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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
-----------------
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 87-0461856
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
348 East 6400 South, Suite 220
Salt Lake City, Utah 84107
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 266-5390
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 19, 2003, the Registrant had issued and outstanding
75,000,000 shares of common stock, par value $.0001 per share.
1
DIGITAL COURIER TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended December 31, 2002
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed and Consolidated Balance Sheets ..................................................... 3
Consolidated Statement of Operations - Quarter Ended December 31, 2002.......................... 5
Consolidated Statement of Operations - Six Months Ended December 31, 2002....................... 6
Consolidated Statement of Cash Flows - Six Months Ended December 31, 2002 ..................... 7
Notes to Consolidated Financial Statements .....................................................9
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ............13
Item 4 Controls and Procedures ..........................................................................20
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..................................................................................21
Item 2 Changes in Securities and Use of Proceeds..........................................................23
Item 6 Exhibits and Reports on Form 8-K .................................................................24
Signatures ......................................................................................................28
Certifications ..................................................................................................29
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2002 2002
(unaudited)
------------ ------------
CURRENT ASSETS:
Cash $ 6,936 $ 47,492
Restricted cash 2,353,341 10,507,453
Receivable from payment processor 326,383 146,820
Prepaid expenses and other current assets 294,878 366,680
------------ ------------
Total current assets 2,981,538 11,068,445
------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 166,362 7,471,563
Furniture, fixtures and leasehold improvements 32,222 391,756
------------ ------------
198,584 7,863,319
Less accumulated depreciation and amortization (178,816) (6,921,417)
------------ ------------
Net property and equipment 19,768 941,902
------------ ------------
TOTAL ASSETS: $ 3,001,306 $ 12,010,347
============ ============
See accompanying notes to condensed consolidated financial statements.
3
DIGITIAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31, June 30,
2002 2002
------------- -------------
CURRENT LIABILITIES:
Notes payable (including related party notes
payable of $389,191 and $98,665) $ 1,157,245 $ 606,719
Current portion of capital lease obligations 28,470 44,674
Accounts payable 1,087,775 1,673,507
Merchant reserves 3,095,338 10,726,219
Accrued merchant deposit 668,255 692,246
Settlements due to merchants 60,515 28,572
Accrued chargebacks 575,000 1,882,195
Accrued legal settlement 1,893,000 531,743
Other accrued liabilities 527,281 1,493,773
------------- -------------
Total current liabilities 9,092,879 17,679,648
------------- -------------
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 (291,535,565) (290,610,414)
------------- -------------
Total stockholders' deficit (9,691,573) (9,274,466)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT: $ 3,001,306 $ 12,010,347
============= =============
See accompanying notes to condensed consolidated financial statements.
4
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
REVENUE $ 1,957,069 $ 4,668,676
COST OF REVENUE 1,411,388 2,958,635
------------ ------------
Gross margin 545,681 1,710,041
------------ ------------
OPERATING EXPENSES:
Depreciation and amortization 221,690 2,323,146
Selling, general and administrative 836,876 1,480,840
Research and development 23,732 119,491
Change in estimate of chargeback accrual (1,298,748) --
------------ ------------
Total operating expenses (216,658) 3,923,477
------------ ------------
OPERATING INCOME (LOSS) 762,339 (2,213,436)
------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale of assets (281,921) --
Accrual for legal settlement (1,361,257) 1,387
Gain on settlement of liability 484,556 --
Interest income and other income 895 --
Interest and other expense (13,180) (44,492)
------------ ------------
Net other expense (1,170,907) (43,105)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (408,568) (2,256,541)
INCOME TAX -- --
------------ ------------
NET INCOME (LOSS) $ (408,568) $ (2,256,541)
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic and Diluted $ (0.01) $ (0.05)
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 75,000,000 42,994,000
------------ ------------
See accompanying notes to condensed consolidated financial statements.
5
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
REVENUE $ 4,802,050 $ 9,311,571
COST OF REVENUE 3,620,990 5,954,840
Gross margin 1,181,060 3,356,731
OPERATING EXPENSES:
Depreciation and amortization 460,213 4,686,781
Selling, general and administrative (includes $0 and ($285,346),
respectively of non-cash, stock-based expense) 1,645,450 3,089,465
Research and development (includes $0 and ($363,954), respectively
of non-cash, stock-based expense) 115,576 252,882
Chargebacks -- 250,000
Visa and Mastercard Fines -- 60,000
Change in estimate of chargeback accrual (1,298,748) --
------------ ------------
Total operating expenses 922,491 8,339,128
------------ ------------
OPERATING INCOME (LOSS) 258,569 (4,982,397)
------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale of assets (281,921) --
Accrual for legal settlement (1,361,257) --
Gain on settlement of liability 484,556 --
Interest and other income 1,876 42,984
Interest and other expense (26,975) (96,380)
------------ ------------
Net other expense (1,183,721) (53,396)
------------ ------------
LOSS BEFORE INCOME TAXES (925,152) (5,035,793)
INCOME TAX -- --
------------ ------------
NET LOSS $ (925,152) $ (5,035,793)
------------ ------------
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.01) $ (0.12)
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 63,358,000 415,519,000
============ ============
See accompanying notes to condensed consolidated financial statements.
6
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Unaudited)
Increase (Decrease) in Cash
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (925,152) $ (5,035,793)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 460,213 4,686,781
Loss on sale of assets 281,921 --
Gain from change in estimate of accrued chargebacks (1,298,748) --
Gain on settlement of liability (484,556) --
Changes in operating assets and liabilities
Restricted cash 8,154,112 12,566,322
Deposit with payment processor -- 2,067,148
Receivable from payment services processor (179,563) 907,268
Deferred revenue -- (162,000)
Prepaid expenses and other current assets 241,802 63,225
Accounts payable 173,824 384,117
Settlements due to merchants 31,943 (2,432,152)
Merchant reserves (7,630,881) (10,457,139)
Accrued merchant deposits (23,991) --
Due to payment processor -- (2,467,107)
Accrued chargebacks (8,447) 223,047
Accrued legal settlement 1,361,257 --
Accrued liabilities (167,922) (116,428)
------------ ------------
Net cash (used in) provided by operating activities $ (14,188) $ 227,289
------------ ------------
See accompanying notes to condensed consolidated financial statements.
7
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (Continued)
(Unaudited)
Increase (Decrease) in Cash
2002 2001
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment received on note receivable 10,000 --
Purchase of property and equipment -- (11,792)
--------- ---------
Net cash provided by (used in) investing activities 10,000 (11,792)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (21,368) (23,601)
Principal payments on borrowings (15,000) (699,290)
--------- ---------
Net cash used in financing activities (36,368) (722,891)
--------- ---------
NET DECREASE IN CASH (40,556) (507,394)
CASH AT BEGINNING OF PERIOD 47,492 712,264
--------- ---------
CASH AT END OF PERIOD $ 6,936 $ 204,870
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,085 $ 103,455
========= ==========
During the six months ended December 31, 2002 the Company:
o Satisfied an other accrued liability to a related party of
$798,570 with a $290,526 related party note payable and 28,948,428
shares of the Company's common stock.
o Sold property and equipment in exchange for an $180,000 note
receivable.
o Satisfied an account payable with a $260,000 note payable.
See accompanying notes to condensed consolidated financial statements.
8
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
Significant Events During the Period
o M2 Transaction
During the three months ended December 31, 2002, the Company
expanded its relationship with M2 Corporation. The Company sold M2
a license giving M2 certain rights to use its software. In
addition, the Company sold essentially all of its data center
assets. These transactions are discussed in detail in Note 7
below. As a result of this transaction, all of the Company's
processing services have been contracted out to M2. M2 performs
the processing services for the Company's customers; the Company
charges its customers for such services and pays a fee to M2.
o Settlement of Accounts Payable
The Company successfully negotiated the settlement of a disputed
trade payable. The Company settled a liability of $744,829 with a
note payable of $275,000. The promissory note bears simple
interest at a rate of 6.00% apr and is to be paid in monthly
installments of $15,000 until June 15, 2004 when the entire unpaid
principal and interest balance is due. $15,000 was paid by
December 31, 2002. This resulted in a gain of $484,556 being
recorded during the three months ended December 31, 2002.
o Change in Estimate of Chargeback Accrual
The Company recorded a gain of $1,298,748 on a change in
accounting estimate during the three months ended December 31,
2002. The Company maintains a reserve for unrecoverable merchant
chargebacks. Based upon management estimates and analysis, which
considered the recent minimal amounts of unrecoverable merchant
chargebacks recorded and decreasing processing volumes, the
reserve was decreased resulting in the recorded gain.
o Loss of Significant Customer
As fully discussed in Note 8, during the three months ended
December 31, 2002 the Company lost its relationship with its
European processing partner and, as a result, significant merchant
processing volume.
o Increase in Accrual for Legal Settlement
The Company recorded expense of $1,361,257 during the three-month
period ended December 31, 2002 related to a pending settlement of
the Bank of Nevis legal matter. The matter and settlement are
fully discussed below under Legal Matters in Note 3 below.
9
Condensed Unaudited Financial Statements
The accompanying interim condensed financial statements as of December 31, 2002
and for the three and six months ended December 31, 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 U.S. 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
and six months ended December 31, 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.
Substantial Doubt About the Company's Ability to Continue as a Going Concern
During the three months ended December 31, 2002 the Company's operations
generated income of $762,339, however operating income was mainly a result of a
non-cash adjustment of $1,298,748 to our chargeback accrual due to a change in
estimate. Without this adjustment, we would have incurred a significant
operating loss. During the six months ended December 31, 2002 the Company's
operations generated income of $258,569, however operating income was mainly a
result of a non-cash adjustment of $1,298,748 to our chargeback accrual due to a
change in estimate. Without this adjustment, we would have incurred a
significant operating loss. Since its inception, our business has incurred
significant losses, and as of December 31, 2002 had negative working capital of
$6,111,341. 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. Although 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 ongoing operating
expenses. 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.
Stock Options
The Company has established the Second Amended and Restated Incentive Plan (the
"Option Plan") for employees and consultants. The company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
10
Three Months Ended Six Months Ended
December 31 December 31
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net loss, as reported $ (408,568) $(2,256,541) $ (925,152) $(5,035,793)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (27,000) (14,000) (85,000) (125,000)
----------- ----------- ----------- -----------
Pro forma net loss $ (435,568) $(2,270,541) $(1,010,152) $(5,160,793)
=========== =========== =========== ===========
Net loss per common share:
Basic and diluted - as reported $ (0.01) $ (0.05) $ (0.01) $ (0.12)
=========== =========== =========== ===========
Basic and diluted - pro forma $ (0.01) $ (0.05) $ (0.02) $ (0.12)
=========== =========== =========== ===========
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 4,142,444 and 4,142,444 shares of common stock at weighted
average exercise prices of $0.14 and $0.82 per share as of December 31, 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
December 31, 2002 and 2001 respectively; 360 shares of Series D preferred stock
convertible to 12,000,000 shares of common stock at $0.30 per share at December
31 2002, and 360 shares of Series A preferred stock convertible to 800,000
shares of common stock at $4.50 per share at December 31, 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.
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 authorized capital as discussed in Note
5 below. The inclusion of these options would have been antidilutive, thereby
decreasing net loss per common share.
11
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Legal Matters
On January 17, 2003, Certegy Card Services, Inc., f/k/a Equifax Card Services,
Inc. ("Certegy"), filed a lawsuit against the Company as the successor in
interest by merger to Access Services, Inc., and other parties named therein in
the Circuit Court for the Sixth Judicial Circuit for Pinellas County, Florida.
In that lawsuit, Certegy alleges that Access Services engaged in sales and
marketing activities that culminated in a credit card processing agreement
between Certegy and a third part, Tridico and Tridco, L.L.C. ("TNT"), and that
TNT breached that agreement resulting in damages to Certegy. Certegy alleges
that it has obtained a judgment against TNT in the amount of $4,424,539.51,
which is unsatisfied. Certegy alleges that Access Services, which was acquired
by the Company in 1999, is liable for the TNT judgment pursuant to an indemnity
covenant in a separate agreement between Certegy and Access Services, and claims
money damages for Certegy's losses, interest and attorney fees. The Company
intends to vigorously defend the litigation.
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 were owed to him were not paid. The Company disputed in
writing any claim by Mr. Levine to severance payments under the alleged
agreement. On December 12, 2002, the Company, with several other parties, filed
a lawsuit against Evan M. Levine in U.S. District in Salt Lake City, Utah. In
that action, the Company and its co-plaintiffs sought declaratory judgment for,
among other things, that (i) DCTI had no employment agreement with Mr. Levine,
(ii) any employment agreement asserted by Mr. Levine was not authorized by the
Company or its Board of Directors; (iii) no change of control as defined in the
alleged contract had occurred; and (iv) an alleged stock option agreement Levine
claimed to have for 3,750,000 shares of common stock was invalid and
unenforceable. The Company also asserted a claim for an unspecified amount of
money damages against Mr. Levine. The parties entered into a settlement
agreement resolving all claims of Mr. Levine against the Company and all claims
of the Company against Mr. Levine before Mr. Levine filed an answer.
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 $105,571. The Company intends to vigorously defend this lawsuit.
12
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 has answered the complaint and intends to 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 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 ("BONI") 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 (the
"BONI Agreement"). In particular, BONIalleges that DataBank, which the Company
acquired in October 1999, and/or the Company breached the BONI Agreement by (1)
failing to pay processing fees due under the BONI Agreement; (2) negligently
instructing BONI to make refunds to merchants; (3) instructing BONI 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 BONI may suffer; (5) not
having proper or effective software to manage credit card transactions; (6)
delaying in instructing BONI to make payments; (7) improper bookkeeping; (8)
failing to maintain sufficient information for merchant accounts; (9) providing
inaccurate instructions to BONI; and (10) failing to provide timely instructions
to BONI. The claim also alleges that the Company and DataBank breached an
13
agreement with BONI to be bound by the findings of PricewaterhouseCoopers
regarding the amounts owed by each party under the BONI Agreement. Finally, BONI
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 moved to dismiss, but its motion was denied. During the three months
ended December 31, 2002, the Company entered into an interim settlement
agreement with BONI that allows the Company to continue its appeal but calls for
the payment by the Company of $1,027,000 that the parties admit is not in
dispute.
On April 8, 2002, Next Generation Ltd., Prospect Creek, Ltd., Oxford Partners,
Ltd., and Carib Venture Partners, Ltd. (the "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 connection with 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.
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 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. The Company is presently involved in settlement negotiations.
In November 2000, Ameropa Ltd. ("Ameropa") filed suit in the California Superior
Court in Los Angeles against the Company and Don Marshall, the current Chief
Executive Officer and a director of the Company, alleging that Ameropa is the
assignee of several persons and entities that 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
14
cause of action in the Third Amended Complaint. In July 2002, Ameropa filed its
Fourth Amended Complaint. The Company answered the complaint and otherwise is
defending 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 States District Court for the District of Utah. The Company intends
to vigorously defend the claim. The claim for damages is for approximately
$422,720. The court in that matter has ordered the Company to mediate the
dispute, but no date has been set for the mediation
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. Limited
discovery has occurred and there is currently a mediation scheduled for February
20, 2003.
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
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 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.
The Company believes that it has adequately provided for all known financial
exposures, that are probable and reasonably estimable.
15
NOTE 4 - Under funded Merchant Reserves
At December 31, 2002 and June 30, 2002, the Company has withheld $3,095,338 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 December 31, 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 December 31, 2002, our merchant reserves accrual was
$3,095,338, however our restricted cash set aside for the purpose of funding
such reserve was only $2,353,341, therefore the merchant reserve accrual was
under funded by $741,997.
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.
Common Stock Issuances and Other Transactions
In September 2002, the Company issued 28,948,428 shares of its common stock upon
the conversion of a debt payable to a stockholder (see Marshall Settlement and
Conversion, below).
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
16
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
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
17
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.
Starting with fiscal 2000, and due to the Company's then-recent acquisitions and
growth, options were granted to more employees who did not hold mature shares of
the Company's common stock, and therefore the Company determined that these
options should be accounted for using variable plan accounting. Under variable
plan accounting, changes, either increases or decreases, in the market price of
the Company's common stock results in a change in the measurement of
compensation. Compensation is measured as the difference between the market
price and the option exercise price and is amortized to expense over the vesting
period. During the three months and six months ended December 31, 2002, the
Company did not record any expense associated with these awards as their
intrinsic value was zero.
During the six months ended December 31, 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 - AGREEMENTS 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,
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
18
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
agreed to provide $500,000 of debt financing, which was anticipated to involve
the issuance by the Company of debentures to M2, although definitive
documentation for such financing was not completed because the parties were
unable to agreed to specific terms. During the quarter ended December 31, 2002,
and in lieu of debt financing contemplated by the Provider Agreement, the
Company and M2 entered into a Software License, Source Code, and Derivative
Product Distribution Agreement (the "M2 Software License"). Under M2 Software
License, M2 obtained a non-exclusive license to use the Company's proprietary
software associated with its credit card processing business in consideration of
payment by M2 of $50,000. Also during the quarter ended December 31, 2002, the
Company agreed with M2 to sell to M2 essentially all of the fixed assets at the
Company's Salt Lake City and Clearwater data center facilities for total
consideration of $180,000, with payments to be made to the Company according to
an installment payment schedule. During the quarter ended December 31, 2002, M2
paid a total of $10,000 of the purchase price for such assets. The remainder of
the purchase price is due to be paid by M2 by April 6, 2003.
NOTE 8 - LOSS OF PROCESSING PARTNER AND CUSTOMERS
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 card processing through the Company
at the end of October 2002. Revenues for the three and six months ended December
31, 2002 have been negatively impacted because these two customers represented
approximately 41% of the Company's total revenues from the beginning of fiscal
19
2003 through date processing was discontinued. The Company has put in place an
agreement with a new European processing partner and begun the process of
migrating its remaining European customers to that platform. There can be no
assurance that remaining European customers will successfully be migrated to
this new platform.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
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
("SFAS No. 145"). This statement eliminates the current requirement that gains
and losses on debt 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 ("SFAS No. 146"), 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.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123, "which is effective for all fiscal years
ending after December 15, 2002. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation under SFAS No. 123 from the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25. SFAS 128 also changes the disclosure requirements of SFAS 123,
requiring a more prominent disclosure of the pro-forma effect of the fair
value-based method of accounting for stock-based compensation. The adoption of
SFAS No. 148 by the Company did not have a material impact on the Company's
financial position or future operations.
20
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
During the three months ended December 31, 2002 the Company's operations
generated a loss of $536,409 including non-cash expense for depreciation. During
the six months ended December 31, 2002 the Company's operations generated a loss
of $1,040,179 including non-cash expense for depreciation. Since its inception,
our business has incurred significant losses, and as of December 31, 2002 the
Company had negative working capital of $5,245,341. As a result, there is
substantial uncertainty about the Company's ability to continue as a going
concern, which was reflected in the auditor's report on the Company's financial
statements for the 2002 fiscal year.
During the first six months of the current fiscal year, the Company has
significantly reduced some of its costs and operating expenses and will continue
to seek ways to more effectively manage its operations. In light of such cost
reductions, 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.
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.
21
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.
Accrual for chargebacks. The Company maintains an accrual for chargebacks that
it may incur from the credit card processing volume that goes through its
system. Although the Company holds merchant funds in reserve to offset
chargebacks, in the event a merchant has insufficient reserves and is unable to
meet the chargeback obligation, the chargeback expense is then the Company's
liability. Because these chargebacks relate to ongoing revenues, a reserve is
maintained. At December 31, 2002 the reserve balance was $575,000 compared to
$1,882,195 at June 30, 2002. The reserve is an estimate made by Company's
management and is based upon processing volume and unrecoverable chargeback
expense experience.
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 December 31, 2002 compared with three months ended December
31, 2001.
Revenue
Revenue for the three months ended December 31, 2002 was $1,957,069 as compared
to $4,668,676 for the three months ended December 31, 2002, a decrease of 58%.
During the three months ended December 31, 2002, substantially all revenues were
derived from payment processing activities, including $53,106 of revenues
related to fees earned on the processing of chargebacks. During the three months
ended December 31, 2001, substantially all revenues were derived from payment
processing activities, including $222,685 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, and specifically
the loss of the Company's European processing partner and related customers as
discussed in Note 8 to the financial statements. Revenues for the three months
22
ended December 31, 2002 include $50,000 from the sale of a software license to
M2 as discussed in Note 7 to the financial statements, which the Company
believes will be a non-recurring event.
Cost of Revenue
Cost of revenue includes amounts paid to banks and processing partners. Cost of
revenue for the three months ended December 31, 2002 was $1,411,388 or 72.1% of
revenue. For the three months ended December 31, 2001, cost of revenue was
$2,958,635 or 63.4% of revenue. The increase of cost of revenue as a percentage
of revenue is due to an increase in the percentage of our merchants' transaction
dollar volume paid to banks and processors.
Operating Expenses
Depreciation and amortization expense decreased 90.5% to $221,690 during the
three months ended December 31, 2002 from $2,323,146 during the three months
ended December 31, 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 43.5% to $836,876 during
the three months ended December 31, 2002 from $1,480,840 during the three months
ended December 31, 2001. The decrease in selling, general and administrative
expense was primarily due to reductions in work force and paid executive staff
during and after fiscal 2002, and the Company's efforts to otherwise reduce
operating costs.
Research and development expense decreased 80.1% to $23,732 during the three
months ended December 31, 2002 from $119,491 during the three months ended
December 31, 2001. The decrease in research and development expense was due to
the reduction of development staff during fiscal 2002.
The Company recorded a gain from a change in accounting estimate of $1,298,748
during the three month period ended December 31, 2002, as a result of adjusting
down its reserve for uncollectable chargebacks. This adjustment is based on
management assessment of risk of uncollectable chargebacks. The downward
adjustment is due primarily to lower processing volumes and improved controls
that mitigate potential uncollectable merchant chargebacks.
The Company's variable option plan did not create any non-cash compensation
adjustment during the three months ended December 31, 2002 or December 31, 2001
because all outstanding options maintained exercise prices greater than the
quoted stock price during the three months ended and as of December 31, 2002 and
December 31, 2001 respectively.
Our income tax benefit is zero because we fully provide for our deferred tax
assets as realization of these benefits is not deemed to be more likely than
not.
23
Other Income and Expense
The Company incurred net other income and expense of ($1,170,907) for the three
months ended December 31, 2002. This compares to ($43,105) for the three months
ended December 31, 2001. The following items recorded during the three months
ended December 31, 2002 account for the net other expense: The Company recorded
a gain of $484,556 as a result of settling disputed amounts invoiced by a
vendor. These amounts had previously been recorded as operating expense. In
addition, Company recorded $1,361,257 additional expense for the pending
settlement with Bank of Nevis, as discussed in Note 3 of the financial
statements. The Company had previously recorded $531,743 for this matter.
Interest and other income and expenses totaled ($12,285)
Six months ended December 31, 2002 compared with six months ended December 31,
2001.
Revenue
Revenue for the six months ended December 31, 2002 was $4,802,050 as compared to
$9,311,571 for the six months ended December 31, 2001, a decrease of
approximately 48%. During the six months ended December 31, 2002, revenues were
primarily derived from payment processing activities, including $134,368 of
revenues related to fees earned on the processing of chargebacks. During the six
months ended December 31, 2001, revenues were primarily derived from payment
processing activities, including $700,578 of revenues related to fees earned on
the processing of chargebacks. In addition, $162,000 of revenues were earned
under a software distribution agreement. The decrease in revenues is primarily
due to fewer merchants utilizing the Company's processing services. This is
partially due to the loss of the Company's European processing partner and
related customers as discussed in Note 8 to the financial statements. Revenues
for the six months ended December 31, 2002 include $50,000 from the sale of a
software license to M2 as discussed in Note 7 to the financial statements.
Cost of Revenue
Cost of revenue for the six months ended December 31, 2002 was $3,620,990 or
75.4% of revenue. For the six months ended December 31, 2001, cost of revenue
was $5,954,840 or 64.0% of revenue. The increase of cost of revenue as a
percentage of revenue is due to an increase in the percentage of our merchants'
transaction dollar volume paid to banks and processors.
Operating Expenses
Depreciation and amortization expense decreased 90.2% to $460,213 during the six
months ended December 31, 2002 from $4,686,781 during the six months ended
December 31, 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.
24
Selling, general and administrative expense decreased 46.7% to $1,645,450 during
the six months ended December 31, 2002 from $3,089,465 during the six months
ended December 31, 2001. The decrease in selling, general and administrative
expense was primarily due to reductions in work force and paid executive staff
during and after fiscal 2002, and the Company's efforts to otherwise reduce
operating costs.
Research and development expense decreased 54.3% to $115,576 during the six
months ended December 31, 2002 from $252,882 during the six months ended
December 31, 2001. The decrease in research and development expense was due to
the reduction of development staff during fiscal 2002.
The Company recorded a gain from a change in accounting estimate of $1,298,748
during the six month period ended December 31, 2002, as a result of adjusting
down its reserve for uncollectable chargebacks. This adjustment is based on
management assessment of risk of uncollectable chargebacks. The downward
adjustment is due primarily to lower processing volumes and improved controls
that mitigate potential uncollectable merchant chargebacks.
The Company's variable option plan did not create any non-cash compensation
adjustment during the six months ended December 31, 2002 or December 31, 2001
because all outstanding options maintained exercise prices greater than the
quoted stock price during the six months ended and as of December 31, 2002 and
December 31, 2001 respectively.
Our income tax benefit is zero because we fully provide for our deferred tax
assets as realization of these benefits is not deemed to be more likely than
not.
During six months ended December 31, 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 six months ended December
31, 2002.
Other Income and Expense
The Company incurred net other income and expense of ($1,183,721) for the six
month period ended December 31, 2002. This compares to ($53,396) for the six
month period ended December 31, 2001. For the six month period ended December
31, 2002, the following items account for the net other income: The Company
recorded a gain of $484,556 as a result of settling disputed amounts invoiced by
a vendor. These amounts had previously been recorded as operating expense. The
Company recorded $1,361,257 additional expense for the pending settlement with
Bank of Nevis, as discussed in Note 3 of the financial statements. The Company
had previously recorded approximately $531,743 for this matter. Interest and
other income and expense totaled ($25,099)
25
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
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 December 31, 2002, had an accumulated deficit of
$291,535,565. 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.
M2 Agreement
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
26
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.
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
agreed to provide $500,000 of debt financing, which was anticipated to involve
the issuance by the Company of debentures to M2, although definitive
documentation for such financing was not completed because the parties were
unable to agreed to specific terms. During the quarter ended December 31, 2002,
and in lieu of debt financing contemplated by the Provider Agreement, the
Company and M2 entered into a Software License, Source Code, and Derivative
Product Distribution Agreement (the "M2 Software License"). Under M2 Software
License, M2 obtained a non-exclusive license to use the Company's proprietary
software associated with its credit card processing business in consideration of
payment by M2 of $50,000. Also during the quarter ended December 31, 2002, the
Company agreed with M2 to sell to M2 essentially all of the fixed assets at the
Company's Salt Lake City and Clearwater data center facilities for total
consideration of $180,000, with payments to be made to the Company according to
an installment payment schedule. During the quarter ended December 31, 2002, M2
paid a total of $10,000 of the purchase price for such assets. The remainder of
the purchase price is due to be paid by M2 by April 6, 2003.
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. Also, the revenue generated from the
licensing transaction and the cash received upon the sale to M2 of the data
center assets as described above have provided additional cash to fund the
Company's operations.
27
Chargeback Reserves
- -------------------
At December 31, 2002 and June 30, 2002, the Company had withheld $3,095,338 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 December 31, 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 December 31, 2002, our merchant reserves accrual was
$3,095,338, however our restricted cash set aside for the purpose of funding
such reserve was only $2,353,341, therefore the merchant reserve accrual was
under funded by $741,997.
Cash Flow Activities
- --------------------
Operating activities used $14,188 during the six months ended December 31, 2002
compared to providing $227,289 during the six months ended December 31, 2002.
The net loss of $925,152 incurred during the six months ended December 31, 2002
included non-cash depreciation of $460,213, a non-cash adjustment to the accrued
chargeback estimate of $1,298,748, a non-cash gain on settlement of liabilities
of $484,556, and a non-cash loss on the sale of assets of $281,921. The decrease
in restricted cash of $8,154,112 was offset, in large part, by a decrease in the
merchant reserve liability of $7,630,881. Other changes in current asset and
liabilities accounts accounted for the remaining net cash used in operating
activities during the period.
During the six months ended December 31, 2001, operating activities provided
cash of $227,289. The net loss of $5,035,793 was mostly offset by non-cash
depreciation and amortization expense of $4,686,781. Additionally, cash provided
by a decrease in restricted cash was offset by a decrease in merchant reserve
and merchant settlement liabilities. These decreases are consistent with the
decrease in revenues. Also, reducing the liability to payment processor offset
cash provided by the liquidation of our deposit with payment processor. Other
changes in current asset and liabilities accounts accounted for the remaining
net cash used in operating activities during the period.
During the six months ended December 31, 2002, investing activities provided
$10,000 in cash from the payment received on the note receivable from the sale
of assets to M2 Corporation.
During the six months ended December 31, 2001, investing activities used $11,792
for the purchase of assets.
During the six months ended December 31, 2002, $36,368 was paid as principal
repayment of capital lease obligations and notes payable. During the six months
ended December 31, 2001, $699,290 and $23,601 was paid as principal repayment of
notes payable and capital lease obligations, respectively
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
28
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 January 17, 2003, Certegy Card Services, Inc., f/k/a Equifax Card Services,
Inc. ("Certegy"), filed a lawsuit against the Company as the successor in
interest by merger to Access Services, Inc., and other parties named therein in
the Circuit Court for the Sixth Judicial Circuit for Pinellas County, Florida.
In that lawsuit, Certegy alleges that Access Services engaged in sales and
marketing activities that culminated in a credit card processing agreement
between Certegy and a third part, Tridico and Tridco, L.L.C. ("TNT"), and that
TNT breached that agreement resulting in damages to Certegy. Certegy alleges
that it has obtained a judgment against TNT in the amount of $4,424,539.51,
which is unsatisfied. Certegy alleges that Access Services, which was acquired
by the Company in 1999, is liable for the TNT judgment pursuant to an indemnity
covenant in a separate agreement between Certegy and Access Services, and claims
money damages for Certegy's losses, interest and attorney fees. The Company
intends to vigorously defend the litigation.
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 were owed to him were not paid. The Company disputed in
writing any claim by Mr. Levine to severance payments under the alleged
agreement. On December 12, 2002, the Company, with several other parties, filed
a lawsuit against Evan M. Levine in U.S. District in Salt Lake City, Utah. In
that action, the Company and its co-plaintiffs sought declaratory judgment for,
among other things, that (i) DCTI had no employment agreement with Mr. Levine,
(ii) any employment agreement asserted by Mr. Levine was not authorized by the
Company or its Board of Directors; (iii) no change of control as defined in the
alleged contract had occurred; and (iv) an alleged stock option agreement Levine
claimed to have for 3,750,000 shares of common stock was invalid and
unenforceable. The Company also asserted a claim for an unspecified amount of
money damages against Mr. Levine. The parties entered into a settlement
agreement resolving all claims of Mr. Levine against the Company and all claims
of the Company against Mr. Levine before Mr. Levine filed an answer.
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
29
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 $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 has answered the complaint and intends to 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 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 ("BONI") 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 (the
"BONI Agreement"). In particular, BONIalleges that DataBank, which the Company
acquired in October 1999, and/or the Company breached the BONI Agreement by (1)
failing to pay processing fees due under the BONI Agreement; (2) negligently
instructing BONI to make refunds to merchants; (3) instructing BONI 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 BONI may suffer; (5) not
30
having proper or effective software to manage credit card transactions; (6)
delaying in instructing BONI to make payments; (7) improper bookkeeping; (8)
failing to maintain sufficient information for merchant accounts; (9) providing
inaccurate instructions to BONI; and (10) failing to provide timely instructions
to BONI. The claim also alleges that the Company and DataBank breached an
agreement with BONI to be bound by the findings of PricewaterhouseCoopers
regarding the amounts owed by each party under the BONI Agreement. Finally, BONI
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 moved to dismiss, but its motion was denied. During the three months
ended December 31, 2002, the Company entered into an interim settlement
agreement with BONI that allows the Company to continue its appeal but calls for
the payment by the Company of $1,027,000 that the parties admit is not in
dispute.
On April 8, 2002, Next Generation Ltd., Prospect Creek, Ltd., Oxford Partners,
Ltd., and Carib Venture Partners, Ltd. (the "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 connection with 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.
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 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. The Company is presently involved in settlement negotiations.
In November 2000, Ameropa Ltd. ("Ameropa") filed suit in the California Superior
Court in Los Angeles against the Company and Don Marshall, the current Chief
Executive Officer and a director of the Company, alleging that Ameropa is the
assignee of several persons and entities that 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
31
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 answered the complaint and otherwise is
defending 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 States District Court for the District of Utah. The Company intends
to vigorously defend the claim. The claim for damages is for approximately
$422,720. The court in that matter has ordered the Company to mediate the
dispute, but no date has been set for the mediation
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. Limited
discovery has occurred and there is currently a mediation scheduled for February
20, 2003.
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
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 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.
The Company believes that it has adequately provided for all known financial
exposures, that are probable and reasonably estimable.
32
Item 2. Changes in Securities and Use of Proceeds
Item 2(c) Equity Securities Issued or Sold by the Registrant
without Registration.
During the six months ended December 31, 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.
33
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)
10.16 License Agreement with M2, Inc., dated November 27, 2002
10.17 Bill of Sale for Data Center Assets (M2, Inc.)
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
34
(b) Current Reports on Form 8-K
On December 3, 2002, the Company filed an amendment to a Current Report on Form
8-K that originally was filed on July 29, 2002. The amendment to such Current
Report reflected that in connection with his conversion, the Company had
understated the actual number of issued and outstanding shares of common stock
as of July 8, 2002, and the actual number of shares issued and outstanding was
not 45,053,019, as reported in the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 2002, but was 46,051,572. Thus, the Company was able
to issue to Mr. Marshall only 28,948,428 shares, rather than the 29,946,981
shares indicated in the original Current Report. Thus, the percentage of the
Company's common stock controlled by Mr. Marshall is approximately 49.9% rather
than the 51.1% originally stated in the Current Report.
35
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: By /s/ Lynn J. Langford
-----------------------------
February 19, 2003 Lynn J. Langford
Chief Financial Officer
36
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: February 19, 2003 /s/ Don Marshall
---------------------------------
Don Marshall
Chief Executive Officer
(Principal Executive Officer)
37
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: February 19, 2003 /s/ Lynn J. Langford
-------------------------------------------------
Lynn J. Langford
Chief Financial Officer
(Principal Financial and Accounting Officer)
38