SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- -------
Commission File Number 0-20771
TRANSAXIS, 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)
Digital Courier Technologies, Inc.
(Former name, if changed since last report)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 May 20, 2003, the Registrant had issued and outstanding 750,000
shares of common stock, par value $.0001 per share, after adjustment for a
1-for-100 reverse stock split effective May 8, 2003.
1
TRANSAXIS, INC.
---------------
FORM 10-Q
For the Quarterly Period Ended March 31, 2003
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed and Consolidated Balance Sheets at March 31, 2003 and June 30, 2002....................3
Consolidated Statement of Operations - Three Months ended March 31, 2003 and 2002............... 5
Consolidated Statement of Operations - Nine Months Ended March 31, 2003 and 2002.................6
Consolidated Statement of Cash Flows - Nine Months Ended March 31, 2003 and 2002 .............. 7
Notes to Consolidated Financial Statements ....................................................10
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ............22
Item 4 Controls and Procedures ..........................................................................29
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..................................................................................30
Item 2 Changes in Securities and Use of Proceeds..........................................................33
Item 3 Defaults Upon Senior Securities....................................................................34
Item 5 Other Information..................................................................................34
Item 6 Exhibits and Reports on Form 8-K .................................................................35
Signatures ......................................................................................................37
Certifications ..................................................................................................38
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
TRANSAXIS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2003 June 30,
(unaudited) 2002
------------ ------------
CURRENT ASSETS:
Cash $ 6,936 $ 47,492
Restricted cash 1,824,394 10,507,453
Trade Receivables 111,675 --
Receivable from payment processor 15,006 146,820
Prepaid expenses and other current assets 79,878 366,680
------------ ------------
Total current assets 2,037,889 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 (183,547) (6,921,417)
------------ ------------
Net property and equipment 15,037 941,902
------------ ------------
TOTAL ASSETS: $ 2,052,926 $ 12,010,347
============ ============
See accompanying notes to condensed consolidated
financial statements.
3
TRANSAXIS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
March 31, June 30,
2003 2002
------------- -------------
CURRENT LIABILITIES:
Notes payable (including related party notes payable
of $389,191 and $ 98,665) $ 1,307,630 $ 606,719
Current portion of capital lease obligations 17,072 44,674
Accounts payable 918,176 1,673,507
Merchant reserves 2,852,003 10,726,219
Accrued merchant deposit 669,246 692,246
Settlements due to merchants 60,515 28,572
Accrued chargebacks 574,104 1,882,195
Accrued legal settlement 1,717,341 531,743
Other accrued liabilities 527,239 1,493,773
------------- -------------
Total current liabilities 8,643,326 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, 750,000 and
460,430 shares outstanding, respectively
75 46
Additional paid-in capital 280,492,817 279,984,802
Warrants outstanding 1,363,100 1,363,100
Stock subscription (12,000) (12,000)
Accumulated deficit (292,034,392) (290,610,414)
------------- -------------
Total stockholders' deficit (10,190,400) (9,274,466)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT: $ 2,052,926 $ 12,010,347
============= =============
See accompanying notes to condensed consolidated
financial statements.
4
TRANSAXIS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
NET REVENUES $ 440,897 $ 4,017,630
COST OF REVENUES 276,598 2,302,136
------------ ------------
Gross margin 164,299 1,715,494
------------ ------------
OPERATING EXPENSES:
Depreciation and amortization 4,731 2,313,368
Impairment writedown of goodwill -- 12,135,383
Selling, general and administrative 634,698 1,390,263
Research and development 5,008 130,928
Fines and chargebacks -- 210,000
------------ ------------
Total operating expenses 644,437 16,179,942
------------ ------------
OPERATING LOSS $ (480,138) $(14,464,448)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 5,861 569
Interest and other expense (25,547) (24,821)
------------ ------------
Other expense, net (18,686) (24,252)
------------ ------------
NET LOSS $ (498,824) $(14,488,700)
============ ============
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.67) $ (33.23)
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 750,000 436,000
============ ============
See accompanying notes to condensed consolidated
financial statements.
5
TRANSAXIS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
NET REVENUES $ 5,242,946 $ 13,329,200
COST OF REVENUES 3,897,589 8,256,976
------------ ------------
Gross margin 1,345,357 5,072,224
------------ ------------
OPERATING EXPENSES:
Depreciation and amortization 464,944 7,000,149
Impairment writedown of goodwill -- 12,135,383
Selling, general and administrative 2,280,148 4,479,719
Research and development 120,585 383,810
Fines and chargebacks -- 520,000
Change in estimate of chargeback accrual (1,298,748) --
------------ ------------
Total operating expenses 1,566,929 24,519,061
------------ ------------
OPERATING LOSS (221,572) (19,446,837)
------------ ------------
OTHER INCOME (EXPENSE):
Accrual for legal settlement (1,361,257) 1,387
Interest and other income 4,763 42,167
Gain on settlement of liability 484,556 --
Net loss on sale of assets (281,921) --
Interest and other expense (48,547) (121,202)
------------ ------------
Other expense, net (1,202,406) (77,648)
------------ ------------
NET LOSS $ (1,423,978) $(19,524,485)
============ ============
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (2.12) $ (46.27)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted 672,000 422,000
============ ============
See accompanying notes to condensed consolidated
financial statements.
6
TRANSAXIS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,423,978) $(19,524,485)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 464,944 7,000,149
Loss from impairment writedown of goodwill -- 12,135,383
Loss on disposition of equipment 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, net of effect of
acquisitions:
Restricted cash 8,683,059 16,518,733
Trade accounts receivable (111,675) --
Receivable from payment processor (43,845) 1,087,140
Deposit with payment services processor -- 2,067,148
Deferred revenue -- (324,388)
Prepaid expenses and other current assets 336,802 103,104
Accounts payable 304,610 210,979
Settlements due to merchants 31,943 (2,140,134)
Merchant reserves (7,874,216) (13,977,960)
Accrued merchant deposits (23,000) --
Due to processor -- (2,484,107)
Accrued chargebacks (9,343) 179,340
Accrued legal settlement 1,361,257 --
Accrued liabilities (167,964) 7,800
------------ ------------
Net cash provided by operating activities 27,211 858,702
------------ ------------
See accompanying notes to condensed consolidated
financial statements.
7
TRANSAXIS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (Continued)
(Unaudited)
2003 2002
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (20,895)
Payment received on note receivable 10,000 --
----------- -----------
Net cash provided by (used in) investing 10,000 (20,895)
activities
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (32,767) (33,328)
Principal payments on borrowings (45,000) (1,049,936)
----------- -----------
Net cash used in financing activities (77,767) (1,083,264)
----------- -----------
NET DECREASE IN CASH (40,556) (245,457)
CASH AT BEGINNING OF PERIOD 47,492 712,264
----------- -----------
CASH AT END OF PERIOD $ 6,936 $ 466,807
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,937 $ 112,810
During the nine months ended March 31, 2003 the Company:
o Satisfied an 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 a $180,000 note
receivable.
o Satisfied an account payable with a $260,000 note payable.
o Satisfied an account payable of $300,385 net of an offsetting
receivable for $120,000 with a note payable of $180,385.
o Reduced an accrued legal settlement liability by $175,659 with an
offsetting reduction of a receivable from payment processor. 8
During the nine months ended March 31, 2002, the Company issued 14,286
shares of common stock to a related party as settlement of a $100,000
obligation.
See accompanying notes to condensed consolidated
financial statements.
9
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
Significant Events During the Nine Months Ended March 31, 2003
o M2 Transaction
During the nine months ended March 31, 2003, the Company entered into
and then expanded a relationship with M2 Corporation. The Company
entered into a provider agreement with M2 pursuant to which M2 agreed
to provide many of the Company's administrative and operational
services on an outsourced basis. Also, the Company sold M2 a
nonexclusive license to the Company's Internet Payment Gateway
technology. In addition, the Company sold to M2 essentially all of its
data center assets. These transactions are discussed in Management's
Discussion & Analysis below. As a result of these transactions, all of
the Company's processing services have been contracted out to M2. M2
performs 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 by issuing a note
payable of $275,000. The promissory note bears simple interest at an
annual interest rate of 6.00% 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. This resulted in a gain of $484,556 being
recorded during the nine months ended March 31, 2003.
o Change in Estimate of Chargeback Accrual
The Company recorded a gain of $1,298,748 on a change in accounting
estimate during the nine months ended March 31, 2003. 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
During the nine months ended March 31, 2003 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 nine-month period
ended March 31, 2003 related to a pending settlement of the Bank of
Nevis legal matter. The matter and settlement are discussed below under
Legal Matters in Note 4 below.
10
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Unaudited Financial Statements
The accompanying interim condensed financial statements as of March 31, 2003 and
for the three and nine months ended March 31, 2003 and 2002 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 nine
months ended March 31, 2003 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 and nine months ended March 31, 2003, the Company
generated net losses of $498,824 and $1,423,978 respectively. Since its
inception, our business has incurred significant losses, and as of March 31,
2003 had negative working capital of $6,605,437. As a result, there is
substantial doubt about the Company's ability to continue as a going concern,
which was stated in auditor's report on the Company's financial statements for
the 2002 fiscal year. Although during the periods covered by this report,
management projected improved cash flows from operating activities, improvement
was not realized due to decreases in operating revenue and the loss of customers
and processing relationships. Management continues to try to implement plans for
increasing cash flow from operating activities, although there can be no
assurance that management will be successful. 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.
11
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 as
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.
Three Months Ended Nine Months Ended
March 31 March 31
------------------------------ -----------------------------
2003 2002 2003 2002
-------------- --------------- -------------- --------------
$ (498,824) $ (14,488,700) $ (1,423,978) $ (19,524,485)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (7,000) (126,000) (92,000) (250,000)
-------------- --------------- -------------- --------------
$ (505,824) $ (14,614,700) $ (1,515,978) $ (19,774,485)
============== =============== ============== ==============
Net loss per common share:
Basic and diluted - as reported $ (0.67) $ (33.23) $ (2.12) $ (46.27)
============== =============== ============== ==============
Basic and diluted - pro forma $ (0.67) $ (33.52) $ (2.26) $ (46.86)
============== =============== ============== ==============
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - REVERSE STOCK SPLIT
On May 8, 2003, the Company completed a 1-for-100 reverse stock split, thus
reducing the number of common shares issued and outstanding on that date from
75,000,000 to 750,000. All common share amounts in this Form 10-Q have been
adjusted to reflect this reverse stock split. All outstanding options and
warrants to purchase common stock have also been adjusted to reflect the reverse
stock split.
NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted EPS") reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised or converted into common stock. The
computation of Diluted EPS does not assume exercise or conversion of securities
that would have an anti-dilutive effect on net loss per common share.
Options to purchase 41,424 and 41,424 shares of common stock at weighted average
exercise prices of $14 and $82 per share as of March 31, 2003 and 2002,
12
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
respectively; warrants to purchase 24,900 and 4,900 shares of common stock at
weighted average exercise prices of $198 and $1,002 per share as of March 31,
2003 and 2002 respectively; 360 shares of Series D preferred stock convertible
to 120,000 shares of common stock at $30 per share at March 31 2003, and 360
shares of Series A preferred stock convertible to 8,000 shares of common stock
at $450 per share at March 31, 2002 were not included in the computation of
Diluted EPS. The inclusion of the options, warrants and preferred stock would
have been anti-dilutive, thereby decreasing net loss per common share.
In addition to the options issued, 22,329 additional options to purchase shares
at weighted average exercise prices of $8 had been approved but had not been
granted because of insufficient authorized capital as discussed in Note 6 below.
The inclusion of these options would have been anti-dilutive, thereby decreasing
net loss per common share.
NOTE 4 - 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 party, 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 $4,424,540, 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 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.
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
13
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, BONI alleges 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
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.
14
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. After the period ended
March 31, 2003, claims of the Next Generation plaintiffs were dismissed with
prejudice.
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 5,000 shares of the
Company's stock pursuant to the parties' June 1, 1999 Registration Rights
Agreement. The complaint asserted 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. During the three months ended March 31, 2003, the Company
entered into a settlement agreement with Messrs. Thompson and Nagel, and the
case was dismissed.
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. Discovery in the case is ongoing, and subsequent to March 31,
2003, Ameropa sought permission to file its Fifth Amended Complaint. If filed,
the Company will answer the complaint and otherwise defend 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.
15
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 October 20, 2003. Discovery
is on-going and DCTI is vigorously defending against the claims.
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.
NOTE 5 - Under funded Merchant Reserves
At March 31, 2003 and June 30, 2002, the Company has withheld $2,852,003 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 March 31, 2003 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 March 31, 2003, the merchant reserve accrual was
$2,852,003, however, restricted cash on hand for funding such reserves was only
$1,824,394. Therefore, merchant reserve accrual was under funded by $1,027,609
as of March 31, 2003.
NOTE 6 - CAPITAL TRANSACTIONS.
On May 8, 2003, the Company affected a 1-for-100 reverse stock split, thus
reducing the number of common shares issued and outstanding on that date from
75,000,000 to 750,000. All common share amounts in this Form 10-Q have been
retroactively restated to reflect this reverse stock split. All outstanding
options and warrants to purchase common stock were also retroactively revised to
reflect the reverse stock split.
16
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 289,484 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 35,000 shares of common stock and agreed to pay Mr.
Marshall $800,000 in quarterly installments (the "Cash Payment"), beginning with
the quarter ending December 31, 2001, based upon a percentage of the Company's
earnings before taxes, depreciation and amortization, if any, during each
quarter. The Company agreed to make all payments by October 2004 with annual
interest at 15% accruing beginning in 2003. To assure payment, the Company also
executed a confession of judgment that could be entered upon default under the
Settlement Agreement, in the amount of $7,500,000.
In February 2002, Mr. Marshall asserted that the Company had defaulted with
respect to its obligation to pay the Cash Payment because the Company failed to
remit to him the required quarterly payment after due notice and after the
expiration of the cure period specified in the Settlement Agreement. In order to
resolve that dispute, the Company and Mr. Marshall entered into Amendment No. 1
to Settlement Agreement, dated March 18, 2002, pursuant to which, among other
things, (i) Mr. Marshall waived any prior default by the Company with respect to
the Cash Payment obligation under the Settlement Agreement, (ii) the Company
paid to Mr. Marshall a concession fee of $136,000, of which $36,000 was paid on
March 20, 2002 and $100,000 was paid by delivery to Mr. Marshall of 14,286
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
17
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
each month (for an aggregate monthly payment of $7,000) commencing with May 5,
2002 and until March 31, 2006, when the balance would be payable in full, (iv)
the Company agreed that upon an event of default as defined in the Amendment,
including any default in the payment by the Company of the Cash Payment
according to the modified schedule, any unpaid balance of the Cash Payment would
begin to accrue simple interest at the rate of 1.5% per month until paid in
full, and Mr. Marshall would be able to convert all or any portion of the then
unpaid balance of the Cash Payment plus any accrued and unpaid interest into the
Company's common stock at the lesser of (A) $7 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 $525,570 of
the outstanding cash amount under the Amendment Agreement into 299,470 shares of
the Company'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
$508,045 into 289,484 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
principal and $29,084 accrued interest, which amount continues to be convertible
into common stock at Mr. Marshall's option.
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
374,268 shares of the Company's 750,000 issued and outstanding shares of common
stock, representing 49.9% of the total voting power.
NOTE 7 - STOCK-BASED COMPENSATION
The Company has elected to continue to apply Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans as they relate to employees and directors. Since fiscal 2000,
the Company has used variable plan accounting to account for stock based
compensation. Under variable plan accounting, changes, either increases or
decreases, in the market price of the Company's common stock result 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 nine months ended
March 31, 2003, the Company did not record any expense associated with these
awards, as their intrinsic value was zero.
18
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
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.
In April 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." This statement requires the
classification of gains or losses from the extinguishments of debt to meet the
criteria of Accounting Principles Board Opinion No. 30 before they can be
classified as extraordinary in the income statement. As a result, companies that
use debt extinguishment as part of their risk management cannot classify the
gain or loss from that extinguishment as extraordinary. The statement also
requires sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The Company does not
expect Adoption of SFAS No. 145 did have a material impact on financial position
or future operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard, which is effective for exit or
disposal activities initiated after December 31, 2002, provides new guidance on
the recognition, measurement and reporting of costs associated with these
activities. The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date the
company commits to an exit or disposal plan. The adoption of SFAS No. 146 by the
Company is not expected to have a material impact on the Company's financial
position or future operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Ethics (FIN No. 46),
which addresses consolidation by business enterprises of variable interest
entities. FIN No. 46 clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not expect to identify any variable interest entities that must
be consolidated. In the event a variable interest entity is identified, the
Company does not expect the requirements of FIN No. 46 to have a material impact
on its financial condition or results of operations.
19
TRANSAXIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN No. 45). FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice to record a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN No. 45
also requires the Company to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are effective for the Company in the
first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company's previous accounting
for guarantees issued prior to the date of the initial application of FIN No. 45
will not be revised or restated to reflect the provisions of FIN No 45. The
Company does not expect the adoption of FIN No. 45 to have a material impact on
its consolidated financial position, results of operations or cash flows.
NOTE 9 - SUBSEQUENT EVENTS
On April 30, 2003, the Company entered into a Letter of Intent ("LOI")
with FreeStar Technology Corporation, a Nevada corporation ("FreeStar"), for the
purpose of setting forth the proposed terms of an agreement in principle
pursuant to which FreeStar would acquire the issued and outstanding common stock
of the Company pursuant to a statutory merger of the Company with and into a
subsidiary of FreeStar (the "Merger").
Under the LOI, each outstanding share of the Company's common stock
outstanding or deemed to be outstanding upon the assumed conversion of any
preferred stock or other convertible instruments as a result of the consummation
of the Merger is to be converted into the right to receive that number of
validly issued, fully paid, nonassessable and registered shares of FreeStar
equal to (a) the greater of (i) 10,000,000 shares, or (ii) that number of shares
equal to $1,800,000 divided by the Closing Price (as defined in the LOI), (b)
divided by the number of shares of the Company's common stock outstanding or
deemed to be outstanding as of the Effective Date of the Merger (as defined in
the LOI).
The consummation of the proposed Merger is dependent upon a number of
conditions, including among others to be set forth in definitive documentation:
(a) the negotiation and execution of a definitive agreement; (b) the formal
approval of the Boards of Directors and shareholders of each of the companies;
(c) the effectiveness of a Form S-4 registration statement with the Securities
and Exchange Commission covering the shares to be issued by FreeStar in the
transaction; (d) the completion by each of the companies of its due diligence
investigation concerning the other company to each company's satisfaction; and
(e) at FreeStar's expense, rendering of a fairness opinion by an independent
broker-dealer firm that the contemplated transaction is fair to FreeStar and the
stockholders of the Company.
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 and nine months ended March 31, 2003, the Company
generated net losses of $498,824 and $1,423,978 respectively. Since its
inception, our business has incurred significant losses, and as of March 31,
2003 had negative working capital of $6,605,437. As a result, there is
substantial doubt about the Company's ability to continue as a going concern,
which was stated in auditor's report on the Company's financial statements for
the 2002 fiscal year. Although during the periods covered by this report,
management projected improved cash flows from operating activities, improvement
was not realized due to decreases in operating revenue and the loss of customers
and processing relationships. Management continues to try to implement plans for
increasing cash flow from operating activities, although there can be no
assurance that management will be successful. 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.
The Company has continued its efforts to reduce operating expenses during the
three months ended March 31, 2003, and will be required to continue to do so. As
of the end of such period, the Company has essentially outsourced its core
business operations to a third party, and has significantly decreased its
administrative and managerial overhead. Management is also seeking to develop
new and different processing partner and customer opportunities that will allow
the Company to exploit what it believes are significant technological advantages
of its Internet payment processing systems. Notwithstanding those efforts,
management does not currently anticipate that cash flows from operations will be
sufficient to sustain operations during the next 12 months absent significant
improvements in cash flow from operations or access to supplemental financing in
the form of third party debt or equity transactions. There can be no assurance
21
that management's plans to add processing customers and partners 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.
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.
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 March 31, 2003 the reserve balance was $574,104 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.
Results of Operations
Three months ended March 31, 2003 compared with three months ended March 31,
2002.
Revenue
Revenue for the three months ended March 31, 2003 was $440,897, compared to
$4,017,630 for the three months ended March 31, 2002, a decrease of 89%. During
the three months ended March 31, 2003, substantially all revenues were derived
from payment processing activities, including $24,837 of revenues related to
fees earned on the processing of chargebacks. During the three months ended
March 31, 2002, revenues were primarily derived from payment processing
activities, including $212,235 of revenues related to fees earned on the
processing of chargebacks. In addition, $162,387 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, and specifically
the loss of the Company's European processing partner and related customers.
Cost of Revenue
Cost of revenue includes amounts paid to banks and processing partners. Cost of
revenue for the three months ended March 31, 2003 was $276,598 or 62.7% of
22
revenue. For the three months ended March 31, 2002, cost of revenue was
$2,302,136 or 57.3% 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 99.8% to $4,731 during the three
months ended March 31, 2003 from $2,313,368 during the three months ended March
31, 2002. 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 and decrease of depreciation expense
from the sale of the Company's data center assets in Florida and Utah during the
three months ended December 31, 2002.
Selling, general and administrative expense decreased 54.3% to $634,698 during
the three months ended March 31, 2003 from $1,390,263 during the three months
ended March 31, 2002. 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 96.2% to $5,008 during the three
months ended March 31, 2003 from $130,928 during the three months ended March
31, 2002. The decrease in research and development expense was due to the
reduction of development staff during fiscal 2002, as well as, the outsourcing
of R&D to M2 earlier in fiscal 2003.
The Company's variable option plan did not create any non-cash compensation
adjustment during the three months ended March 31, 2003 or March 31, 2002
because all outstanding options maintained exercise prices greater than the
quoted stock price during the three months ended and as of March 31, 2003 and
March 31, 2002 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.
Other Income and Expense
The Company incurred net other income and expense of ($18,686) for the three
months ended March 31, 2003. This compares to ($24,252) for the three months
ended March 31, 2002. During the three-month period ended March 31, 2003,
interest and other expense of $25,547 were partially offset by interest and
other income of $5,861. During the three-month period ended March 31, 2002,
interest and other expense of $24,821 were partially offset by interest and
other income of $569.
Nine months ended March 31, 2003 compared with nine months ended March 31, 2002.
23
Revenue
Revenue for the nine months ended March 31, 2003 was $5,242,946 compared to
$13,329,200 for the nine months ended March 31, 2002, a decrease of 60.7%.
During the nine months ended March 31, 2003, revenues were primarily derived
from payment processing activities, including $159,205 of revenues related to
fees earned on the processing of chargebacks. During the nine months ended March
31, 2002, revenues were primarily derived from payment processing activities,
including $912,813 of revenues related to fees earned on the processing of
chargebacks. In addition, $324,388 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 largely due to
the loss of the Company's European processing partner and related customers.
Revenues for the nine months ended March 31, 2003 include $50,000 from the sale
of a software license to M2.
Cost of Revenue
Cost of revenue for the nine months ended March 31, 2003 was $3,897,589 or 74.3%
of revenue. For the nine months ended March 31, 2002, cost of revenue was
$8,256,976 or 61.9% 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 93.4% to $464,944 during the
nine months ended March 31, 2003 from $7,000,149 during the nine months ended
March 31, 2002. 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 and decrease of depreciation
expense from the sale of the Company's data center assets in Florida and Utah
during the three months ended December 31, 2002.
Selling, general and administrative expense decreased 49.1% to $2,280,148 during
the nine months ended March 31, 2003 from $4,479,719 during the nine months
ended March 31, 2002. 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 68.6% to $120,585 during the nine
months ended March 31, 2003 from $383,810 during the nine months ended March 31,
2002. 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 nine month period ended March 31, 2003, as a result of adjusting down
its reserve for uncollectable chargebacks. This adjustment is based on
management's 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.
24
The Company's variable option plan did not create any non-cash compensation
adjustment during the nine months ended March 31, 2003 or March 31, 2002 because
all outstanding options maintained exercise prices greater than the quoted stock
price during the nine months ended and as of March 31, 2003 and March 31, 2002
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 nine months ended March 31, 2002, 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 nine months ended March
31, 2003.
Other Income and Expense
The Company incurred net other income and expense of ($1,202,406) for the nine
months ended March 31, 2003. This compares to ($77,648) for the nine-month
period ended March 31, 2002. For the nine month period ended March 31, 2003, 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 settlement with Bank of Nevis, as
discussed in Note 4 of the financial statements. The Company had previously
recorded approximately $531,743 for this matter. Interest and other income and
expense totaled ($43,784).
Liquidity and Capital Resources
The Company likely will need to raise additional capital to finance ongoing
operations during the next fiscal year and to enable the Company to continue its
efforts to add new customers, re-enlist past customers, and seek new
opportunities with payment processors. 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 March 31, 2003, had an accumulated
deficit of $292,034,392. As a result, there is substantial uncertainty about the
Company's ability to continue as a going concern, which was stated in the
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 sustain
operations or ever achieve or sustain profitability.
25
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 the Company's Salt
Lake City, Utah offices. The initial term of the Provider Agreement is five
years. M2's services under the Provider Agreement are to be subject at all times
to the oversight and approval of the Company's Chief Executive Officer, who, in
turn, is subject to the oversight of the Company's Board of Directors.
In return for its services under the Provider Agreement, the Company is required
to pay M2 a monthly fee (the "Monthly Fee") equal to 115% of M2's actual costs
and expenses incurred in connection with its performance under the Provider
Agreement, provided that the Company shall not be required to pay, in cash, all
or any portion of the Monthly Fee if the Company does not have "Free Cash Flow",
as defined in the Provider Agreement sufficient to make such payments. Free Cash
Flow is defined as total cash receipts from the Company's business for a given
month, less Operating Outlays. Operating Outlays are defined as ordinary
expenses actually paid by the Company plus payables paid, plus expenses accrued
in the ordinary course of the Company's business, but excluding (i) any Monthly
Fees paid to M2, (ii) any payments of Monthly Fees due to M2 but deferred
because of insufficient Free Cash Flow, and interest thereon, (iii) any interest
payments relating to any loans entered into by the Company or any of its
subsidiaries prior to the date of the Provider Agreement, (iv) any interest
payments relating to any payables or accrued expenses incurred by the Company or
any of its subsidiaries prior to the beginning of such month, (v) the payment of
any liabilities other than payables or accrued expenses incurred in the ordinary
course of business, (vi) payments made to any officer or director of the Company
or any of its subsidiaries or any of their affiliates for anything other than
(a) normal salary in amount equal to that in effect for the month prior to the
date hereof and (b) reimbursement of ordinary business expenses in a manner
consistent with prior practice, and (vii) payments for the acquisition of
capital equipment. If Monthly Fees are not paid because of insufficient Free
Cash Flow, the remaining unpaid portion of the Monthly Fee shall be paid by the
Company (A) in cash within 30 days, or (B) by delivery of a demand note for the
unpaid amount and bearing interest at 8% per annum, which demand note must be
paid out of future Free Cash Flow in excess of amounts necessary to pay current
Monthly Fees. Since the inception of the Provider Agreement, the Company has not
had Free Cash Flow to pay M2, resulting in the accrual of amounts payable to M2.
On March 11, 2003, and pursuant to the terms of a letter agreement between the
Company and M2, the Company executed a promissory note in favor of M2 in the
amount of $180,384.93. The note is payable on or before July 1, 2003, and bears
interest at the annual rate of eight percent.
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. No Bonus
Compensation was paid or payable to M2 for its services under the Provider
Agreement through March 31, 2003.
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. M2's agreement to provide such
26
financing was subject to the negotiation of definitive terms and documentation.
Although negotiations took place after the execution of the Provider Agreement,
the parties were never able to agree to mutually acceptable terms for such debt
financing. As an alternative to such debt financing, M2 and the Company agreed
that M2 would purchase from the Company essentially all of the fixed assets at
the Company's Salt Lake City and Clearwater data center facilities for total
consideration of $180,000. Some of that purchase price was paid in the quarter
ended December 31, 2002, and the remainder of such purchase price was satisfied
with the reduction of amounts payable to M2 during the quarter ended March 31,
2003. Also, and in a simultaneous transaction, the Company and M2 entered into a
Software License, Source Code, and Derivative Product Distribution Agreement
(the "M2 Software License"). Under the 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.
The Company believes that the Provider Agreement has reduced expenses by
streamlining and outsourcing some management, sales, marketing and technology
functions, and allowing the Company essentially to defer the payment of general
operating expenses until Free Cash Flow is sufficient to make payments. The
Company believes that the Provider Agreement may in the future enhance liquidity
by increasing sales volume by introducing new payment processing and portfolio
business, however, there can be no assurance that such benefits will
materialize. The liquidity generated by (i) the sale of the data center assets
to M2, (ii) the M2 Software License, and (iii) the deferral of expenses paid by
M2 was instrumental in allowing the Company to maintain operations during the
period ended March 31, 2003.
Chargeback Reserves
- -------------------
At March 31, 2003 and June 30, 2002, the Company has withheld $2,852,003 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. 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 March 31, 2003, the
merchant reserves accrual was $2,852,003, however, restricted cash on hand for
27
the purpose of funding such reserve was only $1,824,394. Therefore, the merchant
reserve accrual was under funded by $1,027,609.
Cash Flow Activities
- --------------------
Operating activities provided $27,211 during the nine months ended March 31,
2003, compared to providing $858,702 during the nine months ended March 31,
2003. The net loss of $1,423,978 incurred during the six months ended December
31, 2002 included non-cash depreciation of $464,944, 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 $8,683,059 was offset, in large part, by a
decrease in the merchant reserve liability of $7,874,216. Other changes in
current asset and liabilities accounts accounted for the remaining net cash
provided by operating activities during the period.
During the nine months ended March 31, 2002, operating activities provided cash
of $858,702. The net loss of $19,524,485 was mostly offset by non-cash
depreciation and amortization expense of $7,000,149 and impairment writedown of
goodwill of $12,135,383. 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 nine months ended March 31, 2003, 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 nine months ended March 31, 2002, investing activities used $20,895
for the purchase of assets.
During the nine months ended March 31, 2003, $77,767 was paid as principal
repayment of capital lease obligations and notes payable. During the nine months
ended March 31, 2002, $1,083,264 was paid as principal repayment of capital
lease obligations and notes payable.
Item 4. Controls and Procedures.
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
28
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 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.
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
29
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, BONI alleges 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
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. After the period ended
March 31, 2003, claims of the Next Generation plaintiffs were dismissed with
prejudice.
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 (5,000 post
reverse split) shares of the Company's stock pursuant to the parties' June 1,
1999 Registration Rights Agreement. The complaint asserted 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. During the three months ended March
31, 2003, the Company entered into a settlement agreement with Messrs. Thompson
and Nagel, and the case was dismissed.
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. Discovery in the case is ongoing, and subsequent to March 31,
2003, Ameropa sought permission to file its Fifth Amended Complaint. If filed,
the Company will answer the complaint and otherwise defend 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
30
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 October 20, 2003. Discovery
is on-going and DCTI is vigorously defending against the claims.
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.
Item 2. Changes in Securities and Use of Proceeds
Item 2(c) Equity Securities Issued or Sold by the Registrant without
Registration.
During the nine months ended March 31, 2003, the Company issued the following
securities without registration under the Securities Act of 1933, as amended
(the "Securities Act"):
Effective February 7, 2003, and as partial consideration of a settlement of a
lawsuit between the Company and a former officer, the Company issued a five-year
warrant to purchase a total of 20,000 shares of common stock at an exercise
price per share of $1.00 per share. The Company issued such warrant, and would
issue any shares of common stock issued upon the exercise thereof, without
registration under the Securities Act of 1933 (the "Securities Act") in reliance
on Section 4(2) of the Securities Act. Such warrant was issued, and any shares
of common stock issuable upon exercise thereof would be issued as restricted
securities, and the certificates representing such securities are and would be
stamped with a standard legend to prevent any resale without registration under
the Securities Act or pursuant to an exemption.
On July 8, 2002, the holder of a convertible payment obligation converted
$525,569.52 of the outstanding cash amount payable to him into 299,470 shares of
the Company's common stock. The Company subsequently notified that holder 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 289,484 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.
31
Item 3. Defaults Upon Senior Securities
On December 24, 2002, the Company executed a promissory note in favor of a
vendor in the total principal amount of $275,000. The note was executed, in
part, for an agreed reduction of amounts payable to such vendor in the amount of
$744,829. The note is payable in monthly payments of $15,000, due on the
fifteenth day of each month after February 15, 2003, with $15,000 payable before
the 31st day of December 2002 and January 2003. The Company did not make the
payments required to be made in March and April 2003 on such note. The holder of
the note has provided written notice of default of the note. Upon the occurrence
of an event of default under the note, the principal and accrued interest under
the note accelerated and become immediately due and payable. The outstanding
amount of principal and accrued interest on the note at March 31, 2003 is
$230,000 and $1,150 respectively.
Item 5. Other Information
Name Change and Reverse Stock Split
- -----------------------------------
Although the Company did not submit any matter to a vote of its security
holders, on March 11 and 13, 2003, the holders of a majority of the issued and
outstanding shares of the Company's common stock delivered to the Company
written consents approving two separate matters pursuant to Section 228 of the
Delaware Business Corporation Law. First, the stockholders approved a 100 for 1
reverse split of all of the Company's then issued and outstanding shares of
common stock (the "Reverse Stock Split"). Second, the stockholders approved an
amendment to the Company's Amended and Restated Certificate of Incorporation
changing the name of the Company to "TransAxis, Inc." (the "Name Change"). The
Company prepared and filed with the Securities and Exchange Commission, and then
delivered to all stockholders an Information Statement on Schedule 14C
pertaining to the Reverse Stock Split and the Name Change. The Reverse Stock
Split and the Name Change became effective 20 days after the Schedule 14C was
mailed to the Company's stockholders, on May 8, 2003.
FreeStar Letter of Intent
- -------------------------
On April 30, 2003, the Company entered into a Letter of Intent ("LOI")
with FreeStar Technology Corporation, a Nevada corporation ("FreeStar"), for the
purpose of setting forth the proposed terms of an agreement in principle
pursuant to which FreeStar would acquire the issued and outstanding common stock
of the Company pursuant to a statutory merger of the Company with and into a
subsidiary of FreeStar (the "Merger").
Under the LOI, each outstanding share of the Company's common stock
outstanding or deemed to be outstanding upon the assumed conversion of any
preferred stock or other convertible instruments as a result of the consummation
of the Merger is to be converted into the right to receive that number of
validly issued, fully paid, nonassessable and registered shares of FreeStar
equal to (a) the greater of (i) 10,000,000 shares, or (ii) that number of shares
equal to $1,800,000 divided by the Closing Price (as defined in the LOI), (b)
divided by the number of shares of the Company's common stock outstanding or
deemed to be outstanding as of the Effective Date of the Merger (as defined in
the LOI).
32
The consummation of the proposed Merger is dependent upon a number of
conditions, including among others to be set forth in definitive documentation:
(a) the negotiation and execution of a definitive agreement; (b) the formal
approval of the Boards of Directors and shareholders of each of the companies;
(c) the effectiveness of a Form S-4 registration statement with the Securities
and Exchange Commission covering the shares to be issued by FreeStar in the
transaction; (d) the completion by each of the companies of its due diligence
investigation concerning the other company to each company's satisfaction; and
(e) at FreeStar's expense, rendering of a fairness opinion by an independent
broker-dealer firm that the contemplated transaction is fair to FreeStar and the
stockholders of the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Location
-------- ------------------- --------
3.1 Amended and Restated Certificate of Incorporation, filed with (1)
the Delaware Secretary of State September 16, 1998
3.1.1 Certificate of Amendment of Amended and Restated Certificate of Attached
Incorporation, filed with the Delaware Secretary of State
December 22, 1998
3.1.2 Certificate of Amendment of Amended and Restated Certificate of Attached
Incorporation, filed with the Delaware Secretary of State
October 18, 1999
3.1.3 Certificate of Amendment of Amended and Restated Certificate of Attached
Incorporation, filed with the Delaware Secretary of State
May 6, 2003
3.2 By-laws (1)
4.1 Certificate of Designation of Series D Convertible Preferred Attached
Stock, filed with Delaware Secretary of State on January
22, 2002
10.1 Second Amended and Restated Incentive Plan (2)
10.2 Settlement Services Agreement with St. Kitts Nevis Anguilla (3)
National Bank
10.3 Transaction Processing Services Agreement with Equifax Card (3)
Services, Inc.
10.4 Global Master Service Agreement with Global Payment Systems LLC (3)
10.5 Amendment No. 1 to Settlement and Release Agreement with Don (4)
Marshall dated March 18, 2002
10.6 Agreement with M2, Inc. dated September 30, 2002 (5)
10.7 License Agreement with M2, Inc., dated November 27, 2002 (6)
10.8 Bill of Sale for Data Center Assets (M2, Inc.) (6)
99.1 Certification Attached
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 1998. (2) Incorporated by reference to the Company's
Preliminary Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on October 28, 1999.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 2000. (4) Incorporated by reference to the Company's
Form 8-K filed on March 27, 2002 (5) Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended June 30, 2002 (6) Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 2002
(b) Current Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter ended March
31, 2003.
34
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.
TRANSAXIS, INC.
Date: By /s/ Lynn J. Langford
---------------------------
May 20, 2003 Lynn J. Langford
Chief Financial Officer
35
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Don Marshall, Chief Executive Officer of TransAxis, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TransAxis, 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: May 20, 2003 /s/ Don Marshall
---------------------------------
Don Marshall
Chief Executive Officer
(Principal Executive Officer)
36
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Lynn J. Langford, Chief Financial Officer of TransAxis, Inc. certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TransAxis, 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: May 20, 2003 /s/ Lynn J. Langford
------------------------------------------------
Lynn J. Langford
Chief Financial Officer
(Principal Financial and Accounting Officer)
37