SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q/A
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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Commission File Number 0-20771
DIGITAL COURIER TECHNOLOGIES, INC.
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(exact name of registrant as specified in its charter)
Delaware 87-0461856
(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)
(435) 655-3617
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The Registrant has
only one class of stock issued and outstanding which is Common Stock with $.0001
par value. As of November 10, 1998, 13,349,210 shares were issued and
outstanding.
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (AS RESTATED)
(Unaudited)
ASSETS
September 30, June 30,
1998 1998
------------------------------
CURRENT ASSETS:
Cash $ 36,899 $ 3,211,724
Trade accounts receivable 28,888 16,459
Receivable from Focus Direct, Inc. 700,000 --
Receivable from Gannaway, Inc. 378,172 --
Inventory 28,518 21,046
Current portion of AOL anchor tenant placement costs 3,237,281 3,237,281
Prepaid expenses and other current assets 2,217,295 793,721
------------------------------
Total current assets 6,627,053 7,280,231
------------------------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,580,827 6,225,817
Furniture, fixtures and leasehold improvements 752,419 777,419
------------------------------
7,333,246 7,003,236
Less accumulated depreciation and amortization (2,530,827) (2,109,736)
------------------------------
Net property and equipment 4,802,419 4,893,500
------------------------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of
current portion 8,136,841 8,136,841
------------------------------
GOODWILL, net of accumulated amortization of $342,634
and $76,699, respectively 13,090,572 1,441,459
------------------------------
RECEIVABLE FROM DIGITAL COURIER
INTERNATIONAL, INC -- 810,215
------------------------------
OTHER ASSETS 773,075 1,458,500
------------------------------
$ 33,429,960 $ 24,020,746
==============================
See accompanying notes to condensed consolidated financial statements.
2
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (AS RESTATED) (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1998 1998
------------------------------
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 998,069 $ 1,006,906
Note payable 100,000 100,000
Accounts payable 1,046,369 1,458,598
Accrued rental payments for vacated facilities 426,924 544,014
Other accrued liabilities 556,478 531,400
------------------------------
Total current liabilities 3,127,840 3,640,918
------------------------------
CAPITAL LEASE OBLIGATIONS, net of current portion 1,150,110 1,384,132
------------------------------
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, 13,099,085 and 8,268,489 shares
outstanding, respectively 1,310 827
Additional paid-in capital 45,597,765 31,196,354
Warrants outstanding 3,406,106 2,519,106
Receivable to be settled through the repurchase of
common shares by the Company (148,576) (148,576)
Stock subscription receivable (12,000) --
Accumulated deficit (19,692,595) (14,572,015)
------------------------------
Total stockholders' equity 29,152,010 18,995,696
------------------------------
$ 33,429,960 $ 24,020,746
==============================
See accompanying notes to condensed consolidated financial statements.
3
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1998 1997
----------------------------
(As Restated)
NET SALES $ 319,352 $ 17,545
COST OF SALES 179,881 5,459
----------------------------
Gross margin 139,471 12,086
----------------------------
OPERATING EXPENSES:
Write off of in-process research and development 3,700,000 --
Depreciation and amortization 695,728 385,904
General and administrative 594,761 548,659
Selling 531,576 642,006
Research and development 38,670 473,350
----------------------------
Total operating expenses 5,560,735 2,049,919
----------------------------
OPERATING LOSS (5,421,264) (2,037,833)
----------------------------
OTHER INCOME (EXPENSE):
Interest and other income 9,894 61,086
Gain on sale of WorldNow assets 333,245 --
Interest expense (42,455) (23)
----------------------------
Other income, net 300,684 61,063
----------------------------
LOSS FROM CONTINUING OPERATIONS (5,120,580) (1,976,770)
----------------------------
See accompanying notes to condensed consolidated financial statements.
4
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1998 1997
-------------------------------
(As Restated)
DISCONTINUED OPERATIONS:
Income from operations of discontinued direct mail advertising
operations, net of income tax provision of $41,459 $ -- $ 69,099
Loss from operations of discontinued Internet service provider
subsidiary, net of income tax benefit of $41,459 -- (79,972)
-------------------------------
(LOSS) FROM DISCONTINUED OPERATIONS -- (10,873)
-------------------------------
NET LOSS $ (5,120,580) $(1,987,643)
===============================
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.56) $ (0.23)
===============================
Loss from discontinued operations:
Basic and diluted $ -- $ --
===============================
Net loss:
Basic and diluted $ (0.56) $ (0.23)
===============================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 9,191,351 8,560,932
===============================
See accompanying notes to condensed consolidated financial statements.
5
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Increase (Decrease) in Cash
1998 1997
-----------------------------
(As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,120,580) $(1,987,643)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write off of acquired in-process research and development 3,700,000 --
Issuance of common stock and warrants in connection with
@Home agreement 1,110,307 --
Depreciation and amortization 695,728 435,733
Gain on sale of WorldNow assets (333,245) --
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (12,429) (4,536)
Inventory (7,472) --
Prepaid expenses and other current assets (1,273,573) 13,807
Net current assets of discontinued operations -- 79,323
Other assets 5,925 --
Accounts payable (580,724) (612,040)
Accrued liabilities (143,014) (176,370)
Other current liabilities -- 75,000
-----------------------------
Net cash used in operating activities (1,959,077) (2,176,726)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Digital Courier International, Inc. (849,203) --
Purchase of property and equipment (330,010) (469,344)
Net proceeds from sale of WorldNow assets 55,074 --
Increase in investments -- (750,000)
Increase in net long-term assets of discontinued operations -- 252,314
-----------------------------
Net cash used in investing activities (1,124,139) (967,030)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock upon exercise of stock
options 151,250 --
Principal payments on capital lease obligation (242,859) --
-----------------------------
Net cash used in financing activities (91,609) --
-----------------------------
NET DECREASE IN CASH (3,174,825) (3,143,756)
CASH AT BEGINNING OF PERIOD 3,211,724 4,938,404
-----------------------------
CASH AT END OF PERIOD $ 36,899 $ 1,794,648
=============================
See accompanying notes to condensed consolidated financial statements
6
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1998 1997
-----------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 38,999 $ --
See accompanying notes to condensed consolidated financial statements.
7
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of September
30, 1998 and for the three months ended September 30, 1998 and 1997 are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation have been
included. The financial statements are condensed and, therefore, do not include
all disclosures normally required by generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998. The results of operations for the three
months ended September 30, 1998 are not necessarily indicative of the results to
be expected for the entire fiscal year ending June 30, 1999
Subsequent to the Company filing its Quarterly Report on Form 10-Q for
the period ended September 30, 1998 with the Securities and Exchange Commission
("SEC"), the Company has restated certain amounts previously reported as of
September 30, 1998 and June 30, 1998 and for the three months ended September
30, 1998. The Company reevaluated the appraisal of the in process research and
development ("IPR&D") associated with the acquisition of Digital Courier
International, Inc. ("DCII"). The portion of the purchase price allocated to
IPR&D was reduced from $5,600,000 to $3,700,000 (see Note 2). Additionally,
changes have been made in the method used for valuing the shares of common stock
issued in connection with the acquisitions of Sisna, Books Now, WeatherLabs and
DCII (see Note 2). Previously the Company had applied discounts to the quoted
market prices on the dates of the acquisitions due to the shares being
restricted and the Company's stock thinly traded. The restated amounts in the
accompanying financial statements reflect the shares of common stock valued at
the quoted market price on the dates of the acquisitions, which increased the
Sisna purchase price by $558,240, increased the Books Now purchase price by
$78,125, increased the WeatherLabs purchase price by $53,375 and increased the
DCII purchse price by $981,914. In addition, the Company had previously expensed
$1,376,307 of advertising related to the @Home Agreement (see Note 4) as paid
because the amount paid was nonrefundable and the Company had no experience on
which to evaluate the effectiveness of the advertising. The restated amount of
prepaid advertising will be expensed as the advertising services are received.
As a result of the restatement, loss from continuing operations and net loss for
the three months ended September 30, 1998 decreased from $(8,342,280) to
$(5,120,580) or $(0.91) per diluted share to $(0.56) per diluted share.
8
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
Books Now, Inc.
In January 1998, the Company acquired all of the outstanding stock of
Books Now, Inc. ("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 valued at $312,500 and an earn-out of up to
262,500 additional common shares. The issuance of the common shares was recorded
at their fair market value determined to be the quoted closing price on the date
of acquisition.
The acquisition was accounted for as a purchase and the results of
operations of Books Now are included in the accompanying condensed 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 market value of the acquired
assets of $616,764 was recorded as goodwill and is being amortized over a period
of five years.
In November 1998, the Company and the former owner reached a severance
agreement, wherein, the former owner and President of Books Now is to receive
severance payments equal to one year's salary ($81,000). Additionally, the
Company agreed to issue 205,182 shares of the Company's common stock valued at
$1,051,558, based on the quoted market price of the shares on the date of the
severance agreement, to the former shareholders of Books Now. Because the
operations of Books Now were not achieving the performance criteria, both the
$81,000 of cash and the $1,051,558 of common stock will be expensed in the three
months ending December 31, 1998.
WeatherLabs, Inc.
On March 17, 1998, the Company entered into a Stock Exchange Agreement
to acquire all of the outstanding stock of WeatherLabs, Inc. ("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 valued at
$762,503. The issuance of the common shares was recorded at the quoted market
price on the date of acquisition. These shareholders are entitled to receive a
total of 523,940 additional shares over the next three years subject to changes
in the stock price of the Company's common stock, as defined, at the end of each
of the Company's next three fiscal years.
The acquisition was accounted for as a purchase and the results of
operations of WeatherLabs are included in the accompanying condensed
9
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 market value of the acquired assets of $901,394 was recorded
as goodwill and is being amortized over a period of five years.
Digital Courier International, Inc.
Effective March 17, 1998, the Company entered into a Stock Exchange
Agreement (the "Exchange Agreement") with DCII., a Nevada corporation. Pursuant
to the Exchange Agreement, the Company agreed to issue 4,659,080 shares of its
common stock valued at $14,027,338 to the shareholders of DCII. The issuance of
the common shares was recorded at the quoted market price on the date of
acquisition. The acquisition and the changing of the Company's name to Digital
Courier Technologies, Inc. ("DCTI") were approved by the shareholders of the
Company on September 16, 1998.
The acquisition of DCII has been accounted for as a purchase and the
results of operations of DCII are included in the accompanying condensed
consolidated financial statements since the date of acquisition. The tangible
assets and contra-equity acquired included $250,000 of equipment, $20,500 of
deposits and $12,000 of stock subscriptions receivable. Liabilities assumed
consisted of $219,495 of accounts payable and accrued liabilities. After
entering into the Exchange Agreement, the Company made advances to DCII to fund
its operations. The amount loaned to DCII totaled $1,659,418 as of the date of
acquisition. The excess of the purchase price over the estimated fair market
value of the acquired assets was $15,623,750. Of this amount, $11,923,750 was
recorded as goodwill and other intangibles and is being amortized over a period
of five years and $3,700,000 was expensed during the three months ended
September 30, 1998 as acquired in-process research and development.
Upon consummation of the DCII acquisition, the Company immediately
expensed $3,700,000 representing purchased in-process technology that had not
yet reached technological feasibility and has no alternative future use. The
in-process projects were focused on the continued development and evolution of
internet e-commerce solutions including: netClearing and two virtual store
projects (videos and books). The nature of these projects is to provide full
service credit card clearing and merchant banking services over the Internet for
businesses and financial institutions and to market software to help customers
develop virtual stores on the Internet. When completed, the projects will enable
the creation of any "virtual store" through a simplified interface.
As of the date of acquisition, DCII had invested $1,300,000 in the
in-process projects identified above. The developmental projects at the time of
the acquisition were not technologically feasible and had no alternative future
use. This conclusion was attributable to the fact that DCII had not completed a
working model that had been tested and proven to work at performance levels
10
which were expected to be commercially viable, and that the technologies
constituting the projects had no alternative use other than their intended use.
Development of the acquired in-process technology into commercially
viable products and services required efforts principally related to the
completion of all planning, designing, coding, prototyping, scalability
verification, and testing activities necessary to establish that the proposed
technologies would meet their design specifications, including functional,
technical, and economic performance requirements. Management estimates that
approximately $4,000,000 will be required over the next 12 to 18 months to
develop the aforementioned products to commercial viability.
Management estimates that the projects were approximately 50% complete
at the date of the acquisition given the nature of the achievements to date.
These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur.
The net cash flows resulting from the projects underway at DCII, which
were used to value the purchased research and development, are based on
management's estimates of revenues, cost of revenues, research and development
costs, selling, general, and administrative costs, and income taxes from such
projects. These estimates assume that the revenue projections are based on the
potential market size that the projects are addressing, the Company's ability to
gain market share in these segments, and the life cycle of in-process
technology.
Estimated total revenues from the purchased in-process projects peak in
the fiscal years 2001 and 2002 and then decline rapidly in the fiscal years 2003
and 2004 as other new products are expected to enter the market. There can be no
assurances that these assumptions will prove accurate, or that the Company will
realize the anticipated benefit of the acquisition. The net cash flows generated
from the in-process technology are expected to reflect earnings before interest
and taxes, of approximately 35% to 48% for the sales generated from in-process
technology.
The discount of the net cash flows to their present value is based on
the weighted average cost of capital ("WACC"). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
the enterprise. The discount rates used to discount the net cash flows from the
purchased in-process technology were 45% for DCII. This discount rate reflects
the uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, if any, and the uncertainty of technological
advances, all of which are unknown at this time.
As evidenced by their continued support for these projects, management
believes the Company is well positioned to successfully complete the research
and development projects. However, there is risk associated with the completion
11
of the projects, and there is no steadfast assurance that each will meet with
either technological or commercial success. The substantial delay or outright
failure of these eCommerce solutions would negatively impact the Company's
financial condition. If these projects are not successfully developed, the
Company's business, operating results, and financial condition may be negatively
affected in future periods. In addition, the value of other intangible assets
acquired may become impaired.
To date, DCII results have not differed significantly from the forecast
assumptions. The Company's research and development expenditures since the DCII
acquisition have not differed materially from expectations. Revenue contribution
from the acquired technology falls within an acceptable range of plans in its
role in the Company's suite of internet and e-commerce solutions.
Unaudited Pro Forma Data for Acquisitions of Continuing Operations
The unaudited pro forma results of operations of the Company for the three
months ended September 30, 1998 and 1997 (assuming the acquisitions of Books
Now, WeatherLabs and DCII had occurred as of July 1, 1997 and excluding the
write off of acquired in-process research and dvelopment of $3,700,000 in
connection with the DCII acquisition) are as follows:
Three Month Ended September 30,
-----------------------------
1998 1997
-----------------------------
Net sales $ 319,352 $ 102,977
Loss from continuing operations (2,298,495) (2,181,145)
Loss per share from continuing operations (0.18) (0.16)
Sisna, Inc.
On January 8, 1997, the Company completed the acquisition of Sisna,
Inc. ("Sisna") pursuant to an Amended and Restated Agreement and Plan of
Reorganization (the "Agreement"). Pursuant to the Agreement, the Company issued
325,000 shares of its common stock valued at $2,232,961 in exchange for all of
the issued and outstanding shares of Sisna. The issuance of the common shares
was recorded at the quoted market price on the date of acquisition. The
acquisition was accounted for as a purchase. The excess of the purchase price
over the estimated fair market value of the acquired assets less liabilities
assumed was $2,232,961, which was allocated to acquired in-process 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
12
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
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 to Mr. Smith,
Sisna's former owner (and a director of the Company at the time of the sale) and
certain other buyers in exchange for 35,000 shares of the Company's common stock
at a value of $141,904. Mr. Smith and the other buyers received tangible assets
of $55,547 of accounts receivable, $35,083 of prepaid expenses, $47,533 of
computer and office equipment, and $9,697 of other assets and assumed
liabilities of $33,342 of accounts payable, $101,951 of notes payable, and
$243,320 of other accrued liabilities. The sale resulted in a pretax gain on the
sale of $372,657. The sales price to Mr. Smith was determined by arms' length
negotiations between Mr. Smith and the independent Directors and was approved by
the Board of Directors with Mr. Smith abstaining.
The operations of Sisna have been reflected in the accompanying
condensed consolidated financial statements for the period July 1, 1997 through
September 30, 1997 as discontinued operations. The Sisna revenues were $261,351
and the loss from operations was $121,431 during the three months ended
September 30, 1997.
Sale of Direct Mail Advertising Operations
In March 1998, the Company sold its direct mail advertising operations
to Focus Direct, an unrelated 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. Pursuant to the
agreement, Focus Direct agreed to pay the Company $7,700,000 for the above
described net assets. Focus Direct paid the Company $6,900,000 at closing and
will pay the additional $700,000 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.
13
The direct mail advertising operations have been reflected as
discontinued operations in the accompanying condensed consolidated financial
statements for the three month period ended September 30, 1997. The direct mail
advertising revenues were $2,546,836 and the pretax income from operations was
$110,558 during the three months ended September 30, 1997.
Sale of Certain Assets Related to WorldNow
On July 15, 1998, the Company signed an agreement to sell a portion of
its 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 primarily related 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 amounts of up to $500,000. The earn-out amounts are calculated as ten
percent of monthly revenues actually received by Gannaway in excess of $100,000
and are to be paid quarterly. Gannaway acquired tangible assets of approximately
$100,000 consisting primarily of computer and office equipment and assumed no
liabilities. The operations of WorldNow through the date of the sale of the
assets are reflected in the accompanying condensed consolidated financial
statements in loss from continuing operations.
The Company realized a pretax gain of $308,245 on the sale.
NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share ("Diluted EPS")
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net loss per common share.
Options to purchase 1,348,000 and 1,322,380 shares of common stock at
weighted average exercise prices of $3.82 and $5.36 per share as of September
30, 1998 and 1997, respectively, and warrants to purchase 656,942 shares of
common stock at a weighted average exercise price of $9.37 per share as of
September 30, 1998 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 share. As of September 30, 1998, the Company has
agreed to issue up to an additional 786,440 shares of common stock in connection
14
with the acquisitions of Books Now and WeatherLabs (see Note 2), 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.
NOTE 4 - CONTENT LICENSE AND DISTRIBUTION AGREEMENT WITH AT HOME CORPORATION
On July 10, 1998, the Company entered into a Content License and
Distribution Agreement with At Home Corporation ("@Home") for an initial term of
36 months. Under this agreement, the Company has agreed to: (1) pay @Home
$800,000 in non-refundable guaranteed cash payments, (2) issue 20,534 shares of
the Company's common stock, (3) issue seven-year warrants to purchase 100,000
shares of the Company's common stock at $9.74 per share (the "Warrant Shares"),
and (4) issue warrants to purchase 100,000 shares of the Company's common stock
at $19.48 per share (the "Performance Warrants"); in exchange for @Home
providing the Company with advertising, marketing and distribution for the
Company's WeatherLabs services site on the @Home Network and promotion of the
Weather@Home site. The Company is to receive 40 percent of the net advertising
revenue generated from Weather@Home on the @Home Network. The Company will
retain all of the advertising revenue generated from the co-branded Weather@Home
site which is located within WeatherLabs.
The Company made a cash payment to @Home of $266,000 upon execution of
the agreement in July 1998, and is scheduled to make additional payments of
$267,000 on July 10, 1999 and $267,000 on July 10, 2000. The Company issued
20,534 shares of its common stock on the effective date of the agreement. The
Warrant Shares vested on the effective date of the agreement. The Performance
Warrants vest over the term of the agreement as certain promotion criteria are
achieved by @Home. The costs related to the agreement are advertising costs and
will be expensed as the advertising services are received. As of September 30,
1998, the initial cash payment to @Home of $266,000, the fair market value of
the 20,534 shares of common stock of $223,307 and the estimated fair market
value of the Warrant Shares of $887,000 have been recorded as prepaid
advertising expense and will be expensed as advertising services are provided.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Digital Courier Technologies, Inc. (formerly DataMark Holding, Inc. and
referred to herein as "DCTI" or the "Company") is developing and marketing
proprietary electronic commerce software and technologies and online information
15
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 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 for the applicable periods in fiscal 1998 are
classified as discontinued operations in the accompanying condensed 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.
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 businesses
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 sold
its WorldNow Online Network television affiliate website and certain related
assets in July 1998.
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 of its divisions in the rapidly expanding e-commerce sector of the
Internet industry.
In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an
Internet service provider headquartered in Salt Lake City, Utah, for an
16
acquisition price of $2,232,961. In December, 1997, the Board of Directors
reviewed the performance of Sisna in conjunction with a review of the strategic
opportunities available to the Company. Among the conclusions of the Board were
the following: (a) The Internet Service Provider business had become very
competitive during the previous six months, with major corporations such as US
West, America Online, MCI and others aggressively marketing their internet
access offerings; (b) The margins in the ISP business were declining, as
fixed-price, unlimited time access had become prevalent, and (c) Sisna's losses
on a monthly basis were increasing with no apparent near-term prospect of
profitability. For these reasons, the Board concluded that it was in the best
interests of the Company to sell Sisna. The Board solicited offers to buy Sisna
over a period of three months, but due to Sisna's continuing losses of over
$40,000 per month, no offers materialized.
In February 1998, the Board considered terminating the operations of
Sisna to cut the Company's losses, Mr. Henry Smith, a director of the Company
and one of the former owners of Sisna, offered to assume the ongoing cost of
running Sisna. After arms-length negotiations between the independent members of
the Board and Mr. Smith, the Company agreed to sell the operations of Sisna to
Mr. Smith.
In March 1998, the Company sold the operations of Sisna to Mr. Smith
and certain other buyers in exchange for 35,000 shares of the Company's common
stock, valued at $141,904 based on the stock's quoted fair market value. Mr.
Smith and the other buyers received tangible assets of $55,547 of accounts
receivable, $35,083 of prepaid expenses, $47,533 of computer and office
equipment, and $9,697 of other assets and assumed liabilities of $33,342 of
accounts payable, $101,951 of notes payable, and $243,320 of other accrued
liabilities, resulting in a pretax gain on the sale of $372,657. The sales price
to Mr. Smith was determined by arms' length negotiations between Mr. Smith and
the independent directors and was approved by the Board of Directors, with Mr.
Smith abstaining. Sisna's results of operations are included in the accompanying
consolidated statements of operations for the applicable periods in fiscal 1998
as discontinued operations
In January 1998, the Company acquired all of the outstanding stock of
Books Now, a book reseller, in exchange for a maximum of 362,500 shares of the
Company's common stock. One hundred thousand common shares valued at $312,500
were issued at closing and 262,500 common shares are subject to a three-year
earn-out contingency based upon achieving certain financial performance
objectives. The fair market value of the common shares issued was determined to
be the quoted market price on the date of acquisition. 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
17
common stock. At closing 253,260 common shares were issued valued at $762,503,
and an additional 523,960 common shares may be issued upon the attainment by
WeatherLabs of certain financial performance targets. The fair market value of
the common shares issued was determined to be the quoted market price on the
date of acquisition.
The acquisition was accounted for as a purchase. The results of
operations of WeatherLabs 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 ("DCII"), 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 also approved a name change from DataMark Holding,
Inc. to Digital Courier Technologies, Inc. Pursuant to the Exchange Agreement,
the Company issued 4,659,080 shares of its common stock valued at $14,027,338.
The fair market value of the common shares issued was determined to be the
quoted market price on the date of acquisition.
This acquisition was accounted for as a purchase. The results of operations of
DCII are included in the accompanying financial statements from September 16,
1998, the date of acquisition.
Results of Operations
Three months ended September 30, 1998 compared with three months ended September
30, 1997
Net Sales
Net sales for the three months ended September 30, 1998 were $319,352
as compared to $17,545 for the three months ended September 30, 1997. Books
Now's operations, which were acquired in January 1998, and WeatherLabs'
operations, which were acquired in May 1998, accounted for $255,882 and $63,336
of the net sales for the three months ended September 30, 1998, respectively.
WorldNow advertiser and subscriber sales accounted for the net sales $134 during
the three months ended September 30, 1998 and all of the net sales during the
three month period ended September 30, 1997.
Cost of Sales
Cost of sales for the three months ended September 30, 1998 were
$179,881 or 56.3% of net sales. Cost of sales for the three months ended
18
September 30, 1997 were $5,459 or 31.1% of net sales. The increase in cost of
sales as a percent of net sales is due to the change in products and services.
Operating Expenses
The write off of acquired in-process research and development during
the three months ended September 30, 1998 was $3,700,000, which was attributable
to the acquisition of DCII (see Note 2 to the financial statements).
Depreciation and amortization expense increased 80.3% to $695,728
during the three months ended September 30, 1998 from $385,904 during the three
months ended September 30, 1997. The increase in depreciation expense was due to
(1) the equipment acquired in connection with the WeatherLabs and Books Now
acquisitions, (2) the acquisition of new equipment to support the Company's
online operations and (3) the amortization of goodwill related to the acquired
companies.
General and administrative expense increased 8.4% to $594,761 during
the three months ended September 30, 1998 from $548,659 during the three months
ended September 30, 1997. The increase in general and administrative expense was
due to the addition of administrative and support staff and facilities costs
associated with the DCII acquisition offset by the reduction of administrative
and support staff associated with WorldNow Online.
Selling expense decreased 17.2% to $531,576 during the three months
ended September 30, 1998 from $642,006 during the three months ended September
30, 1997. The reduction is selling expense is attributable to the decreased
emphasis on the WorldNow Online television activities, offset by selling
expenses related to Books Now, WeatherLabs, and Videos Now.
Research and development expense decreased 91.8% to $38,670 during the
three months ended September 30, 1998 from $473,350 during the three months
ended September 30, 1997. Research and development expense decreased because of
the decreased emphasis on the WorldNow Online television activities.
Discontinued Operations
During the fiscal year ended June 30, 1998, the Company sold its direct
mail advertising and Internet service operations. Therefore, their results of
operations are presented as discontinued operations. During the three months
ended September 30, 1997, pretax income from the direct mail advertising
operations was $110,558. During the three months ended September 30, 1997, the
Internet service operations incurred a pretax loss of $121,431.
19
Liquidity and Capital Resources
In order to fund the costs 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 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 Company sold its equipment at book value resulting in
no deferred gain or loss on the transaction.
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.
In April 1998, the Company purchased 1,800,000 shares of its common
stock held by a former officer of the Company for $1,500,000 in cash.
Effective June 1, 1998, we entered into a marketing agreement with
America Online ("AOL"), which gave us "permanent anchor tenancy" and advertising
for our Videos Now website on key channels of the America Online Network,
AOL.com and Digital City. Due to low sales volume and unacceptable gross margins
from the sale of videos on our Videos Now website on AOL, we entered into
discussions with AOL beginning in November, 1998 to restructure the terms of the
marketing agreement with AOL. Effective January 1, 1999, we amended the
Marketing Agreement to: (1) reduce the previously required January 1, 1999
payment of $4,000,000 to AOL to a payment of $315,000 on or prior to January 31,
1999, and (2) eliminate any additional cash payments to AOL in the future under
the Marketing Agreement.
On February 1, 1999, we entered into a second amendment with AOL, under
which AOL will return to us (a) 636,942 warrants to purchase common stock and
(b) 601,610 of the 955,414 shares of our common stock previously issued to AOL
under the marketing agreement. All advertising will cease immediately, but we
will continue to have a permanent location or "button" on AOL's Shopping channel
until August 31, 1999. We have no further financial obligations to AOL.
Under the original contract with AOL the Company was to be one of only
two predominantly displayed online stores ("permanent anchor tenant") for the
sale of videos on the AOL channels where subscribers would most likely go to
purchase videos. In addition to the predominant display on the AOL channels, AOL
20
was providing advertising on its other channels to send customers to the
permanent anchor tenant sites. The permanent anchor tenancy included "above the
fold placement" (no scrolling required to see the Company's video site) and an
oversized logo (larger than a banner or a button). Under the amended contract
with AOL the Company will only receive "button" placement on the AOL shopping
channel. "Button" placement is not predominant on the AOL channels, is smaller,
need not be "above the fold" and is not the beneficiary of AOL advertising
designed to send customers to the site.
On July 10, 1998, the Company entered into a 36-month content license
and distribution agreement with @Home, wherein the Company has agreed to pay
@Home $800,000 in cash. The Company made a cash payment to @Home of $266,000 in
July 1998, and is scheduled to make payments to @Home of $267,000 in July 1999
and $267,000 in July 2000.
On October 22, 1998, the Company borrowed $1,200,000 from a group of
individual lenders (the "Loan"). The annual interest rate on the Loan is 24% and
the loan is secured by certain receivables of the Company. The maturity date of
the Loan is October 22, 1999. It may be prepaid without penalty any time after
February 22, 1999. In connection with the Loan, the Company paid a finders fee
of $27,750 and issued two-year warrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share.
Operating activities used $1,959,077 during the three months ended
September 30, 1998 compared to $2,176,726 during the three months ended
September 30, 1997. The net cash used for operating activities during the three
months ended September 30, 1998 was principally attributable to the payments
made to AOL of $1,200,000 and @Home of $266,000.
Cash used in investing activities was $1,124,139 and $967,030 during
the three months ended September 30, 1998 and 1997, respectively. During the
three months ended September 30, 1998, the Company's investing activities
included cash advances for operating activities to DCII of $849,203 and the
acquisition of equipment for $330,010, offset by the receipt of $55,074 from the
sale of certain WorldNow assets. During the three months ended September 30,
1997, the Company's investing activities included the acquisition of equipment
for $469,344, an investment in CommTouch, Ltd of $750,000 and a decrease in the
net long-term assets of discontinued operations of $252,314.
Cash used in financing activities was $91,609 during the three months
ended September 30, 1998 as compared to $0 during the three months ended
September 30, 1997. The increase in cash used was attributable to the receipt of
$151,250 from the exercise of stock options, offset by capital lease obligation
repayments of $242,859.
Management projects that there will not be sufficient cash flows from
operating activities during the next 12 months to provide capital for the
Company to sustain its operations. As of September 30, 1998, the Company had
21
$36,899 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. The Company has
incurred losses from continuing operations of $5,597,967, $7,158,851 and
$3,586,413 and the Company's operating activities have used $6,377,970,
$6,334,660 and $1,385,567 of cash during the years ended June 30, 1998, 1997 and
1996, respectively. As of September 30, 1998, the Company has working capital of
$261,932 and was scheduled to make substantial payments as described above to
AOL and @Home. 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.
On November 24, 1998, the Company raised $1.8 million by selling its
common stock and warrants to purchase common stock to The Brown Simpson
Strategic Growth Funds (the "Purchasers") pursuant to a Securities Purchase
Agreement between the Company and the Purchasers (the "Purchase Agreement"). On
December 2, 1998, the Company sold an additional $1.8 million of common stock to
the Purchasers and amended the Purchase Agreement and related documents (the
"Amended Agreements").
Pursuant to the Purchase Agreement and Amended Agreements, the
Purchasers acquired 800,000 shares of the Company's common stock and five-year
warrants to purchase 800,000 additional shares ("Tranche A"). The exercise price
for 400,000 of the warrants is $5.53 per share and the exercise price of the
remaining 400,000 warrants is $9.49 per share. The exercise price of the
warrants is subject to adjustment on the six month anniversary of each
respective closing to the lesser of the initial exercise price and the average
price of the Company's common stock during any five consecutive business days
during the 22 business days ending on such anniversary of the closing. The
warrants are callable by the Company if for 15 consecutive trading days, the
closing bid price of the Company's stock is at least two times the then-current
exercise price. Because the shares acquired by the purchasers were priced at a
10% discount from the quoted market price no value has been allocated to the
warrants.
The Amended Agreements also require the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 800,000 units, each unit consisting of one share of the Company's
common stock and a warrant to purchase one share of common stock (the "Tranche B
Units"), if certain conditions are met. A condition to the sale of the Tranche B
Units, among others, is that the closing bid price of the Company's common stock
be more than $7 per share for fifteen consecutive trading days. The price for
the Tranche B Units is $7 per Unit and the exercise price of the warrants
contained in the Tranche B Unit will be equal to 110% of the closing bid price
of the Company's stock on the day of the sale of the Tranche B Units.
On March 3, 1999, the Company raised an additional $3.6 million through
the sale of Series A Convertible Preferred Stock (the "Preferred Stock") and
warrants to purchase common stock to the Purchasers pursuant to a Securities
Purchase Agreement between the Company and the Purchasers (the "March Purchase
Agreement").
22
Pursuant to the March Purchase Agreement, the Purchasers acquired 360
shares of the Preferred Stock convertible into 800,000 shares of common stock
and five-year warrants to purchase an additional 800,000 shares of common stock.
The Preferred Stock is convertible into common stock at a price of $4.50 per
share of common stock. The initial exercise price for the warrants is $5.23 per
share, subject to adjustment on the six month anniversary of the closing, to the
lesser of the initial exercise price and the average price of the Company's
common stock during any five consecutive business days during the twenty-two
business days ending on such anniversary of the closing. The warrants are
callable by the Company if for thirty consecutive trading days, the closing bid
price of the Company's common stock is at least two times the then-current
exercise price.
The March Purchase Agreement also requires the Company to sell to the
Purchasers, and the Purchasers to purchase from the Company, an additional
tranche of 1,600,000 units, each unit consisting of Series B Convertible
Preferred Stock convertible into one share of the Company's common stock and a
five-year warrant to purchase one share of common stock (the "Tranche D Units"),
if certain conditions are met. A condition to the sale of the Tranche D Units,
among others, is that the closing bid price of the Company's common stock be
more than $7 per share for thirty consecutive trading days. The price for the
Tranche D Units is $7 per Unit and the exercise price of the warrants contained
in the Tranche D Unit will be $7.70. The March Purchase Agreement terminates the
commitment for Tranche B Units previously disclosed.
Management is actively pursuing other 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.
Year 2000 Issue
Computer systems, software applications, and microprocessor dependent
equipment may cease to function properly or generate erroneous data when the
year 2000 arrives. The problem affects those systems or products that are
programmed to accept a two-digit code in date code fields. To correctly identify
the year 2000, a four-digit date code field will be required to be what is
commonly termed "year 2000 compliant."
To date, the Company has invested approximately $60,000 in an effort to
certify all aspects of its business are year 2000 compliant. The areas of its
business which have been targeted for compliance testing are operations and
software products and services. The Company conducted the certification process
over a three-month period in which all software products and service components
under direct control certified year 2000 compliant. For the operational
components and remaining software and services that are under the control of
third party organizations, the Company has sought their efforts to provide
23
written confirmation and evidence of compliance. The Company may realize
operational exposure and risk if the systems for which it is dependent upon to
conduct day-to-day operations are not year 2000 compliant. The potential areas
of software exposure include:
o electronic data exchange systems operated by third parties with whom
the Company transacts business,
o server software which the Company uses to present content and
advertising to its customers and partners, and
o computers, software, telephone systems and other equipment used
internally.
In October 1997, the Company initiated the review and assessment of all
of its computerized hardware and internal-use software systems to ensure that
such systems will function properly in the year 2000 and beyond. During the last
two years, its computerized information systems have been substantially upgraded
to be year 2000 compliant.
The Company has not yet developed a contingency plan in the event that
any non-compliant critical systems are not remedied by the year 2000, nor has it
formulated a timetable to create such a contingency plan. It is possible that
costs associated with year 2000 compliance efforts may exceed current
projections of an additional $40,000 to reach total compliance. In such a case,
these costs could have a material impact on the Company's financial position and
results of operations. It is also possible that if systems material to the
Company's operations have not been made year 2000 compliant, or if third parties
fail to make their systems compliant in a timely manner, the year 2000 issue
could have a material adverse effect on its business, financial condition, and
results of operations. This would result in an inability to provide functioning
software and services to the Company's clients in a timely manner, and could
then result in lost revenues from these clients, until such problems are
resolved by the Company or the responsible third parties.
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 (1) the
Company has only generated minimal revenue from its Internet businesses, and has
not generated and may not generate the level of sales, users or advertisers
anticipated, and (2) the costs to market the Company's Internet services.
24
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith
Exhibit 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL COURIER TECHNOLOGIES, INC.
Date: June 14, 1999 By /s/ Mitchell L. Edwards
-------------------------------------
Mitchell L. Edwards
Chief Financial Officer
25