, 2002 notice had not been cured, a default had occurred under
the relevant documents, and therefore such holder had converted, as of that
date, $525,569.52 of the outstanding cash amount under the Amendment Agreement
into 29,946,981 shares of DCTI's common stock. The Company subsequently notified
Mr. Marshall that it had understated the number of shares of common stock issued
and outstanding as of the date of his conversion, and therefore he was allowed
to convert only $508,044.91 into 28,948,428 shares of common stock. Certificates
representing these shares were issued to a company owned by such holder on
September 12, 2002. The Company issued such shares without registration under
the Securities Act of 1933 (the "Securities Act") in reliance on Section 4(2) of
the Securities Act. Such shares of common stock were issued as restricted
securities, and the certificates representing such shares was stamped with a
standard legend to prevent any resale without registration under the Securities
Act or pursuant to an exemption.
Item 5. Other Information
From and after July 8, 2002, and as a result, in part, of the
acquisition by Don Marshall of a large number of shares of common stock as
discussed above, the composition of the Company's board of directors changed as
follows: Craig R. Darling was named to the board of directors; Evan M. Levine, a
director and the Company's Interim Chief Executive Officer resigned as of July
23, 2002, and James J. Condon, Chairman of the Board, resigned September 3,
2002. On July 25, 2002 Tom Tesmer was appointed by the board as interim Chief
Executive Officer and a member of the board of directors. On October 8, 2002,
Mr. Tesmer resigned as interim Chief Executive Officer, and Lynn J. Langford was
named Chief Executive Officer and Chief Financial Officer. On October 24, 2002,
Mr. Langford resigned as Chief Executive Officer, and Don Marshall became Chief
Executive Officer. Mr. Langford continues to serve as Chief Financial Officer.
29
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
-------- ------------------- ----------------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws (1)
10.1 Lease Agreement (2)
10.2 Second Amended and Restated Incentive Plan (3)
10.3 Stock Exchange Agreement with Digital Courier (4)
International, Inc.
10.4 Securities Purchase Agreement with Brown Simpson dated November
23, 1998 as amended December 2, 1998 (5)
10.5 Securities Purchase Agreement with Brown Simpson dated March 3,
1999 (6)
10.6 Agreement with Brown Simpson dated June 7, 1999 (8)
10.8 Stock Purchase Agreement with SB.Com, Inc. (7)
10.9 Securities Purchase Agreement with Transaction Systems
Architects, Inc. (7)
10.10 Settlement Services Agreement with St. Kitts Nevis Anguilla (8)
National Bank
10.11 Transaction Processing Services Agreement with Equifax Card (8)
Services, Inc.
10.12 Global Master Service Agreement with Global Payment Systems LLC (8)
10.13 Form of DataBank Settlement Agreement (8)
10.14 Amendment No. 1 to Settlement and Release Agreement with Don (9)
Marshall dated March 18, 2002
10.15 Agreement with M2, Inc. dated September 30, 2002 (10)
21.1 Subsidiaries of the Registrant (8)
99.1 Certification
(1) Incorporated by reference to the Company's Annual Report for the year ended June 30, 1998.
(2) Incorporated by reference to the Company's Annual Report for the year ended June 30, 1995.
(3) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on January 13, 2000.
(4) Incorporated by reference to the Company's Proxy statement filed on September 1, 1998 for Special
Stockholders meeting to be held on September 16, 1998.
(5) Incorporated by reference to the Company's Form 8-K filed on December 11, 1998.
(6) Incorporated by reference to the Company's Form 8-K filed on March 10, 1999.
(7) Incorporated by reference to the Company's Form 8-K filed on June 21, 1999.
(8) Incorporated by reference to the Company's Annual Report for the year ended June 30, 2000.
(9) Incorporated by reference to the Company's Form 8-K filed on March 27, 2002
(10) Incorporated by reference to the Company's Annual Report for the year ended June 30, 2002
(b) Current Reports on Form 8-K
On July 29, 2002, the Company filed a current report on Form 8-K
indicating that a Change of Control had occurred resulting from the conversion,
on July 8, 2002, by Don Marshall of On July 8, 2002, Mr. Marshall notified the
Company that he had converted a total of $525,569.52 of an outstanding cash
amount payable to him by the Company into 29,946,981 shares of the Company's
common stock, and his receipt, on July 12, 2002 of a proxy to vote 1,800,000
additional shares of the Company's common stock on all matters coming before the
stockholders of the Company for a period of three years from the date of the
proxy, resulting in his acquisition of voting control of approximately 51.2% of
the common shares of the Company.
30
On September 18, 2002, the Company filed a current report on Form 8-K
indicating that Mr. George C. Pappas resigned as director of the Company on
August 27, 2002, and on September 3, 2002, Mr. James J. Condon resigned as the
Chairman of the Company's Board of Directors and as a director, and that on
September 13, 2002, Craig R. Darling was elected Chairman of the Board. Mr.
Darling was appointed to the Company's Board of Directors on July 8, 2002. This
filing was subsequently amended to reflect the composition of the Board after
the resignations of Messrs. Pappas and Condon.
31
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: November 19, 2002 By /s/ Lynn J. Langford
-----------------------------
Lynn J. Langford
Chief Financial Officer
32
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Don Marshall, Chief Executive Officer of Digital Courier
Technologies, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Digital
Courier Technologies, Inc. (the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's ability
to record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Don Marshall
---------------------------------
Don Marshall
Chief Executive Officer
(Principal Executive Officer)
33
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Lynn J. Langford, Chief Financial Officer of Digital Courier
Technologies, Inc. certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Digital
Courier Technologies, Inc. (the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's ability
to record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Lynn J. Langford
-------------------------------------------------
Lynn J. Langford
Chief Financial Officer
(Principal Financial and Accounting Officer)
34