SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to___________
Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
(Previous Name of Registrant: DataMark Holding, 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)
136 Heber Avenue, Suite 204
P. O. Box 8000
Park City, Utah 84060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(435) 655-3617
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001
par value
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 7, 1998, 13,099,210 of the Registrant's Common Shares
were outstanding. As of October 7, 1998, the aggregate market value of voting
stock held by non-affiliates of the Registrant was approximately $22,903,028
based on the average of the closing bid and asked prices for the Registrant's
Common Shares as quoted by the NASDAQ National Market.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated herein by reference, as indicated
herein.
PART I
ITEM 1. BUSINESS
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SUMMARY
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and
referred to herein as "DCTI" or the "Company") develops and markets proprietary
electronic commerce software and technologies and online information services
for a variety of computer platforms and hand-held computing devices connected to
the Internet. The core technology is organized into three product groups which
include: a suite of electronic commerce tools for building Internet storefronts
designed for retailing a wide variety of consumer and business products; a
distributed content publishing software suite that allows businesses to
creatively deliver information services across the Internet as well as wireless
networks; and a transaction software suite that incorporates a complete Internet
payment processing system to streamline credit card transactions over the
Internet. The Company utilizes its software suites to host and deliver
information services and e-commerce tools to major businesses, Internet portals,
and financial institutions on the Internet. The Company also licenses the
software. The Company's sophisticated software and technology is currently used
by major portals such as Excite, Netscape and America Online, as well as by the
Company's own prominent group of Web-sites including www.weatherlabs.com and
www.videosnow.com.
The Company's four operating divisions include netClearing(TM),
WeatherLabs(TM), Videos Now(TM), and Books Now(TM). The netClearing division
utilizes both the e-commerce tools and the transaction software suite to provide
a complete electronic commerce package for conducting business and facilitating
credit card payment processing over the Internet. The WeatherLabs division
supplies proprietary real-time weather information to online business throughout
the world, and hosts its own web site for consumers and business customers.
Videos Now and Books Now utilize the Company's software suites to operate
e-commerce web sites that sell media products such as videos, movies,
LaserDiscs, DVDs, and books to consumers and online businesses.
The Company's content and commerce software is designed to be
co-branded or private labeled by its customers. This approach enables the
Company's customers and partners to brand their own sites and products and build
additional value into their online presence with the use of the Company's
technology. The Company believes that significant revenue opportunities exist
for all its divisions in the rapidly expanding e-commerce sector of the Internet
industry.
The Company believes that its combined strengths in information
technology, software development and electronic commerce for the Internet equate
to a powerful business model that can yield significant per-transaction based
revenue streams at a comparatively low cost to the Company. The Company believes
that this model for growth is sustainable in the rapidly expanding market for
Internet commerce.
INTERNET STRATEGY
General
The Company develops sophisticated e-commerce software and information
services for the Internet. The Company has created unique e-commerce, content
publishing, and payment processing software suites that are marketed and
licensed to online businesses including: Internet portals, web sites and
financial institutions. Its principal divisions are netClearing, WeatherLabs,
Videos Now and Books Now. The Company recently acquired Digital Courier
International, Inc., an Internet software development company, that specializes
in electronic commerce. This acquisition is expected to give the Company a
competitive advantage in the fast-paced Internet commerce industry.
netClearing: E-Commerce Payment Processing
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Independent research organizations report that online commerce is
growing at a rapid pace. Forrester Research projects that some 380,000 merchants
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will be online and selling by the year 2000, while International Data Corp.
forecasts that the total volume of e-commerce will surpass $220 billion by 2001.
Beyond simply opening a new consumer sales channel, the Internet enables the
creation of an automated system for online ordering and distribution that can
boost sales volume while lowering costs, thereby increasing the profit margin of
every transaction.
General
The Company's recently launched netClearing technology is a complete
line of payment processing services which can be tailored to fit the needs of
any merchant, from an e-commerce startup to an online retailing giant to a
financial institution such as a merchant bank. For all customers, netClearing
can provide comprehensive transaction services including reporting transaction
activity; handling chargebacks; conducting ongoing fraud detection; and
performing highly efficient authorization, capture, settlement and
reconciliation. netClearing's gateway payment technology, derived from
point-of-sale leader VeriFone Inc., enables merchants to seamlessly integrate
Internet transactions with legacy financial networks, allowing full leverage of
existing infrastructure.
netClearing provides fast and efficient processing at a low transaction
fee by utilizing state-of-the-art technologies. All netClearing solutions can be
easily implemented at a low setup cost, and are highly scalable for future
expansion and increased performance requirements. The software is developed with
open standards technology for full interoperability with existing merchant
systems and Web sites, and is designed for parallel payment processing, for
efficient and robust performance. Moreover, netClearing is highly secure through
support for both SET and SSL; additional security in the form of digital
certificates is provided through VeriFone Inc.'s partner VeriSign.
netClearing Internet Payment Processing
Fast and Secure Authorization and Capture. With netClearing technology,
a merchant collects credit card transaction data sent to its e-commerce site in
a standard message format and sends it to netClearing's secure server through a
secure Web page or electronic form. netClearing's authorization and capture
process allows for both real-time and delayed capture for transactions requiring
synchronized fulfillment and shipment. netClearing's delayed capture feature
protects the consumer from being charged for an order until the goods are
shipped. Once a merchant fulfills authorized purchases, netClearing forwards
settlement files to the appropriate back-end processor. With no payment server
required, this solution is extremely simple to implement and inexpensive to
maintain. Complete transaction reports are sent to merchants as each transaction
batch is processed, or reports are made available online through netClearing's
merchant administration site.
Fully Outsourced Payment Processing. Designed for both financial
institutions and the online merchant who wants to establish real-time private
label e-commerce functionality with minimal overhead, this option provides
complete payment processing with no need for a payment server on the merchant's
side. The e-commerce site's payment page, hosted on a secure payment server at
netClearing's datacenter, is designed by netClearing to appear to be a part of
the merchant's own site. Payment information is authorized and captured in
real-time to enable fast and efficient live transaction processing; delayed
capture can also be specified by the merchant. Real-time reports generated
according to merchant-defined parameters can be printed directly from the
merchant's browser.
API-Level Payment Processing Integration. Established online merchants
already deploying an e-commerce publishing solution can implement netClearing's
leading-edge payment processing technology within their Web site through tight
API-level (application programming interface-level) integration. The merchant
can retain full control of a payment page hosted on their own secure server,
while establishing close interoperability with existing merchant-side accounting
and order-tracking modules for complete leverage of existing investments.
netClearing supports both SET and SSL to guarantee the security of encrypted
payment information transmitted to netClearing, and accepts transactions from
all commercial payment servers.
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Additional Services To Be Provided
Virtual Merchant Accounts. netClearing anticipates providing "virtual
banking services" that will be fully integrated with netClearing's transaction
processing system. These services will be accessible and customizable online for
truly virtual merchant banking. netClearing's Virtual Merchant Accounts will
interface with a merchant bank to give merchants a turnkey e-commerce platform
from which to conduct business on the Internet.
Insurance against Fraudulent Transactions. NetClearing is also
developing a robust e-commerce insurance package with the goal of guaranteeing
risk-free online payments. Typical credit card issuers insure against fraudulent
transactions, but require consumers to assume a deductible. netClearing's
products are anticipated to cover this deductible in full, making e-commerce
even safer for the customer than brick-and-mortar transactions.
Sophisticated Fraud Detection Software. Both customers and merchants
are protected by netClearing's extensive matrix of fraud detection schemes,
which constantly monitor account activity for suspicious transactions. Merchants
and consumers are instantly alerted to evidence of the misuse of credit card
information online, detected by such metrics as the verification of bill to/ship
to addresses, velocity of purchase, and bad card histories cross-referenced in
industry fraud databases.
Full-Service Transaction Reporting. netClearing will enable businesses
to track sales, credits, transactions, and chargebacks through easily-customized
reports viewed with their Web browsers, available 24 hours a day for the
merchant's convenience. Detailed real-time information helps merchants track
purchasing trends across a variety of hourly, daily, and seasonal timelines for
precise planning. Payment information can be easily imported into existing
accounting systems for streamlined financial control.
Security. netClearing has adopted both SSL and SET 1.0/2.0 protocol
standards for consumer-to-merchant authentication and encryption, ensuring the
highest level of security and transactional integrity for electronic commerce.
At the netClearing payment processing facility, merchants are protected by
unmatched network security guarding Virtual Merchant Account servers, account
information, and transaction reports. Extensive firewall protection and secure
merchant data controls prevent intruders from compromising merchants' online
businesses 24 hours a day, seven days a week.
WeatherLabs
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In May 1998, the Company purchased WeatherLabs, Inc., one of the
leading online providers of weather and weather-related information. WeatherLabs
utilizes the Company's sophisticated distributed content publishing software to
deliver weather-related products and services over the Internet.
General
WeatherLabs has provided its clients commercially-focused,
weather-related products and services that enhance the value of web sites and
online services since 1990. From site planning and marketing development, to
custom application design and deployment, the meteorologists, engineers and
creative designers at WeatherLabs offer comprehensive meteorological data
available on the Internet to any business affected by the weather. Clients
include Excite Inc, @Home, Netscape, Conde Nast, SkyTel, Nokia, Philips
Multimedia, and Preview Travel.
Technology
As a pioneer in object-oriented software development, WeatherLabs
encapsulates meteorological and atmospheric science into portable Java objects
in component form that accurately represent the attributes of meteorological
conditions. With this solid technology foundation and the most advanced tools
from JavaSoft, Sun Microsystems, Visigenic and Netscape Communications, the
WeatherLabs development team can continuously and easily enhance the accuracy of
forecasting and analytic engines on the fly without interrupting the production
process.
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The STORM Software Framework. To ensure that weather data and
meteorological measurements are collected and processed efficiently, WeatherLabs
relies upon STORM, the Company's proprietary Java-based and object-oriented
system architecture. STORM permeates every aspect of WeatherLabs and is
responsible for numerical analysis, meteorological science and forecasting
algorithms--as well as the processing and packaging of the data as varied as ski
reports, airport delay forecasts, and editorial content. As a server side
architecture which places the bulk of weather data and algorithmic processing on
the Company's highly specialized computing facilities, STORM enables easy
integration of the entire WeatherLabs product line through a lightweight client
side connection.
Distribution: Taking a Ride on the WeatherBus. Before critical weather
information reaches clients, data speeds through the CORBA/IIOP-based WeatherBus
pipeline to the WeatherFactory research and development facility. After thorough
information analysis and processing with STORM, the WeatherBus automatically
delivers weather products to WeatherLabs' clients in any electronic format. In
this process, built-in load balancing allows STORM to maximize the delivery
performance of information through the WeatherBus from source to final
destination.
Security and Seamless Integration. WeatherLabs products are seamlessly
integrated into proprietary systems with maximum reliability and security
through the Company's real-time encoding system which employs point-to-point
encryption, digital signatures, and dual firewall gateways.
Continuous Weather Information 24 hours a day, 7 days a week.
WeatherLabs ensures the constant flow of weather information to its clients by
leveraging system redundancy in each of its technology centers. Satellite dishes
in San Francisco, London, St. Kitts and Salt Lake City work around the clock to
provide constant--and identical--data to all three WeatherLabs weather centers
which house redundant servers and multiple T1 connections for uninterrupted
weather reporting 24 hours a day, seven days a week. As STORM assimilates
volumes of weather information around the clock, innovative WeatherLabs products
from historical analytics to detailed forecasts will eventually be available for
any geocode on the planet -- down to any street address in the world.
Videos Now
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The Company's electronic commerce software suites are all applied to
create retail storefronts with sophisticated search, database and transaction
processing capabilities. The Company has incorporated all of its technologies
into a robust and scalable retail engine to be initially launched on America
Online as a new video site, Videos Now. Videos Now will be the "Premier Video
Partner" throughout the AOL online service, Digital City, and AOL.com.
Videos Now is a comprehensive online video retailer that will enable
businesses to create customized and effective virtual video storefronts. The
powerful content and commerce engines from Digital Courier give extensive
flexibility to businesses looking to seamlessly integrate a virtual video store
into their Web sites, cellular phones, kiosks or wireless PDA services.
Videos Now, under development for the past nine months, is anticipated
to go online in October 1998 and begin accepting and processing orders for video
product purchases. Among the features of the Videos Now site are a library of
over 100,000 videos, a broad range of movie categories, DVD and Laserdisc
inventory, streaming video previews, major discounts on selected titles, and
monthly specials. The Company is also enabling its technology to deliver
video-on-demand for its customers.
Videos Now offers highly customized, pre-indexed video libraries for
niche-oriented channels on major portals or niche-oriented businesses and
special interest Web sites, such as health care, home cooking, skiing or
biotechnology. The Videos Now library can be tailored to the specific needs of
the channel, site or business customer. For example, a sports-oriented site may
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wish to offer only sports related videos through its virtual video store,
keeping a focus to its overall site. Videos Now business customers can define
and purchase their own video libraries online, and automatically receive the
updates to their video storefront the same day.
The search capabilities of Videos Now offer robust navigation through
thousands of video titles. Moreover, Videos Now is fully integrated with the
entire range of online products from the Company. This integration with the
Company's content offerings provides relevant video title suggestions when cross
referenced by a weather-related media search or a book search. The use of
netClearing technology provides seamless and efficient payment processing and
credit card authorizations.
By securely storing purchasing information such as billing and shipping
information for each retail customer, Videos Now offers its customers
easy-to-use, one-button, one-touch shopping. Customers can keep track of their
video title purchases and request to be notified when titles of a particular
subject matter or authorship are added to the library. In addition, customers
can be notified when particular titles are marked down by a given price
percentage, keeping them abreast of the best buys on the Internet.
Books Now
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In January 1998, the Company purchased Books Now, Inc., which sells
books over the Internet through its strategic relations with certain magazine
distribution companies. Books Now has entered into agreements with over 200
magazine companies and online entities. Books Now provides book ordering
fulfillment services in correlation to certain magazine book reviews, book
mentions and advertisements. Among the magazines with which Books Now has
contracts are Cosmopolitan, Science News, Southern Living and Field & Stream.
Through its "Virtual Bookstore" program, Books Now develops, builds and
maintains a bookstore branded with the look, feel and navigational tools of the
partnering website. This Virtual Bookstore is linked from the partner's websites
home page and other integral locations. Visitors to the magazine's web site are
thus given the opportunity to purchase books which are thematically related to
the content and subject of the magazine. For example, a visitor to the Science
News website can, through the Books Now "Virtual Bookstore" (branded as the
Science News Bookstore), see specially-indexed science-related books available
for sale. Similarly, "Virtual Bookstores" on other partner websites can be
targeted and highlighted with sport books, design books, health books, etc.
Books Now does not attempt to compete with the major destination
booksellers on the Internet, such as Amazon and Barnes & Noble. Books Now does
not attempt to divert Internet traffic to its destination website. Rather, it
enables existing websites to share in book sales revenue while keeping visitors
within their site and brand. Participating websites - which at this time
primarily consist of magazine websites - are able to brand the Company's
technology and e-commerce capabilities with their own interface and logo in the
form of a virtual bookstore. Revenue from purchases made over the Internet from
such websites are shared between Books Now and the website.
The Company intends to incorporate the sophisticated technology
developed for the Videos Now retail engine into the Books Now virtual
bookstores.
Industry partnerships
Through alliances with leaders in the technology industry, Digital
Courier has become a leading developer of technology-driven products. These
partnerships bolster the extensibility and portability of its products.
Netscape Communications. Digital Courier worked with Netscape's engineering team
on the flagship Enterprise Server 3.0. This product offers groundbreaking
integration of CORBA ORB technology directly into the Enterprise Web Server,
enabling server-side Java applications to be more extensible, easily
distributed, and infinitely portable. Digital Courier was among the first
companies to deploy this technology and worked closely with Netscape's
Engineering and QA groups on the final product. All of Digital Courier's
server-based Web applications use the latest versions of this technology today.
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Sun Microsystems. Digital Courier continues to build on a relationship
encompassing the Sun Solaris Operating System group up to the Starfire
Enterprise 10000 super-scalar server technology. The Sun platform comprises over
75% of Digital Courier's production engine and technology center systems.
JavaSoft. Digital Courier is a premier developer partner with JavaSoft. The
company is currently working with several alpha and beta products from JavaSoft
to ensure their suitability for commercial applications. Software applications
developed by Digital Courier were showcased, demonstrated, and endorsed at
JavaSoft's JavaOne conference in the keynote address delivered by Java's creator
James Gosling.
Visigenic. The leader in CORBA technologies for Java, the Visigenic ORB is a key
component to the Digital Courier technology framework. Because this technology
is directly integrated into Netscape's flagship product, Enterprise Server 3.x,
Digital Courier has worked closely with both firms simultaneously to build tools
for the most sophisticated online applications available today.
Symbol Technologies. Digital Courier is working closely with Symbol
Technologies, a leading hand-held device manufacturer, to develop the next
generation of online applications suitable for hand-held devices equipped with
wireless communication capabilities.
Nokia. Nokia is a leading developer of cellular phone technology including the
new generation of Nokia Communicator products. Digital Courier has developed
custom software applications for delivery of weather and financial information
to these cellular phones.
GeoWorks. GeoWorks develops real-time operating systems for third-generation
cellular phones and personal digital assistants. Digital Courier is developing
information products that can be deployed across any device that support the
GeoWorks operating system.
Apple Computer. Digital Courier continues to expand its developer relationship
with Apple Computer's Enterprise Software Division (formerly NeXT Computer,
Inc.). This group develops industry-leading object-oriented technologies that
integrate directly into Web applications and the Java programming language.
Marketing
Each division of the Company has its own specialized marketing staff to promote
and sell the Company's virtual commerce products to websites, online services
and other Internet businesses. Prominent positioning on major portals to
increase visibility has been a primary marketing goal. For example, the
prominence of the WeatherLabs weather service on major sites such as Excite has
led to numerous "inbound" requests to license the service on other websites. The
marketing staff continues to develop relationships with major Internet companies
and websites, and will attempt to position the Company's virtual commerce
products and processing and clearing technology for greater visibility and
market recognition.
The WeatherLabs and netclearing marketing department works out of the Company's
San Francisco offices, and the Books Now and Videos Now departments work out of
the Company's Salt Lake City offices.
Significant Customers
The Company is not dependent upon a single customer. Videos Now, when
launched in October 1998, is expected to initially derive most of its revenue
from its presence on the America Online network and on AOL.com. The Company's
three-year agreement with America Online gives Videos Now "premier anchor
tenancy" on key channels of the America Online service. Loss of America Online
as a customer would have a material adverse affect on Videos Now and on the
Company. The Company is currently in negotiations with other major portals and
Web sites, and consummation of any such prospective transactions would lessen
the dependence of Videos Now on America Online members and visitors. Although
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the WeatherLabs business model has benefited from its high profile on the Excite
and Netscape search engines, its major sources of revenue are expected to
increasingly come from licensing the technology and services to additional
websites, both large and small, and from advertising revenue sharing
arrangements. Moreover, WeatherLabs has recently entered into agreements with
such major Internet companies as @Home, Preview Travel, and the Travel Channel
on the AOL Network. Books Now derives its sales from its virtual bookstores and
its relationships with over 200 magazines.
The Technology
The Company's computer facility is a state-of-the-art data center which
supports the products and services offered by the Company over the Internet. It
has redundant systems in place for power, network, environmental, and fire
suppression. Located in Salt Lake City, the technology center guarantees
consistently optimal performance through state-of-the-art system scalability and
reliability. Features of the facility include:
A redundant OC-12 655Mbps fiber optic data connection into the technology
center yields high bandwith throughput for e-commerce customers.
Switched 155 Mbps asynchronous transfer mode (ATM) backbones to each of the
primary data server providing the bandwidth to handle thousands of simultaneous
transactions.
Powered by a series of HP 9000 multiprocessor servers and Sun Microsystems
Enterprise servers, the super- scalar processing architecture manages the
Company's service components including simultaneous payment processing,
real-time report generation, merchant accounting, and proprietary content
creation, management, and distribution for its web sites.
An expandable 1-Terabyte fully redundant data storage system ensures high
performance and fault tolerant access to critical transactional data.
To ensure that production systems remain up and running around the clock,
seven days a week, the facility exploits modern fire retardant systems,
quad-power conditioners, industrial battery backup arrays as well as an 8- day
backup diesel generator to guarantee a continuous power supply.
Research and Development
The Company has invested significant resources in research and
development over the last three years. During the fiscal years ended June 30,
1998, 1997 and 1996, the Company has spent $1,432,006, $3,966,185 and
$1,478,890, respectively, on research and development. Although the Company's
Books Now and WeatherLabs divisions have current revenues from a variety of
sources, the Videos Now division is still largely in development. It is
anticipated that this division will begin to generate revenue during the next
fiscal year, and that the Company's expenditures on research and development
will correspondingly decrease.
Seasonality
To date the Company has not experienced any significant seasonal
pattern to its business. It is anticipated, however, that as the Company's
virtual commerce sites begin to generate increased revenue, the second quarter
of the Company's fiscal year (October through December) will be responsible for
a disproportionate share of the Company's revenue. This corresponds to the
increased "holiday" shopping on the Internet.
Development of Company
The Company was incorporated under the laws of the State of Delaware on
May 16, 1985. It was formed as a national direct marketing company, and began
incorporating online business strategies in fiscal 1994 with the objective of
becoming a national leader in the interactive online direct marketing industry.
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The Company recruited an experienced management and technical team to design and
implement a high-end Internet services business model. In addition to
engineering and constructing a state-of-the-art computer and data facility in
Salt Lake City, the Company acquired an Internet access business and entered
into strategic alliances with companies in the electronic mail ("e-mail")
business. The Company formed a division to create a network of interconnected
Web communities to be promoted by local television station affiliates. The
Company divested its direct marketing, internet access, and television website
hosting businesses in fiscal 1998. In March 1998, the Company signed an
agreement to acquire Digital Courier International, Inc., a private Internet
software development company. The acquisition was consummated in September,
1998, and the Company formally changed its name to Digital Courier Technologies,
Inc.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. In addition, the
Company expects the market for Internet-based commerce and advertising, to the
extent it continues to develop, to be intensely competitive. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Although the Company believes that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments.
The Company has a number of competitors that provide software to
merchants and financial institutions for processing payment card transactions
over the Internet. They include VeriFone, Inc., IBM Corporation, and AT&T
Corporation. Several other competitors, including CyberCash, Inc. and
ClearCommerce Corporation, offer software that enables Internet merchants to
obtain credit card authorizations through one of a variety of communications
links with credit card processors. Open Market, Inc., among others, provides
electronic commerce software that includes payment components designed to
facilitate on-line credit card transactions. Several of these competitors are
developing software to process transactions in compliance with the SET standard,
including VeriFone, IBM, and Trintech. All of these companies are providers of
software, rather than complete payment services, but their software does provide
merchants and financial institutions an alternative to the Company's service.
Additional competition could come from Web browser companies and
software and hardware vendors that incorporate Internet payment capabilities
into their products. Further, because of the rapidly evolving nature of the
industry, many of the Company's collaborative partners are current or potential
competitors. In particular, the Company believes that Microsoft intends to
actively compete in all areas of Internet and online commerce.
Many of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources than the
Company. In addition, many of the Company's current or potential competitors,
such as Microsoft, have broad distribution channels that may be used to bundle
competing products directly to end-users or purchasers. If such competitors were
to bundle competing products for their customers, the demand for the Company's
services may be substantially reduced, and the ability of the Company to
successfully effect the distribution of its products and the utilization of its
services would be substantially diminished. There can be no assurance that the
Company will be able to compete effectively with current or future competitors
or that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition or operating
results.
The Company also competes with many other e- providers of online
content. Companies such as Reel.com, Amazon, Barnes & Noble, CD Universe and
others sell books and videos on the Internet, directly competing with the
Company's Books Now and Videos Now divisions. These companies have far greater
financial resources than the Company. The Company also competes with The Weather
Channel, Accu-Weather, and other major providers of weather information on the
Internet.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical and
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marketing resources than the Company. In addition, providers of content and
advertising on the Internet may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies, such as Microsoft or Netscape.
In the future, the Company expects to face competition in the various
demographic and geographic markets addressed by the Company. This competition
may include companies that are larger and better capitalized than the Company
and that have expertise and established brand recognition in these markets.
There can be no assurance that the Company's competitors will not develop
Internet products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's offerings. Moreover, a
number of the Company's current customers, licensees and partners have also
established relationships with certain of the Company's competitors, and future
advertising customers, licensees and partners may establish similar
relationships.
The Company also competes with online services and other Web site
operators, as well as traditional offline media such as television, radio and
print for a share of consumers' Internet purchases and advertisers' total
advertising budgets. The Company believes that the number of companies selling
Web-based advertising and the available inventory of advertising space have
increased substantially during the past year. Accordingly, the Company may face
increased pricing pressure for the sale of advertisements. There can be no
assurance that the Company will be able to compete successfully against its
current or future competitors or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
PROPRIETARY RIGHTS
The Company regards its patents, copyrights, trademarks, trade dress,
trade secrets and similar intellectual property \ as critical to its success,
and the Company relies upon trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States, and has obtained the
registration of a number of its trademarks. Substantially all national content
appearing in the Company's online properties is licensed from third parties
under short-term agreements.
GOVERNMENT REGULATION
State Sales and Use Tax Laws. While most online companies have adopted
"mail order" policies with respect to the payment of sales and other taxes, many
states are aggressively attempting to capture new tax revenues from online
transactions. The Company believes that several states are moving aggressively
to tax online retailers and service providers even when they have no physical
presence within the state. The Company currently charges sales tax only for
goods sold over the Internet to customers in the states in which the Company has
operations - California and Utah. If other states assert tax claims for products
sold by the Company over the Internet, compliance could be burdensome and costly
and require reporting that could adversely affect the Company's financial
performance.
Federal Money Transmitter Regulation. Recent federal legislation
imposes a record-keeping requirement on all persons performing wire transfers of
funds. Records of all transactions over $3,000 must be kept in a form accessible
to subpoena for five years. Although this regulation does not currently apply to
the Company's netClearing services, it may be applicable to future phases of
netClearing currently under development. The Company's netClearing services are
being designed to be able to comply with such legislation if required to do so.
State Money Transmitter Regulations. Several states currently have
regulations requiring registration and bonding for "money transmitters."
Although the Company does not believe that these regulations are currently
applicable to it, a significant risk exists that regulators will take the
position that such regulations are applicable to the Company's future phases of
netClearing. While the Company is prepared to fully comply with these
regulations to the extent that they are applicable and does not believe that
compliance will impose a material burden on the Company's operations, there is a
risk that expanding developments in this area of regulation may expose the
Company to greater regulatory burdens in the future.
10
Regulation E. Regulation E has been promulgated by the Federal Reserve
Board under authority of the Electronic Funds Transfer Act. It applies to
entities that issue "access devices" to "consumer asset accounts." The
regulation requires written disclosures at the time an access device is issued,
written receipts for transactions, periodic statements, and error resolutions
procedures. While there is some uncertainty, the Company believes that some
aspects of Regulation E may apply to certain of its netClearing services
currently in development.
Because Regulation E was issued at a time when no Internet services
like those of the Company existed, its application to the Company's services
involves numerous uncertainties and ambiguities. The Company believes that it is
designing and is operating its services in a manner that fully complies with the
intention of Regulation E. There remains the possibility that the Federal
Reserve Board, and the other agencies that interpret and apply the regulation
may in the future challenge the Company's services on the ground that they do
not comply with Regulation E. The costs of responding to such a challenge could
result in significant drains on the Company's financial and management
resources, which could have a material adverse effect on the Company's business,
financial condition or operating results.
EMPLOYEES As of June 30, 1998, the Company had 31 full-time employees.
The Company's future success is substantially dependent on the performance of
its management, sales force, key technical personnel, and its continuing ability
to attract and retain highly qualified technical, sales and managerial
personnel.
11
RISK FACTORS
Risk Factors Regarding the Acquisition
Uncertainty Relating to Integration. The acquisition of Digital Courier
International, Inc. in September 1998 (the "DCII Acquisition") involves the
integration of two companies that have previously operated independently. The
successful combination of the two companies will require significant effort from
each company, including the coordination of their research and development,
utilization and successful commercialization of in-process research and
development, integration of the companies' product offerings, coordination of
their sales and marketing efforts and business development efforts. In order to
reach profitability, DCTI will need to integrate and streamline overlapping
functions successfully. Costs generally associated with this type of integration
that may be incurred by DCTI include the integration of product lines, sales
force cross-training and market positioning of products. While these costs have
not been currently identified, any such costs may have an adverse effect on
operating results in the periods in which they are incurred. Each of DCTI and
Digital Courier International, Inc. has different systems and procedures in many
operational areas that must be rationalized and integrated. There may be
substantial difficulties associated with integrating two separate companies, and
there can be no assurance that such integration will be accomplished smoothly,
expeditiously or successfully. The integration of certain operations following
the DCII Acquisition will require management resources that may distract
attention from normal operations. The business of DCTI may also be disrupted by
employee uncertainty and lack of focus during such integration. Failure to
quickly and effectively accomplish the integration of the operations of DCTI and
Digital Courier International, Inc. could have a material adverse effect on the
consolidated business, financial condition and results of operations of DCTI.
Moreover, uncertainty in the marketplace or customer concern regarding the
impact of the DCII Acquisition and related transactions could have a material
adverse effect on the consolidated business, financial condition and results of
operations of DCTI.
Retention of Employees. The success of the Company will be dependent in
part on the retention and integration of management, technical, marketing, sales
and customer support personnel. There can be no assurance that the Company will
be able to retain such personnel or that the companies will be able to attract,
hire and retain replacements for employees that leave following consummation of
the DCII Acquisition. The failure to attract, hire, retain and integrate such
skilled employees could have a material adverse effect on the business,
operating results and financial condition of the Company.
Potential Dilutive Effect to Stockholders. Although the companies
believe that beneficial synergies will result from the DCII Acquisition, there
can be no assurance that the combining of the two companies' businesses, even if
achieved in an efficient, effective and timely manner, will result in combined
results of operations and financial condition superior to what would have been
achieved by each company independently, or as to the period of time required to
achieve such result. The issuance of DCTI Common Stock in connection with the
DCII Acquisition could reduce the market price of the DCTI Common Stock unless
revenue growth or cost savings and other business synergies sufficient to offset
the effect of such issuance can be achieved.
Liquidity. Management projects that there will not be sufficient cash
flows from operating activities during the next twelve months to provide capital
for the Company to implement its marketing strategy for its divisions. As of
June 30, 1998, the Company had $3,211,724 of cash. The Company is currently
attempting to obtain additional debt or equity funding. If adequate funding is
not available, the Company may be required to revise its plans and reduce future
expenditures. As reflected in the accompanying consolidated financial
statements, the Company has incurred losses from continuing operations of
$6,264,265, $7,158,851 and $3,586,413 and the Company's operating activities
have used $6,752,970, $6,334,660 and $1,385,567 of cash during the years ended
June 30, 1998, 1997 and 1996, respectively. As of June 30, 1998, the Company has
a tangible working capital deficit of $272,968 and is scheduled to make
substantial payments to AOL. None of the Company's continuing operations are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all. There can be no assurance that the additional funding will be available or,
if available, that it will be available on acceptable terms or in required
amounts.
12
Management's plans in regard to these matters include pursuing various
potential funding sources. The Company is currently in negotiations with two
firms to obtain additional working capital through a private placement of the
Company's equity securities. The Company is attempting to accelerate payments
that are due to the Company in the future totaling approximately $1,200,000. The
Company has contacted the entities owing these amounts to negotiate the
acceleration of these payments. The Company is negotiating with a lender to
obtain working capital of $1,200,000 against which loan those receivables would
be pledged. Certain directors of the Company have made oral commitments to make
loans to and additional investments in the Company. Management is actively
pursuing these alternatives until such time as market conditions are more
favorable to obtaining additional equity financing. 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. Management projects that
there will not be sufficient cash flows from operating activities during the
next twelve months to provide capital for the Company to sustain its operations.
Limited Operating History; Anticipated Losses. The Company did not
commence generating revenues from its current operations until January 1998.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company can be based, and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in the new
and rapidly evolving markets for Internet products and services, including the
Web-based advertising market. Specifically, such risks include, without
limitation, the rejection of the Company's services by Web consumers and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its websites, the development of equal or superior services or
products by competitors, the failure of the market to adopt the Web as an
advertising medium, the failure to successfully sell Web-based advertising
through the Company's recently developed internal sales force, potential
reductions in market prices for Web-based advertising, the inability of the
Company to effectively integrate the technology and operations of any other
acquired businesses or technologies with its operations, and the inability to
identify, attract, retain and motivate qualified personnel. There can be no
assurance that the Company will be successful in addressing such risks. As of
June 30, 1998, the Company had an accumulated deficit of $14,680,073. For the
year ended June 30, 1998 and 1997, the Company incurred a loss of $1,790,934 and
$9,340,816. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible. The Company believes that period
to period comparisons of its operating results are not meaningful and that the
results for any period should not be relied upon as an indication of future
performance. As a result of these factors, there can be no assurance that the
Company will not incur significant losses on a quarterly and annual basis for
the foreseeable future.
Fluctuations In Quarterly Operating Results. As a result of the
Company's limited operating history, the Company does not have historical
financial data for a significant number of periods on which to base planned
operating expenses. Although the Company expects that advertising revenue on its
websites will eventually be greater than revenue from direct mail, there can be
no assurance in this regard. Moreover, the sale of advertisements on the Web is
an emerging market that is difficult to forecast accurately. The Company's
expense levels are based in part on its expectations concerning future revenue
and to a large extent are fixed. Quarterly revenues and operating results will
depend substantially upon the advertising revenues received within the quarter,
which are difficult to forecast accurately. Accordingly, the cancellation or
deferral of even a small number of advertising contracts, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenue in relation to the Company's expectations would have an immediate
adverse effect on the Company's business, operating results and financial
condition. The Company has high fixed costs and expenses relating to the
development of the Websites. To the extent that such expenses are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially and adversely affected.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of usage of the Internet,
demand for Internet advertising, seasonal trends in Internet usage and
13
advertising placements, the level of user traffic on the Company's websites, the
advertising budgeting cycles of individual advertisers, the amount and timing of
capital expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new products or services by the Company or its
competitors, pricing changes for Web-based advertising, technical difficulties
with respect to the use of the Company's websites or other media properties
developed by the Company, incurrence of costs relating to acquisitions, general
economic conditions and economic conditions specific to the Internet and online
media. As a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing, service or marketing
decisions or business combinations that could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company also expects to experience seasonality in its business, with user
traffic on the Company's websites being lower during the summer and year-end
vacation and holiday periods, when usage of the Web and the Company's services
typically decline. Additionally, seasonality may affect the amount of customer
advertising dollars placed with the Company in the first and third calendar
quarters as advertisers historically spend less during these quarters.
Due to all of the foregoing factors, in future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected.
Dependence On Continued Growth In Use Of The Internet. The Company's
future success is substantially dependent upon continued growth in the use of
the Internet and the Web in order to support virtual commerce and the sale of
advertising on the Company's websites. Rapid growth in the use of and interest
in the Internet and the Web is a recent phenomenon. There can be no assurance
that communication or commerce over the Internet will become widespread or that
extensive content will continue to be provided over the Internet. The Internet
may not prove to be a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary infrastructure,
such as a reliable network backbone, or timely development and commercialization
of performance improvements, including high speed modems. In addition, to the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed upon it by
such potential growth or that the performance or reliability of the Web will not
be adversely affected by this continued growth. In addition, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols required to handle increased levels of Internet activity, or due
to increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Web. If use of the Internet
does not continue to grow, or if the Internet infrastructure does not
effectively support growth that may occur, the Company's business, operating
results and financial condition would be materially and adversely affected.
Developing Market; Unproven Acceptance Of The Company's Products And
Business Strategy. The markets for the Company's products and media properties
have only recently begun to develop, are rapidly evolving and are characterized
by an increasing number of market entrants who have introduced or developed
information navigation products and services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for virtual commerce
and advertising on the Internet is new and evolving, it is difficult to predict
the future growth rate, if any, and size of this market. There can be no
assurance either that the market for virtual commerce and advertising on the
Internet will develop or that demand content and promotional advertising will
emerge or become sustainable. The Company's ability to successfully sell
advertising on its co-branded websites depends substantially on use of the
Company's websites. If use of the Company's websites fails to continue to grow,
the Company's ability to sell advertising would be materially and adversely
affected. If the market fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if the Company's websites do not achieve
or sustain market acceptance, the Company's business, operating results and
financial condition will be materially and adversely affected.
Risks Associated With Brand Development. The Company believes that
14
establishing and maintaining the "netClearing,", "Books Now", "WeatherLabs" and
"Videos Now" brands is a critical aspect of its efforts to attract and expand
its Internet audience and that the importance of brand recognition will increase
due to the growing number of Internet sites and the relatively low barriers to
entry. Promotion and enhancement of these brands will depend largely on the
Company's success in providing high quality products and services, which cannot
be assured. If consumers do not perceive the Company's existing websites to be
of high quality, or if the Company introduces new features and services or
enters into new business ventures that are not favorably received by consumers,
the Company will be unsuccessful in promoting and maintaining its brands, and
will risk diluting its brands and decreasing the attractiveness of its audiences
to advertisers. Furthermore, in order to attract and retain Internet users and
to promote and maintain these brands in response to competitive pressures, the
Company may find it necessary to increase substantially its financial commitment
to creating and maintaining a distinct brand loyalty among its consumers. If the
Company is unable to provide high quality features and services or otherwise
fails to promote and maintain its brands, or if the Company incurs excessive
expenses in an attempt to improve its features and services or promote and
maintain its brands, the Company's business, operating results and financial
condition will be materially and adversely affected.
Reliance On Advertising Revenues And Uncertain Adoption Of The Web As
An Advertising Medium. The Company anticipates deriving a significant part of
its revenues from the sale of advertisements by the Internet portals, websites
and other customers who utilize the Company's content under short-term
contracts, and expects to continue to do so for the foreseeable future. Most
Internet advertising customers have only limited experience with the Web as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Webbased advertising and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media.
The Company's ability to generate significant advertising revenues will depend
upon, among other things, advertisers' acceptance of the Web as an effective and
sustainable advertising medium, the development of a large base of users of the
Company's services possessing demographic characteristics attractive to
advertisers, and the ability of the Company to develop and update effective
advertising delivery and measurement systems. No standards have yet been widely
accepted for the measurement of the effectiveness of Web-based advertising, and
there can be no assurance that such standards will develop sufficiently to
support Web-based advertising as a significant advertising medium. Certain
advertising filter software programs are available that limit or remove
advertising from an Internet user's desktop. Such software, if generally adopted
by users, may have a materially adverse effect upon the viability of advertising
on the Internet. The Company also recently completed the transition from a
third-party advertising sales agent to internal advertising sales personnel,
which involves additional risks and uncertainties, including (among others)
risks associated with the recruitment, retention, management, training and
motivation of sales personnel. As a result of these factors, there can be no
assurance that the Company will sustain or increase current advertising sales
levels. Failure to do so will have a material adverse effect on the Company's
business, operating results and financial position.
In addition, there is intense competition in the sale of advertising on
the Internet, including competition from other Internet navigational tools as
well as other high-traffic sites, which has resulted in a wide range of rates
quoted by different vendors for a variety of advertising services, which makes
it difficult to project future levels of Internet advertising revenues that will
be realized generally or by any specific company. Competition among current and
future suppliers of Internet navigational services or Web sites, as well as
competition with other traditional media for advertising placements, could
result in significant price competition and reductions in advertising revenues.
There also can be no assurance that the Company's advertising customers will
accept the internal and third-party measurements of impressions received by
advertisements on the Company's websites, or that such measurements will not
contain errors.
Substantial Dependence Upon Third Parties. The Company depends
substantially upon third parties for several critical elements of its business
including, among others, telecommunications, technology and infrastructure,
distribution activities and advertising sales. The Company believes that there
are other third party providers who can provide the same services as those
providers currently used by the Company.
15
Technology And Infrastructure. The Company depends substantially upon
its own computer equipment and its maintenance and technical support to ensure
accurate and rapid presentation of content and advertising to the Company's
customers. Any failure by the Company to effectively maintain such equipment and
provide such information could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, any
termination of telecom agreements with Sprint, or Sprint's failure to renew the
Company's agreement upon expiration could result in substantial additional costs
to the Company in developing or licensing replacement telecom capacity, and
could result in a loss of levels of use of the Company's navigational services.
Enhancement Of The Company's Products. To remain competitive, the
Company must continue to enhance and improve the responsiveness, functionality,
features and content of the Company's main product offerings. There can be no
assurance that the Company will be able to successfully maintain competitive
user response time or implement new features and functions, which will involve
the development of increasingly complex technologies. Furthermore, enhancements
of or improvements to the Company's products may contain undetected errors that
require significant design modifications, resulting in a loss of customer
confidence and user support and a decrease in the value of the Company's
products and services. Any failure of the Company to effectively improve its
products, or failure to achieve market acceptance, could adversely affect the
Company's business, results of operations and financial condition.
Technological Change. The market for Internet products and services is
characterized by rapid technological developments, evolving industry standards
and customer demands, and frequent new product introductions and enhancements.
These market characteristics are exacerbated by the emerging nature of this
market and the fact that many companies are expected to introduce new Internet
products and services in the near future. The Company's future success will
depend in significant part on its ability to continually improve the
performance, features and reliability of the Company's products and content
offerings in response to both evolving demands of the marketplace and
competitive product offerings, and there can be no assurance that the Company
will be successful in doing so.
Management Of Potential Growth. The process of managing large,
potentially high traffic Web sites such as the Company's products and content
offerings will become an increasingly important and complex task. To the extent
that any extended failure of the Company's technology affects customers or
partners, the Company may be exposed to "make good" obligations with its
customers or partners, which could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company management will be
able to achieve the rapid execution necessary to fully exploit the market
opportunity for the Company's products. Any inability to effectively manage
growth could have a material adverse effect on the Company's business, operating
results and financial condition.
Risk Of Capacity Constraints And Systems Failures. A key element of the
Company's strategy is to generate a high volume of use of its products and
content offerings. Accordingly, the performance of the Company's technology is
critical to the Company's reputation, its ability to attract advertisers to the
Company's products and to achieve market acceptance of these products and media
properties. Any system failure that causes interruption or an increase in
response time of the Company's websites could result in less traffic to the
Company's content destinations and, if sustained or repeated, could reduce the
attractiveness of the Company's content offerings to advertisers. An increase in
the volume of traffic to the Company's websites could strain the capacity of the
software or hardware deployed by the Company, which could lead to slower
response time or system failures, and adversely affect the number of impressions
received by advertising and thus the Company's advertising revenues. In
addition, as the number of affiliated Web pages and users increase, there can be
no assurance that the Company's infrastructure will be able to scale
accordingly. The Company is also dependent upon its own technology and link to
the Internet. Any disruption in Internet access or any failure of the Company's
technology to handle higher volumes of user traffic could have a material
adverse effect on the Company's business, operating results and financial
16
condition. Furthermore, the Company is dependent on hardware suppliers for
prompt delivery, installation and service of servers and other equipment used to
deliver the Company's products and services.
The Company's operations are dependent in part upon its ability to
protect its operating systems against physical damage from fire, floods,
earthquakes, power loss, telecommunications failures, break-ins and similar
events. The Company does not presently have redundant, multiple site capacity in
the event of any such occurrence. Despite the implementation of network security
measures by the Company, its servers are vulnerable to computer viruses,
breakins and similar disruptions from unauthorized tampering with the Company's
computer systems. The occurrence of any of these events could result in
interruptions, delays or cessations in service to users of the Company's
websites, which could have a material adverse effect on the Company's business,
operating results and financial condition.
Integration Of Potential Acquisitions. During fiscal 1998, the Company
has acquired Books Now, Inc., WeatherLabs, Inc., and Digital Courier
International, Inc. and has evaluated several other potential acquisitions. As
part of its business strategy the Company expects to enter into further business
combinations and/or make significant investments in, complementary companies,
products or technologies. Any such transactions would be accompanied by the
risks commonly encountered in such transactions. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology or
content and rights into the Company's products and services, the difficulties of
integrating personnel of acquired entities, additional expenses associated with
amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies, the impairment of relationships
with employees and customers as a result of any integration of new management
personnel, and the potential unknown liabilities associated with acquired
businesses. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions.
Trademarks And Proprietary Rights. The Company regards its copyrights,
trademarks, trade dress, trade secrets and similar intellectual property as
critical to its success, and the Company relies upon trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
its employees, customers, partners and others to protect its proprietary rights.
The Company pursues the registration of its trademarks in the United States, and
has applied for the registration of certain of its trademarks. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's copyrights, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
The Company anticipates that it may be subject to legal proceedings and
claims in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by the Company and its licensees. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. The Company is not aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
effect on the Company's financial position or results of operations.
Dependence On Key Personnel. The Company's performance is substantially
dependent on the performance of its senior management and key technical
personnel. In particular, the Company's success depends substantially on the
continued efforts of its senior management team, which currently is composed of
a small number of individuals who only recently joined the Company. The Company
does not carry key person life insurance on any of its senior management
personnel. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, operating
results and financial condition of the Company.
17
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results and financial condition.
Government Regulation And Legal Uncertainties. The Company is not
currently subject to direct regulation by any government agency in the United
States, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. For example, the Company may be subject to
the provisions of the Communications Decency Act (the "CDA"). Although the
constitutionality of the CDA, the manner in which the CDA will be interpreted
and enforced and its effect on the Company's operations cannot be determined, it
is possible that the CDA could expose the Company to substantial liability. The
CDA could also dampen the growth in use of the Web generally and decrease the
acceptance of the Web as a communications and commercial medium, and could,
thereby, have a material adverse effect on the Company's business, results of
operations and financial condition. A number of other countries also have
enacted or may enact laws that regulate Internet content. The adoption of such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products and media properties. Such laws
and regulations also could increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, operating results
and financial condition. Moreover, the applicability to the Internet of the
existing laws governing issues such as property ownership, defamation, obscenity
and personal privacy is uncertain, and the Company may be subject to claims that
its services violate such laws. Any such new legislation or regulation or the
application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's business, operating results and
financial condition.
Liability For Information Services. Because materials may be downloaded
by the online or Internet services operated or facilitated by the Company and
may be subsequently distributed to others, there is a potential that claims will
be made against the Company for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature and content
of such materials. Such claims have been brought, and sometimes successfully
pressed against online services in the past. In addition, the Company could be
exposed to liability with respect to the listings that may be accessible through
the Company's websites, or through content and materials that may be posted by
users in classifieds, bulletin board and chat room services offered by the
Company. It is also possible that if any information provided through the
Company's services, such as stock quotes, analyst estimates or other trading
information, contains errors, third parties could make claims against the
Company for losses incurred in reliance on such information. Also, to the extent
that the Company provides users with information relating to purchases of goods
and services, the Company or its operating subsidiaries could face claims
relating to injuries or other damages arising from such goods and services.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability or legal defense expenses that are not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on the
Company's business, operating results and financial condition.
Concentration Of Stock Ownership. As of October 7, 1998, the present
directors, executive officers, greater than 5% stockholders and their respective
affiliates beneficially owned approximately 37% of the outstanding Common Stock
of the Company. As a result of their ownership, the directors, executive
officers, greater than 5% stockholders and their respective affiliates
collectively are able to control all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company.
18
Volatility Of Stock Price. The trading price of the Company's Common
Stock has been and may continue to be subject to wide fluctuations in response
to a number of events and factors, such as quarterly variations in operating
results, announcements of technological innovations or new affiliations and
services by the Company or its competitors, changes in financial estimates and
recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news reports relating to trends in the Company's markets. In
addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the trading
price of the Company's Common Stock, regardless of the Company's operating
performance.
Antitakeover Effect Of Certain Charter Provisions. The Board of
Directors has the authority to issue up to 2,500,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock may be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change of control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock.
DIRECTORS AND EXCUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding (i) the current directors of
the Company, who will serve until the next annual meeting of stockholders or
until their successors are elected or appointed and qualified, and (ii) the
current executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors.
The Company's executive officers and directors are as follows:
Name Age Position
---- --- --------
James A. Egide* 64 Director and Chairman
Raymond J. Pittman 29 Director, Chief Executive Officer
Mitchell L. Edwards 40 Director, Executive Vice President
and Chief Financial Officer
Glen Hartman* 41 Director
Kenneth M. Woolley* 52 Director
*Serves on compensation and audit committees.
James A. Egide: Director and Chairman
Mr. Egide was appointed as a Director of the Company in January 1995
and Chairman in September 1997. Since 1990, Mr. Egide has primarily been
involved in managing his personal investments, including multiple international
and national business enterprises. In 1978 he co-founded Carme, a public
company, and served as CEO and Chairman of the Board until 1989 when it was
sold. From 1976 until 1980, Mr. Egide's primary occupation was President and
Director of Five Star Industries, Inc., a California corporation which was a
general contractor and real estate developer. His principal responsibilities
were land acquisition, lease negotiations and financing.
19
Raymond J. Pittman: Director and Chief Executive Officer.
Mr. Pittman has been Chief Executive Officer of the Company since March
1998. Mr. Pittman was the founder and Chief Executive Officer of Digital Courier
International, Inc. from 1996 until Digital Courier International was acquired
by the Company in September 1998. Prior to forming Digital Courier
International, Inc., Mr. Pittman was the Chief Executive Officer of Broadway
Technologies Group, a technology development and consulting group. Mr. Pittman
received a Masters degree in Engineering-Economic Systems from Stanford
University and Bachelors degree in Computer Engineering from the Univeristy of
Michigan.
Mitchell L. Edwards: Director, Executive Vice President and Chief Financial
Officer
Mr. Edwards has been Executive Vice President and Chief Financial
Officer of the Company since June 1997. From 1995 until joining the Company, Mr.
Edwards was Managing Director of Law and Business Counsellors, a mergers and
acquisitions and corporate finance consulting firm with offices in California
and Utah, and prior to that was a Partner in the law firm of Brobeck, Phleger &
Harrison in Los Angeles. Mr. Edwards' practice for over 10 years has specialized
in mergers and acquisitions, corporate finance, public offerings, venture
capital and other transactions for emerging and high technology companies
throughout the country. Mr. Edwards received a J.D. from Stanford Law School, a
B.A/M.A. in International Business Law from Oxford University (Marshall
Scholar), and a B.A. in Economics from Brigham Young University (Valedictorian).
He has also worked at the White House and at the United States Supreme Court.
Glen Hartman: Director
Mr. Hartman has been a director of the Company since July 1998. Mr.
Hartman is the founder. principal and a member of the board of directors of
Cosine Communications, Inc. since 1996. Mr. Hartman is also the founding general
partner of Falcon Capital, LLC, a private equity investment company,
specializing in technology companies since 1995. From 1992 to 1995 Mr. Hartman
served as CEO and Chairman of Apex Data, a computer peripherals manufacturing
company. Mr. Hartman holds a B.A. in Economics from UCLA..
Kenneth M. Woolley: Director
Mr. Woolley has been a founder and director of several companies. Mr.
Woolley served on the Board of Directors of Megahertz Holding Corporation, the
leading manufacturer of fax/modems for laptop and notebook computers until
February 1995. Prior to the merger of Megahertz and VyStar Group, Inc. in June
1993, Mr. Woolley had served as President of the parent company. Since 1979, Mr.
Woolley has been a principal in Extra Space Management, Inc. and Extra Space
Storage, privately held companies engaged in the ownership and management of
mini-storage facilities. Since 1989, Mr. Woolley has been a partner in D.K.S.
Associates, and since 1990 a director and executive officer of Realty
Management, Inc., privately held companies engaged in the ownership and
management of apartments, primarily in Las Vegas, Nevada. Mr. Woolley is a
director of Cirque Corporation. Mr. Woolley also serves as an associate
professor of business management at Brigham Young University. Mr. Woolley holds
a B.A. in Physics from Brigham Young University, an M.B.A. and Ph.D. in Business
Administration from the Stanford University Graduate School of Business. Mr.
Woolley is available to the Company on a part-time, as needed basis.
20
Significant Employees
Michael D. Bard: Controller
Mr. Bard joined the Company in September 1996. Mr. Bard was the
Controller for ARD, Inc., a professional services corporation located in
Burlington, Vermont from 1991 to 1996. Prior to joining ARD, Inc., Mr. Bard was
Senior Vice President, Controller for CACI, Inc. International, an information
technology company located in Fairfax, Virginia from 1976 to 1991. Mr. Bard is a
certified public accountant and holds a bachelors degree in accounting.
Brendan Larson: Senior Vice President Business Applications
Mr. Larson joined the Company in 1996. Mr. Larson is the founder of
WeatherLabs, Inc. and served as an officer of WeatherLabs from it founding in
1991 to the present. In 1996 Mr. Larson was employed as a consultant by Broadway
Technologies Group, a software development company. Mr. Larson has an extensive
background in the combined fields of meteorology, broadcast journalism and
computer science. Mr. Larson holds a B.S. degree from Northern Illinois
University.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent stockholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company and on representations that no other reports were required, the
Company has determined that during the last fiscal year all applicable 16(a)
filing requirements were met except as follows: Mr. Edwards and Mr. Bard were
late in filing Form 4's which were due 10 days following the end of the month in
which certain stock options were granted.
ITEM 2. PROPERTIES
- ------- ----------
The Company is leasing from third parties modern office space in Park
City and Salt Lake City, Utah. These offices include a computer data center and
general offices. In August 1996, the Company moved its offices to 12,000 square
feet of modern office space in Salt Lake City, Utah. In May 1997, the Company
acquired 11,000 square feet of additional modern office space in a neighboring
building in Salt Lake City. All facilities are leased from third parties. The
new offices are being leased under three to five year arrangements. Some leases
contain options to renew. The computer equipment and software development
facilities remain in the previous location. The Company also leases office space
and space for a data center in San Francisco. These facilities are believed
adequate for the Company's current needs. The current total monthly rental for
all facilities is $67,014. Some of the leases are subject to annual increases
for inflation adjustments.
The Company presently has approximately 11,000 square feet of office
space in Salt Lake City which it is attempting to sublease. There was a charge
to earnings during the year ended June 30, 1998 of approximately $544,000 for
the costs of subleasing idle facilities and obligations for which the Compnay
will receive no future benefit..
21
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not a party to any legal proceedings which, in its
opinion, after consultation with legal counsel, could have a material adverse
effect on the Company. However, the Company is involved in ordinary routine
litigation incidental to it's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------
Price Range of Common Stock
- ---------------------------
On February 5, 1997, the Company's Common Stock began trading on The
Nasdaq National Market System. Commencing in January 1995 and until the stock
was listed on The Nasdaq National Market, the Company's Common Stock was quoted
on the OTC Bulletin Board. During 1993 and 1994, there was no public market for
the securities of the Company's predecessor, and the Company is not aware of any
quotations for its securities during this period. In prior years, securities of
the Company's predecessor, Exchequer, were traded in the over-the-counter
market.
The Company's common stock trades on The Nasdaq Stock Exchange under
the symbol "DCTI". The following table reflects the high and low bid sales price
reported by The Nasdaq National Market or by the OTC Bulletin Board, as
appropriate, for the periods indicated. The quotes represent interdealer
quotations, do not include mark-up, mark-down or commissions and may not reflect
actual transactions.
High Low
---- ---
Fiscal Year Ending June 30, 1998
--------------------------------
April 1 to June 30, 1998 $9.97 $3.50
January 1 to March 31, 1998 $2.13 $5.00
October 1 to December 31, 1997 $2.44 $5.00
July 1 to September 30, 1997 $2.75 $5.88
Fiscal Year Ended June 30, 1997
-------------------------------
April 1 to June 30, 1997 $7.38 $2.75
January 1 to March 31, 1997 $11.00 $6.75
October 1 to December 31, 1996 $14.38 $7.00
July 1 to September 30, 1996 $16.00 $10.63
On October 7, 1998, the Common Stock was quoted on The Nasdaq National
Market at a closing price of $2.625.
Approximate Number of Equity Security Holders
- ---------------------------------------------
As of October 7, 1998, there were approximately 669 holders of record
of the Company's Common Stock. Because many of such shares are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders..
22
Dividend Policy
The Company has not paid any cash dividends since its inception. The
Company currently intends to retain future earnings in the operation and
expansion of its business and does not expect to pay any cash dividends in the
foreseeable future.
Changes in Securities
Since June 30, 1997, the Company sold the following securities which
were exempt from registration under the Securities Act of 1933 (the "Act"):
In November 1997, the Company issued 20,000 shares of its common stock
to Reed Hansen in lieu of compensation.
In January 1998, the Company issued 100,000 shares of its common stock
to the former shareholders of Books Now, Inc. in connection with the acquisition
of Books Now, Inc.
In March 1998, the Company issued 136,364 shares of its common stock to
Sven Bensen, 40,909 shares to Arthur E. Benjamin and 24,545 shares to Thomas
Dearden under its Amended and Restated Stock Incentive Plan (the "Plan"). These
shares were issued under the provisions of the Plan, which permit the cashless
exercise of options. The Plan has been registered with the SEC on Form S-8.
In April 1998, the Company issued 13,151 shares of its common stock to
Richard Bentz and 4,939 shares to Edwin Patterson under its Plan. These shares
were issued under the provisions of the Plan which permit the cashless exercise
of options.
In May 1998, the Company issued 10,000 shares of its common stock to
Mark Johnson, a former employee, for cash consideration of $1.00 per share under
its Plan.
In May 1998, the Company issued 253,260 shares of its common stock to
the former shareholders of WeatherLabs, Inc. in connection with the acquisition
of WeatherLabs, Inc.
In June 1998, the Company issued 955,414 shares of its common stock and
warrants to purchase 318,471 additional shares of its common stock at a price of
$6.28 per share to America Online, Inc. ("AOL") in accordance with the
Interactive Marketing Agreement that the Company had signed with AOL.
All shares except those issued to the former shareholders of Books
Now, Inc. and WeatherLabs, Inc. and to AOL were issued on the exercise of
options which had been previously granted to the purchaser, and were issued
pursuant to the Company's effective registration statement on Form S-8. The
issuance of shares to the shareholders of Books Now Inc. and WeatherLabs, Inc.
and to AOL were offerings not involving a public offering and were exempt from
registration pursuant to Section 4(2) of the Act.
23
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following unaudited selected financial data should be read in
conjunction with the Company's consolidated financial statements appearing
elsewhere herein.
For the Year Ended June 30,
---------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 803,011 $ 8,812 $ -- $ $ --
Cost of sales 745,871 492 -- -- --
------------- ------------- ------------- ------------- -------------
Gross margin 57,140 8,320 -- -- --
------------- ------------- ------------- ------------- -------------
Operating expenses:
General and administrative 4,092,737 1,400,916 685,528 56,199 --
Depreciation and amortization 1,536,388 398,066 86,828 25,413 --
Research and development 1,432,006 3,966,185 1,478,890 535,502 --
Selling 1,290,012 1,897,665 -- -- --
AOL agreement costs 675,000
Compensation expense related to issuance
of options by principal stockholder -- -- 1,484,375 -- --
------------- ------------- ------------- ------------- -------------
9,026,143 7,662,832 3,735,621 617,114 --
------------- ------------- ------------- ------------- -------------
Other income (expense), net 20,738 495,661 57,209 (973) --
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations before
income taxes and discontinued operations (8,948,265) (7,158,851) (3,678,412) (618,087) --
Income tax benefit 2,684,000 -- 91,999 132,681 --
------------- ------------- ------------- ------------- -------------
Loss from continuing operations (6,264,265) (7,158,851) $(3,586,413) $(485,406) $ --
------------- ------------- ------------- ------------- -------------
Discontinued operations:
Income from discontinued direct
mail advertising operations,
net of income taxes 111,377 300,438 153,332 221,136 62,998
Gain on sale of direct mail advertising
operations, net of income taxes 4,394,717 -- -- -- --
Loss from discontinued internet
service provider subsidiary,
net of income taxe (265,674) (2,482,403) -- -- --
Gain on sale of Internet service provider
subsidiary, net of income taxes 232,911 -- -- -- --
------------- ------------- ------------- ------------- -------------
Income (loss) from discontinued operations 4,473,331 (2,181,965) 153,332 221,136 62,998
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (1,790,934) $ (9,340,816) $ (3,433,081) $ (264,270) $ 62,998
============= ============= ============= ============= =============
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.74) (0.86) (0.61) (0.$0) --
Diluted (0.74) (0.86) (0.61) (0.10) --
Net income (loss):
Basic (0.21) (1.12) (0.58) (0.06) 0.01
Diluted (0.21) (1.12) (0.58) (0.06) 0.01
Weighted average common shares outstanding:
Basic 8,422,345 8,309,467 5,917,491 4,713,028 4,282,299
Diluted 8,422,345 8,309,467 5,917,491 4,713,028 4,432,881
As of June 30,
--------------
1998 1997 1996 1995 1994
Balance Sheet Data:
Working capital $ 2,964,313 $ 3,624,308 $ 12,774,113 $ 794,156 $ 350,428
Total assets 23,222,948 11,320,660 16,222,902 1,073,225 476,210
Long-term debt, net of current portion,
capital lease obligation 1,384,132 -- -- -- --
Stockholders' equity 18,197,898 9,826,083 15,541,624 1,073,225 476,210
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- -----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
The Company began operations in 1987 to provide highly targeted
business to consumer advertising through direct mail. Since the Company's
founding, the direct mail marketing business had provided substantially all of
the Company's revenues. The direct mail marketing business was sold in March
1998 and its results of operations are classified as discontinued operations in
the accompanying consolidated financial statements.
In fiscal 1994, the Company began developing its own proprietary
websites. Since fiscal 1994, the Company has devoted significant resources
towards the development and launch of these websites.
In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an
Internet service provider headquartered in Salt Lake City, Utah. In March 1998,
Sisna was resold to its original owner for 35,000 shares of the Company's common
stock. Sisna's results of operations are included in the accompanying
consolidated statements of operations from the date of acquisition through the
date of sale, as discontinued operations.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. ("Books Now"), a book reseller, in exchange for a maximum of
362,500 shares of the Company's common stock. One hundred thousand shares were
issued at closing and 262,500 shares are subject to a three-year earn-out
contingency based upon achieving certain financial performance objectives. The
acquisition was accounted for as a purchase. Books Now's results of operations
are included in the accompanying consolidated statements of operations since the
date of acquisition. In May, 1998, the Company acquired all of the outstanding
stock of WeatherLabs, Inc., a provider of weather and weather-related
information and products on the Internet, in exchange for up to 777,220 shares
of the Company's common stock. 253,260 shares were issued at closing, and an
additional 523,960 shares may be issued upon the attainment by WeatherLabs of
certain financial performance targets. The acquisition was accounted for as
purchase. The results of operations of WeatherLabs are included in the
accompanying financial statements from the date of acquisition.
The Company entered into a Stock Exchange Agreement with Digital
Courier International, Inc., a Nevada corporation ("Digital Courier"), dated as
of March 17, 1998 (the "Exchange Agreement"). The Exchange Agreement was
approved by the shareholders of the Company in a Special Meeting held on
September 16, 1998 during which the shareholders approved a name change from
DataMark Holding, Inc. to Digital Courier Technologies, Inc. Pursuant to the
Exchange Agreement, the Company has agreed to issue 4,659,080 shares of its
common stock to the shareholders of Digital Courier International, Inc.. This
acquisition will be accounted for as a purchase and the Company anticipates that
approximately $11.7 million of the total purchase price of approximately $13
million will be allocated to in process research and development and will be
expensed in the first quarter fo fiscal 1999. This allocation will be finanlized
upon completion of a third-party valuation. Digital Courier International, Inc.
is a Java based Internet and wireless communications software development
company originally incorporated as Digital Courier Technologies, Inc. on July
23, 1996. For the year ended December 31, 1997, Digital Courier International,
Inc. had no revenues. Digital Courier International, Inc.'s results of
operations are not included in the accompanying financial statements.
Results of Operations
Year ended June 30, 1998 compared with year ended June 30, 1997
Net Sales
Net sales for the year ended June 30, 1998 were $803,011 as compared to
$8,812 for the year ended June 30, 1997. The Books Now operations which were
25
acquired in January 1998 accounted for $392,719 of the fiscal 1998 net sales and
a one time sale of a turn-key Internet computer system accounted for the
remainder of the fiscal 1998 net sales.
Cost of Sales
Cost of sales for the year ended June 30, 1998 were $745,871 or 92.9%
of net sales, $408,667 of the cost of sales were for the one time sale of a
turn-key Internet computer system.. For the year ended June 30, 1997 costs of
sales were $492.
Operating Expenses
General and administrative expense increased 192.1% to $4,092,737
during the year ended June 30, 1998 from $1,400,916 during the year ended June
30, 1997. The increase in general and administrative expense was due to the
addition of administrative and support staff, as well as increased related
facilities costs, associated with WorldNow Online. In addition, the Company
accrued $544,014 for the cost of subleasing idle facilities and the future costs
of idle facilities during the year ended June 30, 1998. General and
administrative expense for the year ended June 30, 1998 also included a charge
of $362,125 for compensation costs related to the issuance and exercise of stock
options.
Depreciation and amortization expense increased 286% to $1,536,388
during the year ended June 30, 1998 from $398,066 during the year ended June 30,
1997. The increase was due to having the Company's state of the art computer
facility in service during the entire year ended June 30, 1998 as compared to
only two months during the year ended June 30, 1997.
Research and development expense decreased 63.9% to $1,432,006 during
the year ended June 30, 1998 from $3,966,185 during the year ended June 30,
1997. Research and development expense decreased due to decreased levels of
activity required for the development of WorldNow Online.
Selling expense decreased 32% to $1,290,012 during the year ended June
30, 1998 from $1,897,665 during the year ended June 30, 1997. The decrease in
selling expense was due to reductions in the sales and marketing staff of
WorldNow Online.
During the year ended June 30, 1998, the Company incurred costs
associated with an interactive marketing agreement with America Online, Inc.
("AOL") of $675,000. On June 1, 1998, the Company entered into an Interactive
Marketing Agreement with America Online, Inc. ("AOL") for an initial term of 39
months (the "Agreement"), which can be extended for successive one-year terms by
AOL thereafter. Under the Agreement, the Company will pay AOL $12,000,000 in
cash and issue a seven-year warrant to purchase 318,471 shares of the Company's
common stock at $12.57 per share (the "Performance Warrant") in exchange for AOL
providing the Company with certain permanent anchor tenant placements for its
Videos Now site on the AOL Network and promotion of the Videos Now site. The
Company is scheduled to make cash payments to AOL of $1,200,000 upon execution
of the agreement in June 1998, $4,000,000 prior to January 1, 1999, $4,000,000
prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. The initia
$1,200,000 payment was not actually made until July 6, 1998. The Performance
Warrant vests over the term of the agreement as certain promotion criteria are
achieved by AOL. The agreement includes an option whereby AOL elected to provide
additional permanent anchor tenant placements for Videos Now on AOL.com (a
separate and distinct website) in exchange for 955,414 shares of the Company's
common stock and a seven-year, fully vested warrant to purchase 318,471 shares
of the Company's common stock at a price of $6.28 per share (the "Option
Warrant").
The original $12 million of cash payments and the value of the Performance
Warrant, to be determined as the warrant vests, will be accounted for as
26
follows: (i) the estimated fair value of the permanent anchor tenant placements
on the AOL Network of $1,750,000 per year, or approximately $5,250,000 in total,
will be charged to expense ratably over the period from the launch of the
Company's interactive site, which is expected to be October 15, 1998, through
the original term of the agreement; and (ii) the remaining amount will be
treated as advertising costs and will be expensed as paid or as the Performance
Warrant vests. The advertising will be expensed as paid in accordance with SOP
93-7, because the Company has no experience on which to evaluate the
effectiveness of the direct response advertising. The value of the common shares
issued of $8,330,016 and the value of the Option Warrant of $2,519,106 represent
the value of the permanent anchor tenant placements on AOL.com and will be
charged to expense ratably over the period from the launch of the Company's
interactive site on AOL.com through the original term of the agreement. As of
June 30, 1998, the initial $1,200,000 payment obligation was allocated $525,000
to AOL anchor tenant placement costs and $675,000 to expense as advertising
costs. The value of the common stock issued and the Option Warrant was recorded
as AOL anchor tenant placement costs in the accompanying consolidated financial
statements.
Discontinued Operations
During March 1998, the Company sold its direct mail marketing and
Internet service operations, therefore, their results of operations are
presented as discontinued operations. During the year ended June 30, 1998,
pretax income from the direct mail marketing operations was $178,204 as compared
to $480,701 for the year ended June 30, 1997. During the year ended June 30,
1998, the Internet service operations incurred a pretax loss of $425,078 as
compared to a pretax loss of $2,662,666 during the year ended June 30, 1997. The
Company realized a pretax gain of $7,031,548 from the sale of its direct mail
marketing operations and a $372,657 gain from the sale of its Internet service
operations during the year ended June 30, 1998.
Year ended June 30, 1997 compared with year ended June 30, 1996
Net Sales
Net sales for the year ended June 30, 1997 were $8,812. There were no
net sales from continuing operations during the year ended June 30, 1996.
Cost of Sales
Cost of sales for the computer online operations for the year ended
June 30, 1997 were $492. There were no sales or related cost of sales for the
year ended June 30, 1996.
Operating Expenses
General and administrative expense increased 104.4% to $1,400,916
during the year ended June 30, 1997 from $685,528 during the year ended June 30,
1996. The increase in general and administrative expense was due to the addition
of administrative and support staff, as well as increased related facilities
costs, associated with WorldNow Online.
Depreciation and amortization expense increased 358.5% to $398,066
during the year ended June 30, 1997 from $86,828 during the year ended June 30,
1996. The increase was due to acquiring the Company's state of the art computer
facility during the year ended June 30, 1997 and placing it into service during
the fourth quarter of the year ended June 30, 1997.
Research and development expense increased 168.2% to $3,966,185 during
the year ended June 30, 1997 from $1,478,890 during the year ended June 30,
1996. Research and development expense increased due to accelerated levels of
activity required for the development of WorldNow Online.
Selling expense for the year ended June 30, 1997 was $1,897,665. The
27
Company did not incur any selling expense during the year ended June 30, 1996
related to continuing operations, because the WorldNow Online main web site was
in its early development stages and was not at the point where net sales could
be attained.
Discontinued Operations
During March 1998, the Company sold its direct mail marketing and
Internet service operations, therefore, their results of operations are
presented as discontinued operations. During the year ended June 30, 1997,
pretax income from the direct mail marketing operations was $480,701 as compared
to $245,331 for the year ended June 30, 1996. During the year ended June 30,
1997, the Internet service operations incurred a pretax loss of $2,662,666.
There were no Internet service operations during the year ended June 30, 1996.
28
Quarterly Results
The following tables set forth certain quarterly financial information
of the Company for each quarter of fiscal 1998 and fiscal 1997. This information
has been derived from the quarterly financial statements of the Company which
are unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited financial statements included herein and include all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the financial results for such periods. This information should
be read in conjunction with the financial statements and the notes thereto and
the other financial information appearing elsewhere herein.
For the three months ended
Sep. 30, 1997 Dec. 31, 1997 Mar. 31, 1998 Jun 30, 1998
------------- ------------- ------------- ------------
Net sales $ 17,545 $ 1,942 $ 385,671 $ 397,853
Cost of sales 5,459 59,598 258,144 422,670
------------- ------------- ------------- ------------
Gross margin 12,086 (57,656) 127,527 (24,817)
------------- ------------- ------------- ------------
Operating expenses:
General and administrative 548,659 425,483 738,944 2,379,651
Depreciation and amoritization 385,904 398,817 383,329 368,338
Research and development 473,350 373,717 454,218 130,721
Selling 642,006 336,355 188,861 122,790
AOL agreement costs -- -- -- 675,000
------------- ------------- ------------- ------------
2,049,919 1,534,372 1,765,352 3,676,500
------------- ------------- ------------- ------------
Other income (expense), net 61,063 (27,589) (26,397) 13,661
------------- ------------- ------------- ------------
Loss from continuing operations before income
taxes and discontinued operations (1,976,770) (1,619,617) (1,664,222) (3,687,656)
Benefit (provision) for income taxes -- (49,829) 2,733,829 --
------------- ------------- ------------- ------------
Income (loss) from continuing operations (1,976,770) (1,669,446) 1,069,607 (3,687,656)
------------- ------------- ------------- ------------
Discontinued operations:
Income (loss) from continuing operations
advertising operations, net of income taxes 110,558 51,368 (50,548) --
Loss from operations of discontinued internet
service subsidiary, net of income taxes (121,431) (123,546) (20,698) --
Gain on sale of direct mail advertising operations,
net of income taxes -- -4,394,717 --
Gain on sale of internet service provider
subsidiary, net of income taxes -- -- 232,911 --
------------- ------------- ------------- ------------
Income (loss) from discontinued operations (10,873) (72,178) 4,556,382 --
------------- ------------- ------------- ------------
Net income (loss) $(1,987,643) $(1,741,624) $ 5,625,989 $(3,687,656)
------------- ------------- ------------- ------------
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.23) $ (0.19) $ 0.12 $ (0.48)
Diluted (0.23) (0.19) 0.12 (0.48)
Net income (loss):
Basic (0.23) (0.20) 0.64 (0.48)
Diluted (0.23) (0.20) 0.64 (0.48)
Weighted average common shares outstanding
Basic 8,560,932 8,605,767 8,763,505 7,723,563
Diluted 8,560,932 8,605,767 8,832,086 7,723,563
29
For the three months ended
--------------------------
Sep. 30, 1996 Dec. 31, 1996 Mar 31, 1997 Jun. 30, 1997
------------- ------------- ------------ -------------
Net sales -- -- -- 8,812
Cost of sales -- -- -- 492
------------- ------------- ------------ -------------
Gross margin -- -- -- 8,320
------------- ------------- ------------ -------------
Operating expenses:
Research and development 307,754 660,362 970,194 2,027,875
General and administrative 109,027 272,640 388,405 630,844
Selling 657,871 273,582 341,400 624,812
Depreciation and amortization 65,709 73,769 80,269 178,319
------------- ------------- ------------ -------------
1,140,361 1,280,353 1,780,268 3,461,850
------------- ------------- ------------ -------------
Other income (expense), net 160,691 128,840 120,259 85,871
Loss from continuing operations before
income taxes and discontinued operations (979,670) (1,151,513) (1,660,009) (3,367,659)
Income tax benefit 51,813 33,850 -- --
------------- ------------- ------------ -------------
Loss from continuing operations (927,857) (1,117,663) (1,660,009) (3,367,659)
------------- ------------- ------------ -------------
Discontinued operations:
Income from discontinued direct mail
advertising operations, net of income taxes 86,356 56,415 120,901 36,766
Loss from discontinued internet service provider
subsidiary, net of income taxes -- (1,823,006) (745,060)
------------- ------------- ------------ -------------
Income (loss) from discontinued operations 86,356 56,415 (1,702,105) (708,294)
------------- ------------- ------------ -------------
Net loss $ (841,501) $(1,061,248) $(3,362,114) $(4,075,953)
============= ============= ============ =============
Net loss per common share:
Income (loss) from continuing operations:
Basic $ (0.11) $ (0.14) $ (0.20) $ (0.41)
Diluted (0.11) (0.14) (0.20) (0.41)
Net income (loss):
Basic (0.10) (0.13) (0.40) (0.49)
Diluted (0.10) (0.13) (0.40) (0.49)
Weighted average common shares outstanding:
Basic 8,110,407 8,126,649 8,479,376 8,309,467
Diluted 8,110,407 8,126,649 8,479,376 8,309,467
(1) The sum of net income (loss) per share amounts for the four quarters may
not equal annual amounts due to rounding.
Liquidity and Capital Resources
Prior to calendar year 1996, the Company satisfied its cash
requirements through cash flows from operating activities and borrowings from
financial institutions and related parties. However, in order to fund the
expenses of developing and launching WorldNow Online, in March 1996, the Company
began a private placement to major institutions and other accredited investors
(the "March 96 Placement"). The Company completed the March 96 Placement for net
proceeds of $16,408,605 during fiscal year 1997, including the exercise of
warrants.
In October 1997, the Company entered into a three-year sale and
leaseback agreement which provided the Company with $2,750,000 in additional
working capital. The Company was required to place $250,000 in escrow upon
signing this agreement.
In March 1998, the Company sold the net assets of DataMark Systems,
Inc., its direct mail marketing subsidiary. To date, the Company has received
$6,857,300 from the sale of these net assets and is scheduled to receive an
additional $700,000 in June 1999.
30
In April 1998, the Company purchased 1,800,000 shares of its common
stock held by a former officer of the Company in exchange for $1,500,000 in
cash.
On June 1, 1998, the Company entered into a thirty-nine month
Interactive Marketing Agreement with America Online, Inc. ("AOL"), wherein the
Company has agreed to pay AOL $12,000,000. The Company made a cash payment to
AOL of $1,200,000 in July 1998, and is scheduled to make payments to AOL of
$4,000,000 prior to January 1, 1999, $4,000,000 prior to July 1, 1999 and
$2,800,000 prior to January 1, 2000.
AOL has exercised its option under the contract and has received
955,414 shares of the Company's common stock and warrants for 318,471 shares of
common stock.
Operating activities used $6,752,970 during the year ended June 30,
1998 compared to $6,334,660 during the year ended June 30, 1997. The increase in
cash used by operating activities during the year ended June 30, 1998 as
compared to 1997 was primarily attributable to the accrual of $675,000 for the
AOL agreement.
Cash used in investing activities was $1,944,751 and $3,697,694 during
the years ended June 30, 1998 and 1997, respectively. During the year ended
June 30, 1998, the Company's investing activities included cash advances for
operating activities to Digital Courier International, Inc., the acquisition of
equipment for $794,344, a net investment in CommTouch, Ltd. valued at $375,000
and the receipt of proceeds from the sale of equipment for $20,938. During the
year ended June 30, 1997, the Company investing activities included the
acquisition of equipment for $3,188,360 and investment in net long-term assets
of discontinued operations of $509,334.
Cash provided by financing activities was $6,971,041 during the year
ended June 30, 1998 as compared to $1,811,354 during the year ended June 30,
1997. The increase in cash provided was attributable to the net receipt of
$6,857,300 from the sale of the direct mail marketing net assets in March 1998,
$2,650,000 from the sale and leaseback agreement entered into in October 1997,
$32,417 from the proceeds received upon the exercise of stock options and
$86,000 from loan proceeds. This increase in cash provided during the year ended
June 30, 1998 was offset in part by the payment of $1,500,000 for the retirement
of common stock owned by former officers of the Company. During the year ended
June 30, 1997, the Company received $1,811,354 from the issuance of common
stock.
Management projects that there will not be sufficient cash flows from
operating activities during the next twelve months to provide capital for the
Company to sutain its operations. As of June 30, 1998, the Company had
$3,211,724 of cash. As described above. The Company made a cash payment to AOL
of $1,200,000 in July, 1998. The Company is currently attempting to obtain
additional debt or equity funding. If adequate funding is not available, the
Company may be required to revise its plans and reduce future expenditures. As
reflected in the accompanyin consolidated financial statements, the Company has
incurred losses from continuing operations of $6,264,265, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,752,970,
$6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and
1996, respectively. As of June 30, 1998, the Company has a tangible working
capital deficit of $272,968 and is scheduled to make substantial payments as
described above to AOL. None of the Company's continuing operations are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all.
Management's plans in regard to these matters include pursuing various
potential funding sources. The Company is currently in negotiations with two
firms to obtain additional working capital through a private placement of the
Company's equity securities. The Company is attempting to accelerate payments
that are due to the Company in the future totaling approximately $1,200,000. The
Company has contacted the entities owing these amounts to negotiate the
acceleration of these payments. The Company is negotiating with a lender to
obtain working capital of $1,200,000 against which loan those receivables would
be pledged. Certain directors of the Company have made oral commitments to make
loans to and additional investments in the Company. Management is actively
pursuing these alternatives until such time as market conditions are more
31
favorable to obtaining additional equity financing. 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. Management projects that
there will not be sufficient cash flows from operating activities during the
next twelve months to provide capital for the Company to sustain its operations.
Year 2000 Issue
Beginning in October 1997, the Company initiated the review and
assessment of all its computerized hardware and internal-use software systems in
order to ensure that such systems will function properly in the year 2000 and
beyond. During the last two years, the Company's computerized information
systems have been substantially replaced and are believed to be Year 2000
compliant. It is possible, however, that software programs acquired from third
parties and incorporated into other applications utilized by the Company may not
be fully Year 2000 compliant, however, in the most likely worst case scenario
these programs would have minimal financial impact on the Company. The Company
intends to continue testing, replacing, or enhancing its internal applications
through the end of 1999 to ensure that risks related to such software are
minimized. Management does not believe that costs associated with Year 2000
compliance efforts will have a material impact on the Company's financial result
or 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 the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from expectations. In addition to matters
affecting the Company's industry generally, factors which could cause actual
results to differ from expectations include, but are not limited to (i) the
Company has only generated minimal revenue from its Internet businesses, and has
not generated and may not generate the level of purchases, users or advertisers
anticipated, and (ii) the costs to market the Company's Internet services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements and reports of independent public
accountants are filed as part of this report on pages F-1 through F-26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- -----------------------------------------------------------------
FINANCIAL STATEMENT DISCLOSURE.
-------------------------------
Effective June 28, 1996, the Registrant dismissed Hansen, Barnett &
Maxwell ("Hansen") as its certifying accountant. Hansen's reports on the
Registrant's financial statements for the years ended June 30, 1995 and 1994 did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
as to uncertainty, audit scope, or accounting principles. The Registrant's board
of directors unanimously approved dismissal of Hansen.
On June 28, 1996, the Registrant engaged Arthur Andersen LLP
("Andersen") to perform its audits and provide accounting services thereafter.
The Registrant did not consult with Andersen prior to such date regarding any
reportable matter.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Located in Part I as permitted by Instruction 3 to Item 401(b)
of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Incorporated by reference to the Registrant's Proxy Statement
for its 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth information regarding Common Stock of
the Company beneficially owned as of October 7, 1998 by: (i) each person known
by the Company to beneficially own 5% or more of the outstanding Common Stock,
(ii) each director and director nominee, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all officers and directors as a group.
As of October 7, 1998, there were 13,099,210 shares of Common Stock outstanding
and no Preferred Stock outstanding.
Amount of Percentage
Names and Addresses of Common of Voting
Principal Stockholders Shares* Securities
---------------------- ------- ----------
Lorne House Trust 995,296 7.6%
Castletown, Isle of Man
America Online, Inc. 955,414 7.3%
22000 AOL Way
Dulles, Virginia 20166
Officers and Directors
----------------------
James A. Egide 1,663,898(1) 12.7%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Raymond J. Pittman 1,930,127 14.7%
187 Fremont Street
San Francisco, California 94105
Kenneth M. Woolley 387,000(2) 2.9%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Mitchell L. Edwards 420,307(3) 3.1%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Glen Hartman 66,667 0.5%
136 Heber Avenue, Suite 204
Park City, Utah 84060
All Directors and Executive Officers 4,467,999 32.7%
33
(5 persons)
* Assumes exercise of all exercisable options held by listed security holders
which can be acquired within 60 days from October 7, 1998.
(1) Includes 25,000 shares which Mr. Egide may acquire on exercise of options.
(2) Includes 225,000 shares which Mr. Woolley may acquire on exercise of
options.
(3) Includes 280,000 shares which Mr. Edwards may acquire on exercise of
options. Does not include 85,000 shares which may be acquired on exercise of
options which are not currently exercisable.
The stockholders listed have sole voting and investment power, except as
otherwise noted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
During the year ended June 30, 1994, the Company made cash loans to two
officers totaling $46,000, which were settled during the year ended June 30,
1995, except for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1994, the Company had borrowed money from certain
officers. Additional borrowings of $50,000 and $129,500 were made during the
years ended June 30, 1996 and 1995, respectively. Principal payments on these
notes were $1,666, $199,500, and $2,152 during the years ended June 30, 1997,
1996 and 1995, respectively. The amounts due on these loans at June 30, 1998,
1997 and 1996 were $0, $0 and $1,666, respectively.
During the year ended June 30, 1996, the Company borrowed $500,000 from
a bank to fund computer equipment purchases. Certain officers and stockholders
guaranteed the loan. In exchange for the guarantee, such persons received a
one-year option to purchase 25,000 shares of common stock at $5.00 per share.
During the year ended June 30, 1997, the Company negotiated services
and equipment purchase agreements with CasinoWorld Holdings, Ltd., Cybergames,
Inc., Online Investments, Inc. and Barrons Online, Inc., companies in which Mr.
Egide, one of the Company's directors and stockholders has an ownership
interest. Under the agreements, the Company provided software development
services, and configured hardware and other computer equipment.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) INDEX TO FINANCIAL STATEMENTS
Title of Documents Page No.
- ------------------ --------
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
- ---------------------------------------------------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-4
34
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-10
(b) Reports on Form 8-K
-------------------
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of its fiscal year ended June 30, 1998.
(c) Exhibits
--------
The following documents are included as exhibits to this report.
Exhibits Exhibit Description Page or Location
3.1 Amended and restated certificate of incorporation attached herewith
3.2 By-laws attached herewith
10.1 Lease Agreement +
10.2 Amended and restated DataMark Holding, Inc Incentive #
Plan
10.3 Interactive Marketing Agreement with America Online, Inc. attached herewith
10.4 Content license and distribution agreement with At Home attached herewith
Corporation
10.5 Stock Exchange Agreement with Digital Courier *
International, Inc.
10.6 Asset Purchase Agreement with Focus Direct, Inc. *
21.1 Subsidiaries of the Registrant attached herewith
27.0 Financial Data Schedule attached herewith
Incorporated by reference to the Company's Proxy statement filed on
September 1, 1998 for Special Stockholders meeting to be held on
September 16, 1998.
# Incorporated by reference to the Company's Form S-8 filed on April 28,
1998.
+ Incorporated by reference to the Company's Annual Report for the year
ended June 30, 1995.
35
DIGITAL COURIER TECHNOLOGIES, INC.
(formerly DataMark Holding, Inc.)
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997 AND FOR
EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 30, 1998
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Courier Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Digital Courier
Technologies, Inc. (formerly DataMark Holding, Inc.) and subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Courier
Technologies, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from continuing operations of $6,264,265, $7,158,851 and $3,586,413 during the
years ended June 30, 1998, 1997 and 1996, respectively. The Company has a
tangible working capital deficit of $272,968 as of June 30, 1998. None of the
Company's continuing operations are generating positive cash flows. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 23, 1998
F-1
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
ASSETS
1998 1997
-------------------------------
CURRENT ASSETS:
Cash $ 3,211,724 $ 4,938,404
Trade accounts receivable 16,459 --
Inventory 21,046 --
Current portion of AOL anchor tenant placement costs 3,237,281 --
Other current assets 118,721 74,742
Net current assets of discontinued operations -- 105,739
-------------------------------
Total current assets 6,605,231 5,118,885
-------------------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,225,817 5,210,607
Furniture, fixtures and leasehold improvements 777,419 724,717
Vehicles -- 29,059
-------------------------------
7,003,236 5,964,383
Less accumulated depreciation and amortization (2,109,736) (510,307)
-------------------------------
Net property and equipment 4,893,500 5,454,076
-------------------------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of current portion 8,136,841 --
-------------------------------
GOODWILL, net of accumulated amortization of $67,997 1,318,661 --
-------------------------------
RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL, INC 810,215 --
-------------------------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS
-- 709,063
-------------------------------
OTHER ASSETS 1,458,500 38,636
-------------------------------
$ 23,222,948 $ 11,320,660
-------------------------------
See accompanying notes to consolidated financial statements.
F-2
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF JUNE 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
CURRENT LIABILITIES: --------------------------------
Current portion of capital lease obligations $ 1,006,906 $ --
Note payable 100,000 --
Accounts payable 1,458,598 1,086,474
Accrued rental payments for vacated facilities 544,014 --
Other accrued liabilities 531,400 408,103
--------------------------------
Total current liabilities 3,640,918 1,494,577
--------------------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 1,384,132 --
--------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 7 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value;
2,500,000 shares authorized, no shares issued
Common stock, $.0001 par value; -- --
20,000,000 shares authorized, 8,268,489 and
8,560,932 shares outstanding, respectively
827 856
Additional paid-in capital 30,506,614 22,714,366
Warrants outstanding 2,519,106 --
Receivable to be settled through the repurchase
of common shares by the Company
(148,576) --
Accumulated deficit (14,680,073) (12,889,139)
--------------------------------
Total stockholders' equity 18,197,898 9,826,083
--------------------------------
$ 23,222,948 $ 11,320,660
--------------------------------
See accompanying notes to consolidated financial statements.
F-3
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
------------------------------------------
NET SALES $ 803,011 $ 8,812 $ --
COST OF SALES 745,871 492 --
------------------------------------------
Gross margin 57,140 8,320 --
------------------------------------------
OPERATING EXPENSES:
General and administrative 4,092,737 1,400,916 685,528
Depreciation and amortization 1,536,388 398,066 86,828
Research and development 1,432,006 3,966,185 1,478,890
Selling 1,290,012 1,897,665 --
AOL agreement costs 675,000 -- --
Compensation expense related to issuance
of options by principal stockholder -- -- 1,484,375
------------------------------------------
Total operating expenses 9,026,143 7,662,832 3,735,621
------------------------------------------
OPERATING LOSS (8,969,003) (7,654,512) (3,735,621)
------------------------------------------
OTHER INCOME (EXPENSE):
Interest and other income 178,354 496,365 95,408
Interest expense (157,616) (704) (38,199)
------------------------------------------
Net other income 20,738 495,661 57,209
------------------------------------------
LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS
(8,948,265) (7,158,851) (3,678,412)
INCOME TAX BENEFIT 2,684,000 -- 91,999
------------------------------------------
LOSS FROM CONTINUING OPERATIONS (6,264,265) (7,158,851) (3,586,413)
------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
DISCONTINUED OPERATIONS: --------------------------------------------
Income from operations of discontinued
direct mail advertising operations,
net of income tax provision of $66,827,
$180,263 and $91,999, respectively $ 111,377 $ 300,438 $ 153,332
Gain on sale of direct mail advertising operations,
net of income tax provision of $2,636,831 4,394,717 -- --
Loss from operations of discontinued Internet
service provider subsidiary, net of income tax benefit
of $159,404 and $180,263, respectively (265,674) (2,482,403) --
Gain on sale of Internet service provider subsidiary,
net of income tax provision of $139,746 232,911 -- --
--------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 4,473,331 (2,181,965) 153,332
--------------------------------------------
NET LOSS $(1,790,934) $(9,340,816) $(3,433,081)
============================================
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.74) $ (0.86) $ (0.61)
============================================
Income (loss) from discontinued operations:
Basic and diluted $ 0.53 $ (0.26) $ 0.03
============================================
Net Loss:
Basic and diluted $ (0.21) $ (1.12) $ (0.58)
============================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 8,422,345 8,309,467 5,917,491
============================================
See accompanying notes to consolidated financial statements.
F-5
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------------
Net loss $(1,790,934) $(9,340,816) $(3,433,081)
Adjustments to reconcile net loss to net cash used in operating activities:
Gains on sales of direct mail and Internet service operations (7,404,205) -- --
Depreciation and amortization 1,536,388 398,066 86,828
Compensation expense related to issuance of stock options 343,750 -- 1,484,375
Issuance of common stock as compensation 61,250 -- --
Compensation expense related to cashless exercise of stock options
18,375 -- --
Loss on disposition of equipment 11,196 -- --
Expense purchased research and development -- 1,674,721 --
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable 101,653 8,206 (8,206)
Inventory 836 -- --
AOL anchor tenant placement costs (525,000) -- --
Other current assets 154,263 (74,742) 2,042
Net current assets of discontinued operations -- 182,041 (178,964)
Other assets (13,360) (38,636) 84,570
Accounts payable 446,168 588,899 443,813
Accrued liabilities 306,650 267,601 133,056
------------------------------------------
Net cash used in operating activities (6,752,970) (6,334,660) (1,385,567)
CASH FLOWS FROM INVESTING ACTIVITIES: ------------------------------------------
Purchase of property and equipment (794,344) (3,188,360) (2,589,212)
Proceeds from sale of equipment 20,938 -- --
Increase in receivable from Digital Courier International, Inc. (810,215) -- --
Increase in net long-term assets of discontinued operations -- (509,334) (70,628)
Cash of discontinued operations 13,870 -- --
Increase in other assets (375,000) -- --
------------------------------------------
Net cash used in investing activities (1,944,751) (3,697,694) (2,659,840)
------------------------------------------
See accompanying notes to consolidated financial statements.
F-8
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
1998 1997 1996
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of direct mail advertising operations $ 6,857,300 $ -- $ --
Net proceeds from sale and lease back of equipment 2,650,000 -- --
Net proceeds from issuance of common stock and other contributed capital 32,417 358,418 16,417,105
Collection of receivables from sale of common stock -- 1,496,137 719,000
Proceeds from borrowings 86,000 -- 29,701
Purchase of common stock from officers (1,700,000) -- --
Principal payments on capital lease obligation (690,183) -- --
Principal payments on borrowings (264,493) (43,201) --
--------------------------------------------
Net cash provided by financing activities 6,971,041 1,811,354 17,165,806
--------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,726,680) (8,221,000) 13,120,399
CASH AT BEGINNING OF YEAR 4,938,404 13,159,404 39,005
--------------------------------------------
CASH AT END OF YEAR $ 3,211,724 $ 4,938,404 $ 13,159,404
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 157,616 $ 9,495 $ 56,942
See accompanying notes to consolidated financial statements.
F-9
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Organization and Principles of Consolidation
DataMark Systems, Inc. ("Systems") was incorporated under the laws of the State
of Nevada on April 29, 1987. DataMark Printing, Inc. ("Printing") was
incorporated under the laws of the State of Utah on March 23, 1992. WorldNow
Online Network, Inc. ("WorldNow"), formerly DataMark Media, Inc., was
incorporated as a wholly owned subsidiary of Systems on October 3, 1994. Systems
negotiated a plan of reorganization and subscription agreement with the
shareholders of Printing (who were also greater than 80 percent shareholders of
Systems) whereby those shareholders transferred all of the outstanding shares of
common stock of Printing to Systems as an additional contribution to capital in
December 1994. No additional shares of common stock of Systems were issued in
the transaction.
Exchequer I, Inc. ("Exchequer"), a publicly held Delaware corporation, was
incorporated May 16, 1985. On January 11, 1995, Systems consummated a merger
agreement with Exchequer whereby Systems became a wholly owned subsidiary of
Exchequer, which changed its name to DataMark Holding, Inc. ("Holding" or the
"Company"). The shareholders of Systems received 2121.013 shares of Holding's
common stock for each share of Systems' common stock outstanding at the date of
the merger. Accordingly, the 2,132 shares of Systems' common stock were
converted into 4,522,000 shares of Holding's common stock. The accompanying
financial statements have been restated to reflect the stock conversion for all
periods presented. The merger was accounted for as a reverse acquisition with
Systems being considered the acquiring company for accounting purposes. Prior to
the merger, Holding had no assets, $26,215 of liabilities and 471,952 shares of
common stock issued and outstanding. The reverse acquisition was accounted for
by recording the liabilities of Holding at the date of merger at their
historical cost, which approximated fair value.
Effective March 17, 1998, Holding entered into a Stock Exchange Agreement (the
"Exchange Agreement") with Digital Courier International, Inc., a Nevada
corporation ("DCII"). Pursuant to the Exchange Agreement, Holding agreed to
issue 4,659,080 shares of its common stock to the shareholders of DCII. The
acquisition and the changing of Holding's name to Digital Courier Technologies,
Inc. ("DCTI") were approved by the shareholders of Holding on September 16,
1998. The acquisition of DCII will be accounted for as a purchase and the
Company anticipates that approximately $11.7 million of the total purchase price
of approximately $13.0 million will be allocated to in process research and
development and will be expensed in the first quarter of fiscal year 1999. This
allocation will be finalized upon completion of a third-party valuation. After
entering into the Exchange Agreement, the Company made advances to DCII to fund
its operations. The amount loaned to DCII totaled $810,215 as of June 30, 1998
and is reflected as a noncurrent receivable in the accompanying June 30, 1998
consolidated balance sheet.
DCII is a Java-based Internet and wireless communications software development
company originally incorporated on July 23, 1996. For the year ended December
31, 1997, DCII had no revenues.
On January 8, 1997, the Company acquired all of the outstanding shares of common
stock of Sisna, Inc. ("Sisna"). In January 1998, the Company acquired all of the
outstanding shares of common stock of Books Now, Inc. ("Books Now") and in May
1998 acquired all of the outstanding common stock of WeatherLabs Technologies,
Inc. ("WeatherLabs"). The acquisitions of Sisna, Books Now and WeatherLabs have
been accounted for as purchases with the results of operations of the acquired
entities being included in th accompanying consolidated financial statements
from the dates of the acquisitions. Additionally, in March 1998, the Company
sold its direct mail advertising operations to Focus Direct, Inc. ("Focus
See accompanying notes to consolidated financial statements.
F-10
Direct") and sold the shares of common stock of Sisna acquired in January 1997
back to Sisna's former major shareholder (see Note 3 for pro forma information).
The accompanying consolidated financial statements have been retroactively
restated to present the direct mail advertising operations and Sisna's Internet
service operations as discontinued operations.
On July 15, 1998, the Company signed an agreement to sell certain assets related
to the Company's Internet-related business branded under the "WorldNow" and
"WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The
assets relate primarily to the national Internet-based network of local
television stations (see Note 12).
DCTI, WeatherLabs, Books Now, WorldNow, Printing and Sisna are collectively
referred to herein as the "Company". All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations and Related Risks
The Company's historical operations have primarily consisted of providing highly
targeted business to consumer advertising for its clients. During fiscal years
1998, 1997 and 1996, the medium for such targeted advertising was direct mail
and was being expanded to include an online network (see discussion below). The
direct mail advertising operations were sold in March 1998.
In January 1997, the Company acquired Sisna, which operates as an Internet
service provider allowing its customers access to the Internet. Through a
network of franchisees, Sisna offers Internet access in 12 states. Sisna was
sold back to Sisna's former major shareholder in March 1998.
In fiscal 1994, the Company began developing an advertiser funded national
Internet service ("WorldNow Online") which was launched in the last quarter of
fiscal year 1997. The Company's strategy for WorldNow Online included the
creation of a national Internet-based network of local television stations.
WorldNow would provide free web hosting, web maintenance and other Internet
features, including national content and advertising, to the television
stations. In return, the stations would provide local content, ranging from
news, weather and sports, to entertainment, recreational and cultural events, as
well as free television advertising and promotions in order to drive local users
of the Internet to the WorldNow site. Both WorldNow and the stations' revenues
would be derived from local and national advertising as well as related commerce
conducted via the Internet. WorldNow went online in June 1997, and began
generating minimal advertising revenues in August 1997. In July 1998, the
Company agreed t sell certain assets related to the national Internet-based
network of local television stations (see Note 12).
As discussed above, the Company has recently acquired Books Now, WeatherLabs and
DCII. The Company's strategy is to be an Internet services company and engage in
e-commerce and provide Internet content development, packaging and distribution
for Internet portals and websites. In addition to e-commerce and web hosting
from its data center, the Company is creating virtual content and commerce
products that can be branded and used by existing Internet portals, websites and
Internet communities. Its main product offerings are Videos Now(TM),
WeatherLabs(TM)and Books Now(TM).
The Company has a limited operating history upon which an evaluation of the
Company can be based, and its prospects are subject to the risks, expenses and
uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services. Specifically, such risks
include, without limitation, the dependence on continued growth in use of the
Internet, the ability of the Company to effectively integrate the technology and
operations of acquired businesses or technologies with its operations, the
ability to maintain and expand the channels of distribution, the ability to
maintain continuing expertise in proprietary and third-party technologies, the
timing of introductions of new services, the pricing policies of the Company's
competitors and suppliers and the ability to identify, attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks or that the Company will achieve or sustain
profitability. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible.
See accompanying notes to consolidated financial statements.
F-11
As reflected in the accompanying consolidated financial statements, the Company
has incurred losses from continuing operations of $6,264,265, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,752,970,
$6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and
1996, respectively. As of June 30, 1998, the Company has a tangible working
capital deficit of $272,968. None of the Company's continuing operations are
generating positive cash flows. Additional funding will be required before the
Company's continuing operations will achieve and sustain profitability, if at
all. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Management's plans in regard to these matters include pursuing various potential
funding sources. The Company is currently in negotiations with two firms to
obtain additional working capital through a private placement of the Company's
equity securities. The Company is attempting to accelerate payments that are due
to the Company in the future totaling approximately $1,200,000. The Company has
contacted the entities owing these amounts to negotiate the acceleration of
these payments. The Company is negotiating with a lender to obtain working
capital of $1,200,000 against which loan those receivables would be pledged.
Certain directors of the Company have made oral commitments to make loans to and
additional investments in the Company. Management is actively pursuing these
alternatives until such time as market conditions are more favorable to
obtaining additional equity financing. 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory
Inventory is valued at the lower of cost or market, with cost being determined
using the first-in, first-out method. As of June 30, 1998, inventory consists
primarily of purchased books to be sold and distributed by Books Now.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when
incurred. Depreciation and amortization of property and equipment are computed
using primarily an accelerated method over the estimated useful lives of the
related assets, which are as follows:
Vehicles 5 years
Printing equipment 5 years
Computer and office equipment 5 - 7 years
Furniture, fixtures and leasehold
improvements 5 - 10 years
When property and equipment are retired or otherwise disposed of, the book value
is removed from the asset and related accumulated depreciation and amortization
accounts, and the net gain or loss is included in the determination of net loss.
See accompanying notes to consolidated financial statements.
F-12
Other Assets
As of June 30, 1998 and 1997, other assets consist of the following:
1998 1997
-----------------------------------
Noncurrent receivable from Focus Direct (see Note 3) $ 700,000 $ -
Investment in CommTouch preferred stock (see below) 375,000 -
Security deposit under capital lease arrangement (see Note 7)
250,000 -
Deposits and other 133,500 38,636
-----------------------------------
$ 1,458,500 $ 38,636
================== ================
During fiscal year 1998, the Company entered into a Series C Preferred Share
Purchase Agreement with CommTouch Software Ltd. ("CommTouch"), an Israeli
company, whereby the Company agreed to invest $750,000 in CommTouch's Series C
Preferred Stock. One half of the investment was made on July 2, 1997 and the
other half was made on September 17, 1997. The Company also has an option to
make an additional $1,000,000 investment in CommTouch's Series C Preferred
Stock. CommTouch is engaged in the development, manufacture and marketing of
PC-based Internetworking software. As of June 30, 1998, management of the
Company determined that the investment in CommTouch was partially impaired and
recorded a reserve of $375,000 against the investment.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated balance sheets
for cash, accounts receivable, and accounts payable approximate fair values
because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's note payable and capital
lease obligations also approximate fair value based on current rates for similar
debt. The $700,000 noncurrent receivable related to the sale of the direct mail
advertising business is noninterest bearing and is not due until June 30, 1999.
The estimated fair value of the receivable as of June 30, 1998 is approximately
$640,500.
Revenue Recognition
Revenue is recognized upon shipment of product and as services are provided or
pro rata over the service period. The Company defers revenue paid in advance
relating to future services and products not yet shipped.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. These deferred tax assets
or liabilities are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
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 fiscal year. Diluted net loss per common share ("Diluted EPS")
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net loss per common share.
See accompanying notes to consolidated financial statements.
F-13
Options to purchase 1,445,000, 1,424,815 and 1,072,215 shares of common stock at
weighted average exercise price of $3.82, $5.36, and $4.63 per share as of June
30, 1998, 1997, and 1996, respectively and warrants to purchase 656,942, 20,000
and 56,125 shares of common stock at weighted average exercise prices of $9.37,
$7,75 and $7.75 per share, respectively, were not included in the computation of
diluted EPS. The inclusion of the options and warrants would have been
antidilutive, thereby decreasing net loss per common shares. As of June 30,
1998, the Company has agreed to issue up to an additional 1,048,940 shares of
common stock in connection with the acquisitions of Books Now and WeatherLabs
(see Note 3). The issuance of the shares is contingent on the achievement of
certain performance criteria and/or the future stock price of the Company's
common stock. These contingent shares have also been excluded from the
computation of diluted EPS.
Supplemental Cash Flow Information
Noncash investing and financing activities consist of the following:
During the year ended June 30, 1998, the Company issued 955,414 shares of common
stock and warrants to purchase 318,471 shares of common stock to America OnLine,
Inc. ("AOL") in connection with an Interactive Marketing Agreement. The common
shares issued were recorded at their fair value of $8,330,016 and the warrants
were recorded at their fair value of $2,519,106 with the offset being recorded
as AOL anchor tenant placement costs (see Note 4). In addition, the Company
acquired the common stock of Book Now and WeatherLabs in exchange for 100,000
and 253,260 shares of common stock, respectively (see Note 3).
During the year ended June 30, 1997, the Company acquired $96,000 of computer
software in exchange for 12,000 shares of common stock. During the year ended
June 30, 1998, the software was returned by the Company and the Company received
back the 12,000 shares of common stock. During fiscal year 1997, the Company
acquired the common stock of Sisna in exchange for 325,000 shares of the
Company's common stock. During fiscal year 1998, the Company sold the common
stock of Sisna back to the former major shareholder of Sisna for the return of
35,000 shares of the Company's common stock.
During the year ended June 30, 1996, the Company received subscription
agreements for the purchase of 214,500 shares of common stock at $7.75 per share
amounting to $1,496,137, net of commissions of $166,238. Payment was received
subsequent to June 30, 1996 (see Note 8).
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components and SFAS No. 131 establishes new
standards for public companies to report information about their operating
segments, products and services, geographi areas and major customers. Both
statements are effective for financial statements issued for periods beginning
after December 15, 1997, accordingly, the Company will adopt SFAS No. 130 and
SFAS No. 131 in its fiscal year 1999 consolidated financial statements.
Management believes the adoption of SFAS Nos. 130 and 131 will not have a
material impact on the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at fair value and that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999; accordingly, the Company will adopt
SFAS No. 133 in its fiscal year 2000 consolidated financial statements.
Management believes the adoption of SFAS No. 133 will not have a material impact
on the consolidated financial statements.
See accompanying notes to consolidated financial statements.
F-14
Reclassifications
Certain reclassifications have been made to the previous years' consolidated
financial statements to be consistent with the fiscal year 1998 presentation.
(3) ACQUISITIONS AND DISPOSITIONS
Books Now
In January 1998, the Company acquired all of the outstanding stock of Books Now,
a seller of books through advertisements in magazines and over the Internet. The
shareholders of Books Now received 100,000 shares of the Company's common stock
upon signing the agreement and can receive 87,500 additional shares per year for
the next three years based on performance goals established in the agreement.
The annual number of shares could increase up to a maximum of 175,000 shares if
the Company's average stock price, as defined, does not exceed $8.50 per share
at the end of the three-year period. The Company granted certain piggyback
registration rights and a one time demand registration right with regard to the
shares received under the agreement. The Company also entered into a three-year
employment agreement with the president of Books Now that provides for base
annual compensation of $81,000 and a bonus on pretax income ranging from 5% to
8% based on the level of earnings.
The acquisition has been accounted for as a purchase and the operations of Books
Now are included in the accompanying consolidated financial statements since the
date of acquisition. The tangible assets acquired included $261 of cash, $21,882
of inventory and $50,000 of equipment. Liabilities assumed included $112,335 of
notes payable, $24,404 of capital lease obligations and $239,668 of accounts
payable and accrued liabilities. The excess of the purchase price over the
estimated fair value of the acquired assets of $538,639 has been recorded as
goodwill and is being amortized over a period of five years.
WeatherLabs
On March 17, 1998, the Company entered into a Stock Exchange Agreement to
acquire all of the outstanding stock of WeatherLabs, one of the leading
providers of weather and weather-related information on the Internet. The
acquisition was closed in May 1998. At closing the shareholders of WeatherLabs
were issued 253,260 shares of the Company's common stock. These shareholders are
entitled to receive a total of 523,940 additional shares over the next three
years based on the stock price of the Company's common stock, as defined, at the
end of the Company's next three fiscal years.
The acquisition has been accounted for as a purchase and the operations of
WeatherLabs are included in the accompanying consolidated financial statements
since the date of acquisition. The tangible assets acquired included $3,716 of
cash, $19,694 of accounts receivable, $115,745 of equipment and $13,300 of
deposits. Liabilities assumed included $100,000 of notes payable, $56,902 of
capital lease obligations and $134,444 of accounts payable and accrued
liabilities. The excess of the purchase price over the estimated fair value of
the acquired assets of $848,019 has been recorded as goodwill and is being
amortized over a period of five years.
Unaudited Pro Forma Data for Acquisitions of Continuing Operations
The unaudited pro forma results of operations of the Company for the years ended
June 30, 1998 and 1997 (assuming the acquisitions of Books Now and WeatherLabs
had occurred as of July 1, 1996) are as follows:
1998 1997
--------------------------------
Revenues $ 1,171,200 $ 368,802
Loss from continuing operations (6,993,401) (7,574,632)
Loss from continuing operations per share (0.80) (0.87)
See accompanying notes to consolidated financial statements.
F-15
Sisna, Inc.
On January 8, 1997, the Company completed the acquisition of Sisna pursuant to
an Amended and Restated Agreement and Plan of Reorganization (the "Agreement").
Pursuant to the Agreement, Holding issued 325,000 shares of its common stock in
exchange for all of the issued and outstanding shares of Sisna. The acquisition
was accounted for as a purchase. The excess of the purchase price over the
estimated fair value of the acquired assets less liabilities assumed was
$1,674,721, which was allocated to purchased research and development and
expensed at the date of the acquisition. Sisna has not been profitable since its
inception. The tangible assets acquired consisted of $32,212 of trade accounts
receivable, $124,151 of inventory and $500,000 of computer and office equipment.
The liabilities assumed consisted of $10,550 of bank overdrafts, $278,227 of
accounts payable, $233,142 of notes payable and $134,444 of other accrued
liabilities.
In connection with the acquisition, the Company entered into three-year
employment agreements with four of Sisna's key employees and shareholders. The
employment agreements provided for automatic renewals for one or more successive
one-year terms (unless notice of non-renewal was given by either party), could
be terminated by the Company for cause (as defined), or could be terminated by
the Company without cause. If terminated without cause, the employees were
entitled to their regular base salary up to the end of the then current term and
any bonus owed pursuant to the employment agreements. The four employment
agreements provided for aggregate base annual compensation of $280,000. The
employment agreements also provided for aggregate bonuses of $500,000, which
were paid as of the date of the acquisition. These bonuses were earned and
expensed as the employees completed certain computer installations. The
employment agreements also included noncompetition provisions for periods
extending three years after the termination of employment with the Company.
In March 1998, the Company sold the operations of Sisna back to Sisna's major
shareholder, who was a director of the Company, in exchange for 35,000 shares of
the Company's common stock. The purchaser of Sisna received tangible assets of
approximately $55,000 of accounts receivable, $35,000 of prepaid expenses,
$48,000 of computer and office equipment, and $10,000 of other assets and
assumed liabilities of approximately $33,000 of accounts payable, $102,000 of
notes payable, and $244,000 of other accrued liabilities resulting in a pretax
gain on the sale of $372,657.
The operations of Sisna have been reflected in the accompanying consolidated
financial statements from the acquisition date in January 1997 through the sale
date in March 1998 as discontinued operations. The Sisna revenues were $555,686
and $341,842, respectively, and the losses from operations were $(425,078) and
$(2,662,666) during fiscal years 1998 and 1997, respectively.
Sale of Direct Mail Advertising Operations
In March 1998, the Company sold its direct mail advertising operations to Focus
Direct, a Texas corporation. Pursuant to the asset purchase agreement, Focus
Direct purchased all assets, properties, rights, claims and goodwill, of every
kind, character and description, tangible and intangible, real and personal
wherever located of the Company used in the Company's direct mail operations.
Focus Direct also agreed to assume certain liabilities of the Company related to
the direct mail advertising operations. Focus Direct is not affiliated with the
Company.
Pursuant to the agreement, Focus Direct agreed to pay the Company $7,700,000 for
the above described assets. Focus Direct paid the Company $6,900,000 at closing
and will pay the additional $800,000 by June 30, 1999. The total purchase price
was adjusted for the difference between the assets acquired and liabilities
assumed at November 30, 1997 and those as of the date of closing. This sale
resulted in a pretax gain of $7,031,548. The purchaser acquired tangible assets
consisting of approximately $495,000 of accounts receivable, $180,000 of
inventory, $575,000 of furniture and equipment, and $10,000 of other assets, and
assumed liabilities of approximately $590,000 of accounts payable and $320,000
of other accrued liabilities.
See accompanying notes to consolidated financial statements.
F-16
The direct mail advertising operations have been reflected as discontinued
operations in the accompanying consolidated financial statements. The direct
mail advertising revenues for the years ended June 30, 1998, 1997 and 1996
amounted to $7,493,061, $6,448,156 and $4,256,887, respectively.
(4) Interactive Marketing Agreement with America Online, Inc.
On June 1, 1998, the Company entered into an Interactive Marketing Agreement
with America Online, Inc. ("AOL") for an initial term of 39 months (the
"Agreement"), which can be extended for successive one-year terms by AOL
thereafter. Under the Agreement, the Company will pay AOL $12,000,000 in cash
and issue a seven-year warrant to purchase 318,471 shares of the Company's
common stock at $12.57 per share (the "Performance Warrant") in exchange for AOL
providing the Company with certain permanent anchor tenant placements for its
Videos Now site on the AOL Network and promotion of the Videos Now site. The
Company is scheduled to make cash payments to AOL of $1,200,000 upon execution
of the agreement in June 1998, $4,000,000 prior to January 1, 1999, $4,000,000
prior to July 1, 1999 and $2,800,000 prior to January 1, 2000. The initial
$1,200,000 payment was not actually made until July 6, 1998. The Performance
Warrant vests over the term of the agreement as certain promotion criteria are
achieved by AOL
The agreement includes an option whereby AOL elected to provide additional
permanent anchor tenant placements for Videos Now on AOL.com (a separate and
distinct website) in exchange for 955,414 shares of the Company's common stock
and a seven-year, fully vested warrant to purchase 318,471 shares of the
Company's common stock at a price of $6.28 per share (the "Option Warrant").
The original $12 million of cash payments and the value of the Performance
Warrant, to be determined as the warrant vests, will be accounted for as
follows: (i) the estimated fair value of the permanent anchor tenant placements
on the AOL Network of $1,750,000 per year, or approximately $5,250,000 in total,
will be charged to expense ratably over the period from the launch of the
Company's interactive site, which is expected to be October 15, 1998, through
the original term of the agreement; and (ii) the remaining amount will be
treated as advertising costs and will be expensed as paid or as the Performance
Warrant vests. The advertising will be expensed as paid in accordance with SOP
93-7, because the Company has no experience on which to evaluate the
effectiveness of the direct response advertising. The value of the common shares
issued of $8,330,016 and the value of the Option Warrant of $2,519,106 represent
the value of the permanent anchor tenant placements on AOL.com and will be
charged to expense ratably over the period from the launch of the Company's
interactive site on AOL.com through the original term of the agreement. As of
June 30, 1998, the initial $1,200,000 payment obligation was allocated $525,000
to AOL anchor tenant placement costs and $675,000 to expense as advertising
costs. The value of the common stock issued and the Option Warrant was recorded
as AOL anchor tenant placement costs in the accompanying consolidated financial
statements.
(5) NOTE PAYABLE
As of June 30, 1998, the Company has a note payable to an unrelated individual
in the amount of $100,000. The note was assumed in the acquisition of
WeatherLabs. The note is unsecured, bears interest at eight percent and is due
on demand.
(6) INCOME TAXES
The components of the net deferred income tax assets as of June 30, 1998 and
1997 are as follows:
1998 1997
----------------------------------------------
Net operating loss carryforwards $ 3,611,000 $ 3,464,800
Accrued liabilities 271,400 83,400
Receivable reserves and other 162,000 22,000
----------------------------------------------
Total deferred income tax assets 4,044,400 3,570,200
Valuation allowance (4,044,400) (3,570,200)
----------------------------------------------
Net deferred income tax asset $ - $ -
==============================================
See accompanying notes to consolidated financial statements.
F-17
As of June 30, 1998, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $10,030,000. For federal
income tax purposes, utilization of these carryforwards is limited if the
Company has had more than a 50 percent change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a change occurs in
the future. The tax net operating losses will expire beginning in 2009.
No benefit for income taxes was recorded during the year ended June 30, 1997.
The income tax benefits recorded for the years ended June 30, 1998 and 1996 of
$2,684,000 and $91,999, respectively, were limited to the income tax provision
recorded on income from discontinued operations. As discussed in Note 1, certain
risks exist with respect to the Company's future profitability, and accordingly,
a valuation allowance was recorded against the entire net deferred income tax
asset.
(7) COMMITMENTS AND CONTINGENCIES
Leases
In October 1997, the Company entered into a sale and three-year capital
leaseback agreement related to $3,000,000 of the Company's computer equipment.
The agreement provided that $250,000 of the proceeds be placed in escrow upon
signing the agreement. The equipment was sold at book value resulting in no
deferred gain or loss on the transaction. The Company assumed certain minor
capital lease obligations related to equipment as a result of the acquisitions
of Books Now and WeatherLabs. The Company leases certain facilities and
equipment used in its operations under operating lease arrangements. Commitments
for minimum rentals under noncancelable leases as of June 30, 1998 are as
follows, net of sublease rentals:
Minimum Operating Leases
------------------------------------------------
Capital Minimum Deduct Net
Lease Lease Sublease Rental
Year ending June 30, Payments Rentals Rentals Commitments
- ---------------------------------------------------------------------------------------------------------------
1999 $ 1,155,481 537,293 $ 188,617 $ 348,676
2000 1,150,872 475,109 267,166 207,943
2001 301,321 293,791 198,044 95,747
2002 13,763 120,478 99,122 21,356
2003 5,220 - - -
-------------------------------------------------------------------
Total minimum lease payments 2,626,657 1,426,671 $ 752,949 $ 673,722
=================================================
Less amount representing interest (235,619)
Present value of net minimum lease
payments, including current
maturities of $1,006,906 $ 2,391,038
=================
The Company incurred rent expense of $552,264, $472,572 and $118,923 in
connection with its operating leases for the years ended June 30, 1998, 1997 and
1996, respectively. Due to the sale of the Company's direct mail advertising
operations and the Sisna Internet service operations during fiscal 1998, the
Company vacated certain leased facilities. The Company accrued a liability for
an estimated $544,014 of future rental payments for vacated facilities that will
not be covered by subleases.
See accompanying notes to consolidated financial statements.
F-18
Purchase Commitment
On November 28, 1996, the Company entered into an agreement with Sprint
Communications Company L.P. ("Sprint") to establish special prices and minimum
purchase commitments in connection with the use of communication products and
services. This agreement was terminated and superceded by an agreement effective
July 15, 1997. The Company has committed to minimum annual usage of at least
$500,000 over a three-year period.
Legal Matters
As discussed in Note 3, during fiscal year 1998 DCTI acquired the common stock
of Books Now in exchange for 100,000 shares of DCTI's common stock with
additional shares to be earned based on Books Now achieving certain performance
goals during the three years following the acquisition date. In June 1998, the
Company received a letter from the prior owner of Books Now, who is also the
current president of Books Now, alleging that his duties had been changed
without his consent and Books Now had been prevented by DCTI from reaching its
financial goals for the first year. The former owner contends that DCTI breached
its agreements with him, breached the implied covenant of good faith and fair
dealing in connection with the agreements and defrauded him in connection with
DCTI's purchase of Books Now's common stock.
DCTI and the former owner are engaged in settlement discussions in an effort to
resolve this matter without litigation. While management believes, after
consultation with legal counsel, that the ultimate outcome of this matter will
not have a significant effect on the Company's consolidated financial position,
liquidity or results of operations, it is possible that a change in the
Company's estimate of its probable liability, if any, could occur.
The Company is the subject of certain other legal matters which it considers
incidental to its business activities. It is the opinion of management, after
consultation with legal counsel, that the ultimate disposition of these legal
matters will not have a material impact on the consolidated financial position,
liquidity or results of operations of the Company.
(8) CAPITAL TRANSACTIONS
Preferred Stock
The Company is authorized to issue up to 2,500,000 shares of its $.0001 par
value preferred stock. As of June 30, 1998, no preferred stock has been issued.
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
During the year ended June 30, 1996, the Company raised equity capital through
private placements of its restricted common stock at $7.75 per share. The
Company engaged finders to introduce potential investors to the Company. The
finders received a ten percent commission and warrants to purchase 250,000
shares of the Company's common stock at a price of $7.75 per share. During
fiscal year 1997 these warrants were cancelled and replaced with 125,000 options
to purchase common stock at $9.00 per share. The Company sold 1,992,179 shares
of common stock for $13,914,849 in proceeds, net of offering costs of
$1,524,538, and received subscriptions for an additional 214,500 shares of
common stock. The proceeds from the subscriptions of $1,496,137, net of offering
costs of $166,238, were received in fiscal year 1997. The Company issued
warrants to purchase up to 377,900 shares of the Company's common stock at $7.75
per share to certain of the investors. During the years ended June 30, 1997 and
1996, 36,125 and 321,775 of these warrants to purchase shares of the Company's
common stock were exercised, respectively.
The Company agreed with certain of the investors to use its best efforts to
register the issued shares and warrants under the Securities Act of 1933. The
Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission during fiscal year 1996 and it became effective in fiscal
year 1997.
See accompanying notes to consolidated financial statements.
F-19
As discussed in Note 3, during the year ended June 30, 1997, the Company issued
325,000 shares of its common stock to purchase Sisna. During the year ended June
30, 1998, the Company sold the operations of Sisna back to Sisna's former major
shareholder for 35,000 shares of the Company's common stock. In fiscal year
1997, the Company acquired certain computer software in exchange for 12,000
shares of common stock. In fiscal year 1998, the Company returned the computer
software for the return of the 12,000 shares of common stock.
During the year ended June 30, 1998, the Company issued 100,000 and 253,260
shares of its common stock to purchase Books Now and WeatherLabs, respectively
(see Note 3). The Company issued 955,414 shares of common stock and warrants to
purchase common stock to AOL in connection with the Interactive Marketing
Agreement described in Note 4.
On April 28, 1998, the Company entered into an Amended Stock Repurchase
Agreement (the "Repurchase Agreement") with Mr. Chad L. Evans, the former CEO
and Chairman of the Board of the Company. Pursuant to the Repurchase Agreement,
the Company agreed to repurchase 1,800,000 shares of the Company's common stock
held by Mr. Evans for $1,500,000. Additionally, the Company entered into a
Confidentiality and Noncompetition Agreement with Mr. Evans, pursuant to which
Mr. Evans, for consideration consisting of $25,000, has agreed, among other
things, not to compete with the Company, solicit employees from the Company, or
use proprietary information of the Company for a period of three years. In
addition, the Company acquired 66,110 shares of common for $199,813 from the
president of the direct mail advertising operations that were sold during the
year.
See accompanying notes to consolidated financial statements.
F-20
(9) STOCK OPTIONS
The Company has established the Omnibus Stock Option Plan (the "Option Plan")
for employees and consultants. The Company's Board of Directors has from time to
time authorized the grant of stock options outside of the Option Plan to
directors, officers and key employees as compensation and in connection with
obtaining financing and guarantees of loans. The following table summarizes the
option activity for the years ended June 30, 1998, 1997 and 1996.
Options Outstanding
Number of Option Price
Shares Per Share
------------------------------------
Balance at June 30, 1995 150,592 $ 0.25
Granted 470,000 5.00-9.00
Balance at June 30, 1996 620,592 0.25-9.00
Granted 65,000 3.25
Expired or cancelled (100,000) 5.00
Balance at June 30, 1997 585,592 0.25-9.00
Granted 365,000 2.75-5.00
Expired or cancelled (305,000) 3.25-7.75
Exercised (150,592) 0.25
Balance at June 30, 1998 495,000 $2.75-9.00
=====================================
All of the above options have been granted with exercise prices equal to or
greater than the intrinsic fair value of the Company's common stock on the dates
of grant. During the year ended June 30, 1998, the Company decreased the option
price to $2.75 per share for 315,000 of the options that had been previously
granted at prices ranging from $3.25 to $7.75 per share and extended the
exercise periods for certain of the options. As of June 30, 1998, 430,000 of the
above options are exercisable and the above options expire, if not exercised,
from December 31, 1998 through June 30, 2002.
The Option Plan provides for the issuance of a maximum of 2,500,000 shares of
common stock. The Option Plan is administered by the Board of Directors who
designate option grants as either incentive stock options or non-statutory stock
options. Incentive stock options are granted at not less than 100 percent of the
market value of the underlying common stock on the date of grant. Non-statutory
stock options are granted at prices determined by the Board of Directors. Both
types of options are exercisabl for the period as defined by the Board of
Directors on the date granted; however, no incentive stock option is exercisable
after ten years from the date of grant. The following table summarizes the stock
option activity for the years ended June 30, 1998, 1997 and 1996 under the
Option Plan.
See accompanying notes to consolidated financial statements.
F-21
Options Outstanding
Number of Option Price
Shares Per Share
-----------------------------------------
Balance at June 30, 1995 634,946 $ 0.50-1.00
Granted 175,000 7.75
Expired or canceled (341,323) 0.50-1.00
Exercised (17,000) 0.50
Balance at June 30, 1996 451,623 0.50-7.75
Granted 510,000 3.25-9.00
Expired or canceled (20,000) 0.50-5.00
Exercised (102,400) 0.50-1.00
Balance at June 30, 1997 839,223 0.50-9.00
Granted 635,000 2.75-7.75
Expired or canceled (250,000) 0.50-7.25
Exercised (274,223) 0.50-3.38
Balance at June 30, 1998 950,000 $ 2.75-9.00
=========================================
In June 1996, in connection with an employment agreement with an officer of
WorldNow, a principal stockholder granted an option to the officer to purchase
237,500 shares of restricted common stock from the principal stockholder at
$1.50 per share. As discussed in Note 8, during the year ended June 30, 1996 the
Company sold shares of restricted common stock in a private placement at $7.75
per share; accordingly, the Company recognized $1,484,375 of compensation
expense related to this transaction during the year ended June 30, 1996.
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. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma information
regarding net income (loss) as if the Company had accounted for its stock
options granted to employees and directors subsequent to June 30, 1995 under the
fair value method of SFAS No. 123. The fair value of these stock options was
estimated at the grant date using the Black-Scholes option pricing model with
the following assumptions: average risk-free interest rates of 5.50, 6.47 and
5.86 percent in fiscal years 1998, 1997 and 1996, respectively, a dividend yield
of 0 percent, volatility factors of the expected common stock price of 88.91,
77.80 and 77.80 percent, respectively, and weighted average expected lives
ranging from one to nine years for the stock options. For purposes of the pro
forma disclosures the estimated fair value of the stock options is amortized
over the vesting periods of the respective stock options. Following are the pro
forma disclosures and the related impact on net loss for the years ended June
30, 1998, 1997 and 1996:
See accompanying notes to consolidated financial statements.
F-22
1998 1997 1996
---------------------------------------------------
Net loss:
As reported $ (1,790,934) $ (9,340,816) $ (3,433,081)
Pro forma (4,895,300) (10,378,303) (3,926,658)
Net loss per share
(basic and diluted):
As reported (0.21) (1.12) (0.58)
Pro forma (0.58) (1.25) (0.66)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to June 30, 1995, and due to the nature and timing of option
grants, the resulting pro forma compensation cost may not be indicative of
future years.
(10) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of its
employees. All employees are eligible to participate and may elect to contribute
to the plan annually. The Company has no obligation to contribute and did not
contribute additional matching amounts to the Plan during any year presented.
(11) RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1994, the Company made cash loans to two officers
totaling $46,000, which were settled during the year ended June 30, 1995, except
for $1,000 which was settled during the year ended June 30, 1997.
Prior to July 1, 1995, the Company had borrowed money from certain officers.
Additional borrowings of $50,000 were made during the year ended June 30, 1996.
Principal payments on these notes were $1,666, and $199,500 during the years
ended June 30, 1997 and 1996, respectively. The amounts due on these loans at
June 30, 1997 and 1996 were $0 and $1,666, respectively.
During the year ended June 30, 1996, the Company borrowed $500,000 from a bank
to fund computer equipment purchases. Certain officers and shareholders
guaranteed the loan. In exchange for the guarantee, such persons received a
one-year option to purchase 25,000 shares of common stock at $5.00 per share
(see Note 9).
During the year ended June 30, 1997, the Company negotiated services and
equipment purchase agreements with CasinoWorld Holdings, Ltd. and Barrons
Online, Inc., companies in which one of the Company's directors and shareholders
has an ownership interest. Under the agreements, the Company provided software
development services, configured hardware and other computer equipment and
related facilities amounting to $410,292. As of June 30, 1998, the Company had a
receivable from these companies in the amount of $148,576. The Company had
agreed to repurchase shares of its common stock as settlement for the
receivable. Accordingly, the receivable is reflected as contra equity in the
accompanying June 30, 1998 consolidated balance sheet.
(12) SUBSEQUENT EVENT
Agreement to Sell Certain Assets Related to WorldNow
On July 15, 1998, the Company signed an agreement to sell certain assets related
to the Company's Internet-related business branded under the "WorldNow" and
WorldNow Online Network" marks to Gannaway Web Holdings, LLC ("Gannaway"). The
assets related primarily to the national Internet-based network of local
television stations. Pursuant to the asset purchase agreement, Gannaway agreed
to pay $487,172 (less certain amounts as defined) in installments over a
one-year period from the date of closing and agreed to pay earn-out payments of
up to $500,000. The earn-out payments are based upon ten percent of monthly
revenues actually received by the buyer in excess of $100,000 and are to be paid
See accompanying notes to consolidated financial statements.
F-23
quarterly. The purchaser acquired tangible assets of approximately $100,000 and
assumed no liabilities. The operations of WorldNow have been reflected in the
accompanying consolidated financial statements in loss from continuing
operations.
See accompanying notes to consolidated financial statements.
F-24
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Dated: October 12, 1998 By /s/ James A. Egide
-----------------------------------------
James A. Egide, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ James A. Egide Director and Chairman October 12, 1998
- ---------------------------- of the Board
James A. Egide
/s/ Raymond J. Pittman Director and Chief October 12, 1998
- ---------------------------- Operating Officer
Raymond J. Pittman
/s/ Mitchell L. Edwards Director, Executive Vice President, October 12, 1998
- ---------------------------- and Chief Financial Officer
Mitchell L. Edwards
Director October , 1998
- ----------------------------
Glen Hartman
Director October , 1998
- ----------------------------
Kenneth Woolley
/s/ Michael D. Bard Controller October 12, 1998
- ----------------------------
Michael D. Bard
See accompanying notes to consolidated financial statements.