SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.__)
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6
(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
DIGITAL COURIER technologies, Inc.
(Name of the Registrant as Specified In Its Charter)
----------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies:
Common Stock, par value $.0001 per share, of Digital
Courier Technologies, Inc.
("DCTI Common Stock")
2. Aggregate number of securities to which transaction applies:
29,660,000 DCTI Shares
3. Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
The filing fee of $32,072 is calculated in accordance with Rule 0-11(c)(1)
under the Securities Exchange Act as follows: one-fiftieth of one percent
of the value of the DCTI Common Stock to be exchanged in the Stock Exchange
Agreement, dated August 13, 1999, (the "Exchange"). The value of the DCTI
Common Stock was determined in accordance with Rule 0-11(a)(4) under the
Exchange Act, as the product of $5.407 (the average of the high and low
prices on August 11, 1999 as reported by NASDAQ) and 29,660,000 the
aggregate number of shares of DCTI Common Stock to be issued in the
Exchange (the value of the securities and other property to be transferred
to security holders in the transaction).
4. Proposed maximum aggregate value of transaction:
$160,356,790
5. Total fee paid:
$32,072
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
1. Amount Previously Paid:
................................................................................
2. Form, Schedule or Registration Statement No.:
................................................................................
3. Filing Party:
................................................................................
4. Date Filed:
................................................................................
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DIGITAL COURIER TECHNOLOGIES, INC.
136 Heber Avenue, Suite 204
PO Box 8000
Park City, Utah 84060
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held September 30, 1999
TO OUR STOCKHOLDERS:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of Digital Courier Technologies, Inc. (the "Company"),
which will be held at the Company's offices at 136 Heber Avenue, Suite 204, Park
City, Utah, on September 30, 1999, at 10:00 a.m. Mountain time, to consider and
act upon the following matters:
1. To authorize the issuance of up to 29,660,000 shares of the Company's
Common Stock in connection with the acquisition by the Company of
DataBank International, Ltd., a company incorporated under the laws of
St. Christopher and Nevis (the "DataBank Acquisition"); and
2. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 50,000,000 to 75,000,000 (the "Amendment
"); and
3. To transact such other business as may properly come before the Special
Meeting or any adjournments of the Special Meeting.
The proposals and other related matters are more fully described in the
accompanying Proxy Statement.
The affirmative vote of the holders of a majority of the outstanding
shares of the Company's Common Stock entitled to vote at the Special Meeting is
required to approve (i) the DataBank Acquisition and (ii) the Amendment.
Only holders of record of the Company's Common Stock at the close of
business on August 31, 1999 will be entitled to notice of and to vote at the
Special Meeting and any adjournments of the Special Meeting.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING
REGARDLESS OF THE NUMBER OF SHARES YOU HOLD. YOU ARE INVITED TO ATTEND THE
SPECIAL MEETING IN PERSON, BUT WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE.
IF YOU DO ATTEND THE SPECIAL MEETING, YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY
AND VOTE YOUR SHARES IN PERSON.
By Order of the Board of Directors
Park City, Utah James A. Egide
August 20, 1999 Chairman of the Board
DIGITAL COURIER TECHNOLOGIES, INC.
-------------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
To Be Held September 30, 1999
General
The enclosed proxy is solicited on behalf of the Board of Directors of
Digital Courier Technologies, Inc., a Delaware corporation ("DCTI" or the
"Company"), for use at DCTI's Special Meeting of stockholders (the "Special
Meeting") to be held on September 30, 1999 at 10:00 a.m., Mountain Time, and at
any adjournment thereof, for the purposes set forth herein and in the
accompanying Notice of Special Meeting of Stockholders. The Special Meeting will
be held at the Company's offices at 136 Heber Avenue, Suite 204, Park City, Utah
84060.
This Proxy Statement and the enclosed proxy card were mailed on or
about September 1, 1999 to all Stockholders entitled to vote at the Special
Meeting.
Record Date
Only holders of record of DCTI's Common Stock, par value $.0001 per
share (the "DCTI Common Stock"), at the close of business on August 31, 1999
(the "Record Date") are entitled to notice of and to vote at the Special
Meeting. As of the Record Date, 18,456,355 shares of DCTI's Common Stock were
outstanding. For information regarding security ownership by management and by
the beneficial owners of more than 5% of DCTI's Common Stock, see "Security
Ownership of Certain Beneficial Owners and Management."
Proxies; Revocability of Proxies
All shares entitled to vote and represented by properly executed
proxies received prior to the Special Meeting, and not revoked, will be voted at
the Special Meeting in accordance with the instructions indicated on those
proxies. If no instructions are indicated on a properly executed proxy, the
shares represented by that proxy will be voted as recommended by the Board of
Directors. If any other matters are properly presented for consideration at the
Special Meeting, the persons named in the enclosed proxy and acting thereunder
will have discretion to vote on those matters in accordance with their best
judgment. The Company does not currently anticipate that any other matters will
be raised at the Special Meeting.
A stockholder may revoke any proxy given pursuant to this solicitation
at any time before it is voted by delivering to DCTI's Corporate Secretary a
written notice of revocation or a duly executed proxy bearing a date later than
that of the previously submitted proxy, or by attending the Special Meeting and
voting in person.
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Voting and Solicitation
Each stockholder is entitled to one vote for each share of Common Stock
on all matters presented at the Special Meeting.
The cost of soliciting proxies will be borne by DCTI. DCTI may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their reasonable expenses in forwarding solicitation materials to
such beneficial owners. Proxies may also be solicited by certain of DCTI's
directors, officers, and regular employees, without additional compensation,
personally or by telephone, telegram, letter or facsimile.
Quorum; Abstentions; Broker Non-Votes
The presence at the Special Meeting, either in person or by proxy, of
the holders of one-third of the outstanding shares of Common Stock entitled to
vote shall constitute a quorum for the transaction of business. DCTI intends to
include abstentions and broker non-votes as present or represented for purposes
of establishing a quorum for the transaction of business, but to exclude
abstentions and broker non-votes from the calculation of shares entitled to
vote.
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PROPOSAL NO. 1
AUTHORIZATION OF ISSUANCE OF UP TO 29,660,000 SHARES OF COMMON STOCK IN
CONNECTION WITH THE ACQUISITION OF DATABANK INTERNATIONAL, LTD.
Forward Looking Information
Statements regarding the Company's expectations as to future
performance 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.
General
The Company has entered into a Stock Purchase and Exchange Agreement
with DataBank International, Ltd., a company organized under the laws of St.
Christopher and Nevis ("DataBank"), and the selling stockholders of DataBank
(the "Selling Stockholders") (the "Exchange Agreement"), dated as of August 13,
1999. Pursuant to the Exchange Agreement, the Company has agreed to issue up to
29,660,000 shares of its common stock (the "DCTI Shares") to the Selling
Stockholders in exchange for all of the issued and outstanding shares of
DataBank (the "DataBank Acquisition"). If the full number of DCTI Shares are
issued in the DataBank Acquisition, the Selling Stockholders will own 62% of the
outstanding shares of DCTI and will be able to control the election of directors
and the determination of DCTI's business, including transactions involving any
merger, share exchange, sale of assets outside the ordinary course of business
and dissolution.
The Exchange Agreement
The following is a brief summary of certain material provisions of the
Exchange Agreement not summarized elsewhere in this Proxy Statement. The summary
is qualified in all respects by reference to the complete text of the Exchange
Agreement, which is incorporated by reference in its entirety and attached to
this Proxy Statement as Annex I. Terms that are not otherwise defined in this
summary or elsewhere in this Proxy Statement have the meanings set forth in the
Exchange Agreement. All stockholders are urged to read the Exchange Agreement in
its entirety.
Consideration
At the Closing (defined in the Exchange Agreement), the Company will
exchange 16,600,000 shares of its common stock for all of the outstanding shares
of common stock of DataBank in a tax-free exchange intended to qualify as a
reorganization within the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code, as amended (the "Code").
If DataBank meets certain milestones (the "Milestones"), the Company
may be required to deliver up to an additional 13,066,000 shares of DCTI Common
Stock to the Selling Stockholders. The Milestones are as follows:
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o During the twelve month period beginning July 1, 1999 (i) if DataBank's
operations produce net income of $6,000,000, the Company will be required to
deliver to the Selling Stockholders 3,250,000 of the DCTI Shares; (ii) if such
operations produce net income of more than $6,000,000 but less than $8,000,000,
the Company will deliver to the Selling Stockholders the number of DCTI Shares
determined by the formula [(Net income - 6,000,000) x 3,280,000/2,000,000] plus
3,250,000]; and (iii) if such operations produce net income of $8,000,000 or
more, the Company will deliver to the Selling Stockholders 6,530,000 DCTI Shares
(the "First Milestone"). If DataBank meets the full first Milestone, the Selling
Stockholders will own, in the aggregate, 23,130,000 shares of DCTI Common Stock,
representing 55% of the outstanding DCTI Common Stock, and thus will be able to
control all stockholder votes.
o During the twenty four month period beginning July 1, 1999 (i) if
DataBank's operations produce net income of $14,000,000, the Company will be
required to deliver to the Selling Stockholders 6,500,000 DCTI Shares minus the
number of DCTI Shares delivered on the First Milestone; (ii) if such operations
produce net income of more than $14,000,000 but less than $20,500,000, the
Company will deliver to the Selling Stockholders the number of Shares determined
by the formula [(Net income - 14,000,000) x (6,560,000/6,500,000) + 6,500,000]
minus the number of Shares delivered on the First Milestone; and (iii) if such
operations produce net income of more than $20,500,000, the Company will deliver
to the Selling Stockholders 13,060,000 DCTI Shares minus the number of DCTI
Shares delivered on the First Milestone. If DataBank meets the full Second
Milestone, the Selling Stockholders will own, in the aggregate, 29,660,000
shares of DCTI Common Stock, representing 62% of the outstanding DCTI Common
Stock.
Conditions To Consummation Of The DataBank Acquisition
The obligations of DCTI, DataBank and the Selling Stockholders to
consummate the DataBank Acquisition are conditioned upon the occurrence of
certain events, including, among other things:
o COMPLIANCE: DCTI and DataBank shall be in compliance with all
applicable laws, including without limitation, federal and state
securities laws;
o NO PROCEEDINGS: No action or proceeding against DataBank or DCTI shall
have been instituted before a court or other governmental body, or
shall have been threatened which, if successful, will prohibit the
consummation or require substantial rescission of the transactions
contemplated by the Exchange Agreement;
o STOCKHOLDER APPROVAL: A majority of the outstanding shares of DCTI
Common Stock shall have approved the Exchange Agreement and all of the
transactions contemplated thereby;
o EMPLOYMENT AGREEMENT: DCTI shall have received an executed employment
agreement from Don Marshall in the form specified in the Exchange
Agreement;
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o COMPLIANCE WITH OBLIGATIONS: DataBank, the Selling Stockholders and
DCTI shall have performed in all material respects all of their
obligations required to be performed by them at or prior to the
Effective Time, and DCTI shall have received a certificate from each of
DataBank and the Selling Stockholders to such effect; and
o REPRESENTATIONS AND WARRANTIES TRUE; CONSENTS: Each of the
representations and warranties of DataBank, the Selling Stockholders
and DCTI set forth in the Exchange Agreement shall have been true and
correct when made and on and as of the Closing Date of the Exchange as
if made on and as of such date.
o SHARE CERTIFICATES: DCTI shall have received certificates for the
DataBank Shares from the Selling Stockholders;
o RESIGNATION OF DIRECTORS: Each of the members of DataBank's board of
directors, other than David Hicks and Don Marshall, shall have tendered
his resignation to DataBank;
o BOARD OF DIRECTORS: DCTI shall have taken all action necessary such
that the number of directors of DCTI shall be increased to at least
seven, including three members nominated by the Selling Stockholders;
o REGISTRATION RIGHTS AGREEMENT: DCTI and the Selling Stockholders shall
have entered into a Registration Rights Agreement. See "--Restricted
Stock and Registration Rights Agreement."
o OPINION OF COUNSEL: DCTI shall have received an opinion of legal
counsel to DataBank.
Certain Representations And Warranties
The Exchange Agreement contains certain representations and warranties
of DataBank with respect to DataBank as to, among other things: (i) due
organization, valid existence and good standing; (ii) the completeness and
correctness of organizational documents; (iii) DataBank's capital structure;
(iv) DataBank's power and authority to execute and deliver the Exchange
Agreement, to perform its obligations thereunder and to consummate the DataBank
Acquisition; (v) the absence of any conflict between the execution and
performance of the Exchange Agreement and DataBank's organizational documents,
applicable law and certain contracts; (vi) the absence of any required consent
or permit of, or filing with any governmental or regulatory authority, except as
provided in the Exchange Agreement; (vii) the absence of material adverse
changes or events; (viii) the absence of material pending or threatened
litigation against DataBank; (ix) DataBank's labor relations; (x) title to and
adequacy of DataBank's assets; (xi) DataBank's right to use intellectual
property; (xii) the existence, legality and effect of material contracts; (xiii)
DataBank's insurance coverage; (xiv) the accuracy of information supplied to
DCTI by DataBank; (xv) except as disclosed, the absence of transactions between
DataBank and related parties; and (xvi) the absence of any liability for
broker's or finder's fees.
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The Exchange Agreement also contains certain representations and
warranties of DCTI as to, among other things: (i) due organization, valid
existence and good standing; (ii) the completeness and correctness of
organizational documents; (iii) the authority and validity of the DCTI Common
stock to be issued in the DataBank Acquisition; (iv) the power and authority of
DCTI to execute and deliver the Exchange Agreement, to perform their obligations
thereunder and to consummate the DataBank Acquisition; (v) compliance with law;
(vi) availability and accuracy of DCTI's financial statements; (vii) the absence
of any required consent or permit of, or filing with any governmental or
regulatory authority, except as provided in the Exchange Agreement; (viii)
certain tax matters and the payment of taxes; (ix) the absence of material
pending or threatened litigation against DCTI; (x) the absence of any conflict
between the execution and performance of the Exchange Agreement and DCTI's
organizational documents, applicable law and certain contracts; (xi) DCTI's
insurance coverage; and (xii) title to and adequacy of DCTI's assets.
The Exchange Agreement also contains certain representations and
warranties of the Selling Stockholders as to, among other things: (i) title to
the shares of DataBank being transferred pursuant to the Exchange Agreement,
(ii) that the Selling Stockholders are purchasing the DCTI Shares for their own
account for investment purposes; (iii) that each Stockholder has received all
information necessary to decide whether to purchase the DCTI Shares; (iv) each
Stockholder's investment experience and sophistication in investment matters;
(v) the understanding that the DCTI Shares are "restricted securities" under the
Securities Act of 1933, as amended (the "Securities Act"); and (vi) that each
Stockholder that is a foreign investor has fully observed the laws of its
jurisdiction in connection with a subscription of the DCTI Shares.
Certain Covenants
In the Exchange Agreement, DCTI, DataBank and the Selling Stockholders
have agreed to various customary covenants.
DataBank and the Selling Stockholders have agreed that:
o Each will use its best efforts, to cause the Company to carry on and
preserve the business, goodwill and the relationships of the Company
with suppliers, employees, agents and others in substantially the same
manner as they have been prior to the DataBank Acquisition;
o Each shall not permit DataBank to (i) incur any additional
indebtedness, or guarantee any indebtedness or obligation of any other
party; (ii) issue, redeem or purchase any of DataBank's capital stock
or securities convertible into its capital stock or grant or issue any
options, warrants or rights to subscribe for its capital stock or
securities convertible into its capital stock or commit to do any of
the foregoing; (iii) enter into, amend or terminate any material
agreement or arrangement, other than in the ordinary course of
business; (iv) notify DCTI prior to entering into, amending or
terminating any material agreement or arrangement in the ordinary
course of business; (v) increase the compensation payable to any of
DataBank's officers, employees or agents, or adopt or amend any
employee benefit plan or arrangement; (vi) enter into any employment
contract or agreement with any existing or prospective employee which
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is not terminable at will; (vii) pay any obligation or liability, fixed
or contingent, other than current liabilities; (viii) cancel, without
full payment, any note, loan or other obligation owing to DataBank;
(ix) acquire or dispose of any properties or assets used in the
businesses of DataBank except in the ordinary course of business; (x)
create or suffer to be imposed any lien, mortgage, security interest or
other charge on or against DataBank's properties or assets; (xi) engage
in any activities or transactions outside the ordinary course of
DataBank's business as presently conducted; (xii) make or adopt any
change in DataBank's governing documents; or (xiii) take any action, or
omit to take any action, within their control, that would cause, and to
promptly notify DCTI in writing of any event or occurrence which causes
any of the representations and warranties set forth in the Exchange
Agreement to become untrue, incomplete, or inaccurate in any material
respect as of or prior to the closing date of the DataBank Acquisition;
o DataBank will and the Selling Stockholders will cause DataBank to (i)
maintain DataBank's existing insurance policies, unless comparable
insurance is substituted therefor, and shall not take any action to
terminate or modify those insurance policies; (ii) maintain DataBank's
books and records consistent with past practices and policies and in
accordance with GAAP; (iii) maintain in good working condition,
ordinary wear and tear excepted, and in compliance in all material
respects with all applicable laws and regulations, all fixed assets
owned, leased or operated by DataBank; (iv) observe and perform, and
remain in compliance with, DataBank's obligations in agreements and
contracts the breach or violation of which would have a material
adverse effect on DataBank, and not enter into any agreements or
contracts which would require payments by DataBank of more than $25,000
over any period of twelve (12) months; and (v) maintain compliance with
the terms and conditions of all licenses or permits held by DataBank or
under which it operates or conducts its businesses and use their best
efforts to maintain all such license or permits in full force and
effect.
o DataBank will (i) give DCTI and its accountants, legal counsel and
other representatives full access to all of the properties, books,
contracts, commitments and records relating to the business, assets and
liabilities of DataBank, and will furnish such parties with all the
information they request, (ii) give prompt notice of the receipt of any
notice of default under any instrument or agreement to which DataBank
or its assets is a party or any lawsuit or other action, (iii) not
initiate or participate in discussions or negotiations to sell
DataBank; and (iv) cause Don Marshall to enter into a non-competition
agreement.
o The Selling Stockholders will (i) not sell, assign or transfer any of
the Databank Shares to anyone other than DCTI or to a transferee who
has agreed to be bound by the Exchange Agreement, (ii) not make any
disposition of all or any portion of the DCTI Shares unless such
disposition is in compliance with all applicable federal and state
securities law (iii) not, to the extent requested by an underwriter of
common stock (or other securities) of DCTI during a two-year period
following the Closing, sell or otherwise transfer or dispose of any
such securities during a reasonable and customary period of time, as
agreed to by DCTI and the underwriters,
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DCTI has agreed that it will:
o Give DataBank and the Selling Stockholders and its accountants, legal
counsel and other representatives full access to all of the properties,
books, contracts, commitments and records relating to the business,
assets and liabilities of DCTI, and will furnish such information as
may be reasonably requested by such parties;
o Cause a stockholders' meeting to be called and held as soon as
practicable for the purpose of voting on the approval and adoption of
the Exchange Agreement;
o Enter into an employment agreement with Don Marshall;
Indemnification and Insurance
In the Exchange Agreement, the Selling Stockholders and DCTI have
agreed that each party, subject to certain limitations contained in the Exchange
Agreement, will indemnify and hold harmless the other party and its successors
and assigns against and in respect of certain damages and actions incurred in
connection with the Exchange Agreement.
Restricted Stock and Registration Rights Agreement
The shares of DCTI Common Stock to be issued in the DataBank
Acquisition are to be restricted shares. The Company has agreed to register
300,000 of such DCTI Shares for resale each quarter for a period of one year
(four quarters) following the Closing, for a total of 1,200,000 shares, on a
registration statement on form S-3 to be kept effective until such shares have
been sold.
Non-Compete
Don Marshall, a shareholder of DataBank has agreed that for the period
of his employment with DataBank, and for a period of two years thereafter, he
will not, directly or indirectly, individually or in concert with others, act as
promoter, shareholder, officer, director, employee, agent, representative,
independent contractor or otherwise compete with DataBank or DCTI in any
jurisdiction or marketing area in which DataBank or DCTI are doing business.
Termination
The Exchange Agreement may be terminated at any time prior to the
Closing of the transactions contemplated thereby by the written consent of the
Selling Stockholders and DCTI. DCTI may also terminate the Exchange Agreement at
any time after October 30, 1999 by delivery of written notice to the Selling
Stockholders, if the closing has not occurred by such date because the
conditions to DCTI's obligations to close the transaction have not been
satisfied. Moreover, the Selling Stockholders may terminate the Exchange
Agreement at any time after October 30, 1999 by delivery of written notice to
DCTI, if the closing has not occurred by such date because the conditions to the
Selling Stockholders' obligations to close the transaction have not been
satisfied.
-9-
Expenses
Each party is responsible for the expenses that it incurs in connection
with the DataBank Acquisition.
Interests Of Certain Persons In The DataBank Acquisition; Conflicts Of Interest
In considering the DataBank Acquisition, holders of shares of DCTI
Common Stock should be aware of the interests certain officers and directors of
the Company have in the DataBank Acquisition that are in addition to the
interests of DCTI stockholders generally. The Company's Board of Directors has
considered these interests, among other matters, in approving the Exchange
Agreement and the DataBank Acquisition.
Don Marshall, President of DataBank, has been appointed President of
the Company by the Company's Board of Directors, effective July 28, 1999.
SB.com, a wholly owned subsidiary of DCTI since June 4, 1999, has had a
contractual relationship with DataBank since January, 1998. Pursuant to their
agreement, SB.com has acted as software developer and payment processor for
certain of DataBank's clients. During the period beginning June 1, 1999, the
date DCTI acquired SB.com, and ending June 30, 1999, DCTI generated
approximately $280,000 in revenues from DataBank.
Employment Agreements
Upon completion of the DataBank Acquisition, Mr. Marshall has agreed to
enter into a two year Employment Agreement, pursuant to which, among other
things, he agrees that he will not compete with the business of DCTI or DataBank
for two years after termination of his employment with the Company. Mr. Marshall
has also agreed that he will forfeit the Milestone Shares to which he would
otherwise be eligible if he voluntarily terminates his employment with the
Company prior to the end of his two-year agreement. Following the DataBank
Acquisition, the Company will pay him an annual salary of $150,000 during the
period of his employment.
The Employment Agreement provides that upon termination without cause,
Mr. Marshall will receive the following benefits: (i) severance payments during
the period from the date of the executive's termination until the date up to 12
months after the effective date of the termination (the "Severance Period")
equal to the base salary which the executive was receiving at the time of such
termination ("Base Salary"), (ii) continuation of all health and life insurance
benefits through the end of the Severance Period and (iii) full and immediate
vesting of each unvested stock and stock option held by the officer.
The Company's Reasons For The Stock Exchange
The DCTI Board of Directors has unanimously approved and adopted the
Exchange Agreement, believes that the DataBank Acquisition is in the best
interests of DCTI and unanimously recommends adoption of the Exchange Agreement
by the holders of DCTI common stock at the Special Meeting.
-10-
At meetings held on January 29, March 15, and June 29, 1999 the DCTI
Board of Directors considered the legal, financial and other terms of the
DataBank Acquisition.
The DCTI Board concluded that the DataBank Acquisition is in the best
interest of DCTI and its stockholders. In reaching its decision to enter into
and recommend the adoption of the Exchange Agreement, the DCTI Board considered
the following material factors:
o The combined company would be in a position to provide payment
processing and fraud control services to a much broader spectrum of
international users, from internet merchants to financial institutions.
o DataBank has an already existing, market-proven payments processing
business, including international financial institution clients.
o DataBank has contracts with international financial institutions that
direct millions of payment processing transactions per month to
DataBank, resulting in over $1.2 million of revenue per month to
DataBank.
o DataBank's business model and management team have proven to be
successful since DataBank's inception.
o DataBank has technology and products and services that could represent
revenue streams and profitability in a shorter time frame than many of
the Company's current projects. Given the cash position of the Company,
the Board concluded that such revenue streams would enhance the
Company's ability to roll out its end-to-end Internet-based e-commerce
payment processing products and services.
o The combined company would possess greater economies of scale and
greater revenue-source diversification within the Internet industry
than the Company could achieve on its own.
o The combined company is expected to achieve significant synergies and
cost savings through the consolidation of DataBank's and the Company's
data centers, management teams and operations.
o The hardware and software expertise of the combined company would
enable the company to compete on a technical basis with companies much
larger in size.
o The combined financial resources of the two companies should permit the
combined entity to accelerate the development and expansion of new
products and services.
o The public stock distribution of the combined company will likely
provide shareholders of the combined company with increased liquidity
and enhance the market visibility of the combined entity.
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o The combined company's projected revenue stream, profitability,
financial condition and results of operations (after giving effect to
the exchange) will be stronger than that of DCTI alone.
The DCTI Board also considered the following potentially negative
material factors in its deliberations concerning the exchange: (i) the risk that
the benefit sought to be achieved in the exchange would not be achieved; (ii)
the change in control of the Company following the transaction; (iii) that the
time to develop the Company's and DataBank's products and services could be
longer than anticipated, creating a need for additional working capital; (iv)
the increase in outstanding shares; and (v) the concerns with owning an offshore
company. The potentially negative factors are described in more detail in "Risk
Factors". After reviewing these potentially negative factors, the DCTI Board
concluded that they were outweighed by the positive factors described above and
accordingly determined that the exchange is fair to, and in the best interests
of, DCTI.
In view of the variety of factors considered by the DCTI Board in
connection with its evaluation of the DataBank Acquisition, the DCTI Board did
not find it practical to, and did not, quantify or otherwise assign relative
weights to such factors.
The DCTI Board concluded, in light of these factors, that the DataBank
Acquisition is fair to and in the best interest of DCTI and its stockholders.
Anticipated Accounting Treatment
The DataBank Acquisition will be accounted for by DCTI under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. Therefore, the aggregate consideration paid by DCTI in connection
with the DataBank Acquisition will be allocated to DataBank's identifiable
assets and liabilities based on their fair market values with the excess being
treated as goodwill. The assets and liabilities and results of operations of
DataBank will be consolidated with the assets and liabilities and results of
operations of DCTI subsequent to the Effective Time. As a result of this
acquisition, DCTI will record approximately $145,000,000 of additional goodwill,
if all earn-out milestones are met, which will be amortized to earnings over a 5
year period from the date of acquisition.
Plans For DataBank After The Acquisition
After the DataBank Acquisition, DataBank will be a wholly-owned
subsidiary of the Company. Certain of the operations of DataBank will be
combined with the operations of the Company at other locations, including its
data center in Salt Lake City. The Company does not have any present plans or
proposals which relate to or would result in an extraordinary corporate
transaction, such as a merger, reorganization or liquidation, involving
DataBank, a sale or transfer of a material amount of assets of DataBank or any
of its subsidiaries or any other material changes in DataBank's business.
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Blue Sky Laws
As of the date of this Proxy Statement, DCTI intends to register or
qualify the shares of DCTI Common Stock offered by this Proxy Statement under
the securities laws of all states where it is not exempt, if any. Certain states
require notice filings or other filings. DCTI either has complied with these
filing requirements or intends to comply with them in a timely fashion.
Material Contacts Between DCTI and DataBank
The original contact between the Company and DataBank occurred in
January 1999 in St. Kitts, as the result of a personal meeting between James
Egide, Chairman and CEO of the Company, and Don Marshall, President of DataBank.
At that time, the Company was actively developing its netClearing payment
processing software and pursuing Internet payment processing opportunities.
DataBank was a private company in the business of providing banks with the
system and expertise to sign up Internet merchant accounts. Over the course of
the next six weeks, Mr. Egide and Mr. Marshall held numerous discussions in St.
Kitts and on the telephone regarding the potential benefits of a business
combination between the Company and DataBank.
During this period, the Company's Board of Directors discussed the
potential acquisition with Mr. Egide. It was concluded, after discussions among
members of the Company's Board of Directors, that the synergies of the Company's
netClearing software and infrastructure, combined with DataBank's revenue
stream, marketing strategy and track record, could produce a profitable company
with great growth prospects in the payment processing arena.
Negotiations between Mr. Egide and Mr. Marshall occurred during January
and February, 1999, and a letter of intent between the Company and DataBank was
signed on March 2, 1999.
In March, 1999, Mr. Marshall visited the Company's offices in Park City
and in Salt Lake City, Utah, to negotiate the Exchange Agreement and visit the
Company's data center.
In April, 1999, Raymond J. Pittman, President of the Company's
netClearing division, visited DataBank's offices and discussed how the software
and business of the two companies could be effectively integrated.
In May, 1999, Mr. Egide and Mitchell Edwards, the Company's Executive
Vice President and Chief Financial Officer, visited DataBank to discuss the
combination of the operations of the two companies.
On June 4, 1999, DataBank and the Company made a joint presentation to
participants in VISA International's E-Commerce Conference in Miami, Florida and
conducted joint marketing efforts to some of the banks in attendance.
In June, 1999, Mr. Marshall visited the Company's offices in Park City
and in San Francisco to conduct due diligence and to meet with Company
management regarding a joint business plan for the combined companies.
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On August 13, 1999, the Company and the Selling Stockholders of
DataBank signed the Exchange Agreement.
-14-
Parties to the DataBank Acquisition
DIGITAL COURIER TECHNOLOGIES, INC.
For a description of our business and financial condition up to and as
of March 31, 1999, see DCTI's Annual Report on Form 10-K/A for the fiscal year
ended June 30, 1998, and each of its Quarterly Reports on Form 10-QA for the
quarters ended September 30, 1998, December 31, 1998 and March 31, 1999, all of
which are incorporated herein by reference.
Introduction
Digital Courier provides state of the art real-time banking and credit
card processing solutions for merchants and financial institutions worldwide
through an integrated solution called netClearing. netClearing is a suite of
commerce-enabling technologies designed specifically with merchant and the
merchant bank in mind.
Merchant Services
Online transactions need to be fast, secure and efficient. As a
technology driven payment-processing expert, netClearing is uniquely qualified
to deliver next-generation software and an absolutely secure payment system that
provides fast transactions at a lower cost. Our technologies and services help
merchants set up their merchant bank account, install payment processing
software, and manage payments processing transactions from credit card
authorization to final sale. netClearing's Payment Plug-in is e-commerce
software for transaction processing. The Payment Plug-in is a lightweight file
that connects a merchant's commerce server through our Internet Payment Gateway
to the major card networks (Visa(TM), MasterCard(TM), American Express(TM),
Discover(TM)). At the merchant's request, transactions are recorded in a secure
transaction database and monitored for fraudulent activity as they pass through
the Internet Payment Gateway. These functions enable reporting capabilities and
enhance fraud control. netClearing's reporting system allows merchants to
search, sort and analyze transaction reports by such criteria as:
o netClearing transaction ID
o Merchant order tracking ID
o Date ranges
o Credit card date and
o Credit card number
o Customer name
netClearing's reports can be used to track a variety of information
about the merchant's business and are available 24 hours a day on the Merchant
Access Web site. Custom reports can be generated and custom formats are
available for download to merchants requiring unique information. The reports
available are:
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Authorizations report
Authorization reports detail all orders that have been
authorized but not yet settled. These reports are used to view
the total number and value of orders the merchant has received
in any date range--daily, monthly or yearly.
Settlement report
This report details all cash receipts that have been deposited
into the merchant's account (this amount does not include
credit card company fees). This report is used to understand
the cash amounts being transferred into a merchant's bank
account.
Credit report
Credit reports detail all credits or refunds for various
transactions. netClearing provides a list of credits issued as
well as details about why the credit was given.
Declined report
This report details all orders that have been declined either
by the card network or by netClearing's internal fraud check.
The reason the cards have been declined is detailed in the
report. Merchants can determine if fraud is being attempted on
a systematic basis on their site or if the design of their Web
site is causing problems with the entry of credit card
information.
By combining these services into a single solution, we streamline the
process for merchants to begin doing business on the Internet. Once the merchant
is up and running, netClearing provides a complete set of tools for managing
their online business transactions. netClearing identifies these transactions on
a level grouped by merchant order number. Merchants can track and initiate
payments on continuing shipments using one order number. Card lookup and
transaction history reports and analysis can help customer service departments
identify and correct problems stemming from possibly erroneous transactions.
netClearing will also maintain a database of tax jurisdictions worldwide to
provide reliable tax assessment on transactions originating from and shipping
from any domestic or VAT tax nexus.
Merchant Banking Services
For financial institutions and netClearing resellers, netClearing's
real-time merchant management, transaction monitoring, and fraud auditing tools
enable these institutions to manage merchant portfolio risk. The Internet
Payment Gateway incorporates all of netClearing's risk management, reporting and
merchant management tools while interacting directly with legacy financial and
banking networks, operating systems, acquiring gateways, VAPS (Visa's access
point) and MIPS (Mastercard's access point). The Gateway is comprised of a
commerce server, a transaction database and fraud screening software that
seamlessly integrate with existing systems. This enables us to integrate select
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components of our platform with participating banks. These components can be
customized to the bank's specifications and allow for a seamless integration of
the applications into the ongoing banking transactions.
Integrating a portfolio of merchants with the Internet Payment Gateway
is straightforward and efficient. The product comes with an easy to use
administration interface that allows the bank to perform functions such as
adding and updating merchants, accessing reports and monitoring fraud across an
entire portfolio of merchants that want to accept credit card transactions to
process the sales of their products across the Internet.
This important technology is available to financial institutions either
remotely through a standard Web browser, or by electing to install the hardware
and software directly at the bank location for direct access to the networks.
Through its Bank Access secure Web site, netClearing offers complete settlement
activity reports for financial institutions. All reports are generated from the
live transaction database. This valuable information includes:
Settlement Report
According to netClearing, summary of portfolio activity for
reporting period.
Merchant ledger
According to the Settlement Authority, the amount that has
been settled into a merchant's account.
Adjustments
Users can view a list and edit a report including pre- and
post-authorizations, credits, fees, etc.
Processing Services
netClearing ensures that the merchant and the bank maintain a solid
business relationship by protecting each party from fraud, theft, and
mismanagement of accounts. By integrating our transaction service bureau with
our automated Internet Payment Gateway, common settlement mistakes and clerical
errors are virtually eliminated. netClearing can process credit, debit, and ACH
transactions directly through its own proprietary Authorization Network or
through any other third party Authorization Network such as FDC/FDR, MAPP,
VisaNet, and others. Our service bureau provides payments processing and related
services to merchants and merchant banks nationwide. The business operation is
divided into two parts, transaction processing and direct merchant sales and
support.
The transaction processing system is based on HP-9000 server systems
operating a modified version of Verifone's "Omnihost" acquiring processing
platform. The facility supports merchant transaction acquisition, capture, and
settlement transmission for all popular credit card types. This operation
currently supports more than three thousand merchants and its clients include
Equifax Merchant Services and First Tennessee Bank. This is fully integrated
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with our Internet Payment Gateway to manage and route a high volume of Internet
transactions through the traditional financial networks for settlement.
The direct merchant sales and support function provides complete
services for merchant portfolios. The services include merchant risk management,
transaction processing, charge-back and retrieval services, payments settlement
and reporting, around the clock merchant terminal and bank help-desk, and
point-of-sale terminal implementation. The operation leverages netClearing
technologies to ensure its merchants receive complete fraud control as well as
the total online transaction and settlement reporting. In addition, the
operation distributes and maintains credit card payments processing products and
services developed in-house as well as products fielded by VisaNet, First USA
and other payment solutions providers.
Risk Management and Internet Fraud Control
netClearing offers data screening software to help merchants reduce
risk due to credit card fraud and data entry errors. As with all netClearing
products, these controls were developed specifically for e-commerce businesses.
Merchants can select the filters that are most appropriate for their business.
Since we acquired Secure-Bank in June of 1999, we have integrated their risk
management software into the netClearing platform. Secure-Bank supplies real
time credit card transactions for merchants worldwide across the Internet. The
technical staff at Secure-Bank wrote and update sophisticated fraud protection
software as well as the engines to process the transactions. The software
protects the processing banks and merchants by scrubbing all transactions
through various transaction screens and/or databases to ensure that much of the
fraud and potential credit card charge backs are spotted and eliminated prior to
going out for authorization. This risk management technology service has also
been made available to other third party processors on a per transaction basis,
to allow them to increase their own risk management capabilities. Currently, we
offer risk management in two packages, one for the merchant, and one for the
merchant bank. These packages include the following services:
Risk Management for Merchants
Checksum (Luhn check)
A basic check of how many digits are in a credit card number
to ensure the customer's credit card is valid.
Address Verification System (AVS)
Merchants can require customers to submit the billing address
of their credit card. The address supplied by the customer is
compared to the address on file with the issuing bank.
Merchants may choose the degree of match (between credit card
number and address) at which the transaction should fail.
Difference between name and card number
A credit card number can be matched to a card holders name for
an existing client. A mismatch may indicate that a card has
been compromised.
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Unusual frequency of purchases
A merchant may record information about how frequently their
product or service is typically purchased with a particular
card number (indicating an individual). The information is
matched to actual activity so merchants are notified of
significant variation from that mean.
Unusual time of day for purchases
A merchant may record typical transaction volume for a
particular time of day. The information is matched to actual
activity so merchants are notified of significant variation
from that mean.
Geographic mismatch
Matching a card's geographic origin (indicated by BIN) against
where the purchase originates (indicated by ISP) may detect
when a stolen card is in use.
Compromised BIN and card database
All transactions can be checked against a database of BINs
(Bank Identification Numbers) or card numbers that may have
been compromised. These options include:
BIN Screening
A BIN corresponds to a whole set of cards that a card issuing
bank has released. When the security of a BIN is compromised,
chances for fraud increase for that BIN. netClearing BIN
screens help to flag numbers that may be compromised.
Card Screening
Transactions may be checked against a database of invalid,
compromised and otherwise questionable credit card numbers.
Declined card screening
All transactions may be checked against a database of credit
card numbers that have declined charges recently. This service
saves clients transaction fees by declining the charge before
it is submitted to the banking network.
Risk Management for Merchant Banks
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netClearing merchant banks using Bank Access to audit transaction and
settlement activity are processing up to $25 million per month with almost no
loss due to fraud. These robust tools and fraud screening software include:
Summary activity
Banks can monitor activity of a single merchant or all
merchants to track sales, credits and single transactions.
Even the flow of money across credit cards can be reviewed to
reveal customer histories, purchasing habits, and money flow
into or out of a card on a daily or historical timeline.
Fraud reporting
Banks can survey and analyze activity by BIN, card number, AVS
and velocity of purchases. Stolen credit cards and
questionable transactions present themselves on demand.
BIN check
Entire BINs can be reviewed for questionable activity and
transactions. Customer data associated with credit cards can
be compared to locate unreported, stolen or generated card
usage. Related merchants are a click away from review with any
transaction under suspicion.
Unusual activity
netClearing also provides the ability to generate 90-day
baseline data for any merchant in a Bank's portfolio. Side
reports offer the ability to locate transactions exceeding the
baseline by whatever range a Bank determines is valid for that
merchant. Excessive tickets, unusual daily deposits and more
can be located quickly and reviewed 24 hours a day.
Review merchant and portfolio activity in real-time
A bank's entire merchant portfolio or a single merchant can be
viewed with netClearing's online charting tools. The ability
to graphically review a merchant's dollar and transaction
count can be a simple indicator of merchant or consumer fraud.
Peak hours can be located as hourly summaries appear in easy
to understand bar charts.
Credit Card Clearing Process
To understand our service better, the following explanation and diagram
describes how the credit card clearing process works, and how netClearing
simplifies the process. netClearing generates real-time reporting and
transaction management services through a secure Web server. Information such as
authorization notices and settlement data from the credit card companies are
stored in the netClearing database,
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which generates reports on the netClearing Web site. This means merchants and
merchant banks can view real-time transaction information any time of day via a
Web browser.
1. Authorization
Before the credit card clearing process begins, merchants must first have a
Web site in which they plan to accept credit cards as payment for goods or
services (1a). Merchants also need a merchant bank account with a financial
institution. Merchants then subscribe to an online payment service such as
netClearing and install payment-processing technology on their Web server.
With netClearing, this is a single program called the Payment Plug-in.
Once the customer submits a credit card number on the merchant's Web site,
the Payment Plug-in contacts the netClearing Internet Payment Gateway (1b)
to request authorization, final sale or credit. The Gateway filters the
information for fraud and may reject the transaction.
If the transaction is not rejected for potential fraud, the transaction
information is then sent to the credit card network (1c) for authorization
or declination of the charge by the Issuing Bank. If the transaction is
approved, an authorization code is returned to the merchant's Web site and
the authorization is complete. With netClearing's system, the real-time
authorization and capture process occurs within 3-5 seconds. Batch requests
are completed within 1 hour.
2. Settlement - Once the product the customer ordered is shipped (or
downloaded), the authorization code is used to settle the amount of the
transaction. netClearing's Internet Payment Gateway and the credit card
network exchange information with the Settlement Authority (2) to confirm
the transaction.
3. Funds transfer - Finally, the Settlement Authority requests a funds
transfer from the Issuing Bank (3a), which moves money through the
Settlement Authority into the merchant's bank (3b). The payment process is
now complete.
Sales and Marketing
We recently entered into a two-year distribution agreement with ACI
Worldwide, a leading international provider of electronic funds transfer
processing systems. ACI will exclusively, with certain geographic exceptions,
market our proprietary electronic commerce technologies through its global sales
force. ACI will integrate our software with its BASE 24(R), WINPAY24(TM) and
related products, as part of its i24(R)-payments strategy. The final product
will include all aspects of handling payments over the web, including
value-added features in areas like customer service, merchant reporting and
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management, and web-centric fraud detection and management. The agreement will
enable our e-commerce products to be distributed on a global scale through ACI's
vast and experienced sales staff in a shorter time frame than we likely would
have been able to achieve on our own.
Acquired Technology
We recently licensed ACI Worldwide's BASE24(R) and Trans24 software.
The software will enhance our existing Internet-based platforms that offer
secure payments processing for business-to-consumer electronic commerce.
BASE24(R) offers fault-tolerant, around-the-clock processing power to acquire,
route and authorize secure electronic payment transactions for our
Internet-based merchant network. Trans24 allows DCTI to manage the Merchant and
Issuing accounting. It also provides an interface into BASE I settlement and ACH
systems. Information from Trans24 can easily be made available to Web based
reporting system for real-time settlement and account information.
Competition
The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
Our primary source of competition comes from developers of other systems for
e-commerce transaction processing such as Clear Commerce, CyberCash,
CyberSource, Digital River, HNC Software, FDMS and Hewlett-Packard (VeriFone).
We also face competition from online merchants who develop custom systems. These
online merchants who have made large initial investments to develop custom
systems may be less likely to adopt an outsourced transaction processing
strategy. In addition, other companies may enter the market for our services. In
the future, we may compete with large Internet-centric companies that derive a
significant portion of their revenues from e-commerce and may offer, or provide
a means for others to offer, e-commerce transaction service.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional services on
terms favorable to us. Our current and potential competitors may develop and
market new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other e-commerce transaction service providers, thereby increasing the
ability of their services to address the needs of our prospective customers.
Competitive pressures could reduce our market share or require the reduction of
the prices of our services, either of which could materially and adversely
affect our business, results of operations or financial condition.
We compete on the basis of certain factors, including:
o system reliability;
o product performance;
o breadth of service offering;
o ease of implementation;
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o time to market;
o customer support; and
o price.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is still rapidly evolving,
and we may not be able to compete successfully against current and potential
competitors.
DATABANK INTERNATIONAL, LTD.
Introduction
DataBank provides merchant banks with the systems and expertise to
allow them to initiate and operate an Internet Merchant Acquiring Program. This
program gives the Bank real-time control over its entire portfolio of merchants
acquiring credit card transactions over the Internet. DataBank incorporates
RISC2000 system which DataBank jointly developed with Secure-Bank. Digital
Courier acquired this technology when it bought Secure-Bank in June of 1999.
These systems provide a real-time method for monitoring and controlling credit
card transactions acquired via the Internet. The systems were designed for use
by banks and operate in a manner that is consistent with traditional bank
functions. Databank now processes Internet credit card transactions for several
high volume merchants. This merchant and merchant bank portfolio is expected to
grow rapidly.
DataBank was incorporated under the laws of St. Christopher and Nevis
in 1997. DataBank's executive offices are located at Central Street, Basseterre,
St. Kitts, West Indies, and its telephone number is 869.465.6802.
DataBank's Strategy
DataBank's objective is to become a leading supplier of online services
and systems to merchant banks wishing to develop an Internet acquiring program.
Marketing to banks who have a substantial number of merchant accounts, rather
than directly to the merchants, allows a smaller marketing effort to generate
substantial rewards. DataBank intends to rapidly build on its growing business
in the banking marketplace. The company is uniquely positioned and experienced
to deliver solutions that precisely meet the needs of merchant banks. This
domain expertise can be readily integrated with Digital Courier's strategy.
The RISC2000 system, which has now been fully integrated into Digital
Courier's netClearing software, allows banks easy and rapid development of an
Internet acquiring and account management program. This will allow DataBank to
turn many new banks on to the program faster than ever before.
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Sales and Marketing
Sales and marketing are carried out through a private network of
international bankers, as well as introductions provided by VISA and MasterCard.
DataBank presently provides services to the Bank of Nevis, St.Kitts Nevis
Anguilla National Bank, Swiss America Bank, and European Federal Bank, all
located in the Caribbean. The Bank of Nevis accounted for approximately 90% of
DataBank's revenues in the six months ended June 30, 1999. DataBank believes
that it will begin payment processing for at least four additional banks in the
near term.
DataBank believes that the market for its services will continue to
expand. Jupiter Communications, an Internet research firm, is predicting that
online commerce will reach $11.9 billion in 1999.
International Operations
All of DataBank's current revenues are generated outside of the United
States. Moreover, it is expected that most of DataBank's future sales will
continue to come from offshore sources. DataBank believes the opportunities to
expand its payment processing services to financial institutions globally are
substantial at this time, and is actively working with other international
institutions around the world. This enables DataBank to govern its operations in
accordance with the rules and regulations promulgated by VISA International,
Mastercard International and the other international credit card authorities. On
the other hand, due to its reliance on international sales, DataBank is subject
to the risks of conducting business outside the U.S. See "Risk Factors".
Competition
In the market in which DataBank operates, namely the provision of
payment processing services to merchant banks, the competition at present comes
from traditional payment processors, such as ACI Worldwide Inc. ("ACI"). DCTI
has recently signed a marketing agreement with ACI by which ACI will market and
distribute DCTI's netClearing product, which now incorporates RISC2000.
Employees
DataBank currently has nine employees. None of the employees are
covered by collective bargaining agreements or have employment contracts.
Facilities
DataBank operates from leased premises comprising approximately 2000
square feet on Bay Road in St.Kitts, West Indies.
Legal Proceedings
There is no material litigation pending against DataBank.
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Management
The following table sets forth certain information concerning each of
DataBank's directors and executive officers:
Name Age Position
------------- --- ----------------------
Don Marshall 40 Managing Director, CEO
David Hicks 31 Director
Arthur Sharpe 54 Director
For the past five years Mr. Don Marshall has been developing software
and business solutions for DataBank International, the company he created in
St.Kitts. He is a professional engineer with a doctoral education in the field
of instrumentation and control. Mr. Marshall is also one of the owners of Caribe
Yachts, a privately owned yacht construction company in St.Kitts. He is managing
director of DataBank as well as sitting on the Board of Directors of Caribe
Yachts Ltd.
Mr. David Hicks studied business management in the United Kingdom
before coming to the Caribbean five years ago. Mr. Hicks is a Director of Caribe
Yachts, a privately owned yacht construction company in St. Kitts and a Director
of DataBank. He brings to DataBank his experience in dealing with international
and European banks.
Arthur Sharpe has been a member of the Board of Directors of DataBank
since its inception in April 1998. For the last five years he has been a real
estate developer, developing residential projects in Jamaica and St. Kitts.
RISK FACTORS
Each DCTI Stockholder should carefully consider and evaluate the
following factors, among others, before voting.
RISK FACTORS REGARDING THE DATABANK ACQUISITION
Change in Control
If the full amount of DCTI Shares are issued in the DataBank
Acquisition, as described in the Exchange Agreement, the Selling Stockholders
will own 62% of the issued and outstanding shares of DCTI's common stock. As
long as the Selling Stockholders own more than 50% of the common stock, the
Selling Stockholders will be able to control the election of directors and the
determination of DCTI's business, including transactions involving any merger,
share exchange, sale of assets outside the ordinary course of business and
dissolution. There can be no assurance that the interests of the Selling
Stockholders will be the same or similar to the interests of the current
stockholders of DCTI. If the interests of the Selling Stockholders differ from
those of the current stockholders, the current stockholders will be unable to
effect a change in DCTI's business by a vote of their shares of DCTI common
stock.
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Uncertainty Relating to Integration
The DataBank 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. Following the DataBank Acquisition, in order
to maintain and increase profitability, DCTI will need to integrate and
streamline overlapping functions successfully. Substantial costs may be incurred
by DCTI in the integration of product lines. While these costs have not been
specifically calculated, any such costs may have an adverse effect on operating
results in the periods in which they are incurred. Each of DCTI and DataBank 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 DataBank Acquisition will
require the use of 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 DataBank 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 DataBank 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 DCTI and DataBank 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 companies 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 DataBank 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 DCTI and DataBank.
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Potential Dilutive Effect to Stockholders
Although the companies believe that beneficial synergies will result
from the DataBank 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 DataBank Acquisition may
have the effect of reducing DCTI's net income per share from levels otherwise
expected and 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.
DataBank's Business is Offshore
Services provided to merchants outside the United States accounted for
all of DataBank's revenues. Following consummation of the DataBank Acquisition,
we intend to expand our international presence in the future. Conducting
business outside of the United States is subject to additional risks that may
affect our ability to sell our services and result in reduced revenues,
including:
o changes in regulatory requirements;
o reduced protection of intellectual property rights;
o evolving privacy laws in Europe;
o the burden of complying with a variety of foreign laws; and
o political or economic instability or constraints on international
trade.
In addition, some software exports from the United States are subject
to export restrictions as a result of the encryption technology in that software
and we may become liable to the extent we violate these restrictions. We cannot
be certain that one or more of these factors will not materially adversely
affect our future international operations, and consequently, our business,
financial condition and operating results.
RISK FACTORS REGARDING DATABANK
Limited Operating History; Anticipated Losses
DataBank commenced operations on April 2, 1998 and thus has a limited
operating history upon which an evaluation of DataBank can be based. 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,
o the failure to sign affiliation agreements with credit card companies,
o the rejection of DataBank's services by banks or Web merchants,
-27-
o the levels of traffic on its merchants' websites not increasing,
o the development of equal or superior services or products by
competitors,
o the inability of DataBank to effectively integrate the technology and
operations of any other acquired businesses or technologies with its
operations, and
o the inability to identify, attract, retain and motivate qualified
personnel.
There can be no assurance that DataBank will be successful in
addressing such risks. The limited operating history of DataBank and the
uncertain nature of the markets addressed by DataBank make the prediction of
future results of operations difficult or impossible. DataBank 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
DataBank will continue to show profits on a quarterly and annual basis.
Fluctuations In Quarterly Operating Results
As a result of DataBank's limited operating history, it does not have
historical financial data for a significant number of periods on which to base
planned operating expenses. Although DataBank expects that its revenue will
increase over time, there can be no assurance in this regard. Moreover,
DataBank's product line constitutes an emerging market that is difficult to
forecast accurately. DataBanks'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
revenues received within the quarter, which are difficult to forecast
accurately. Accordingly, the failure of merchant banks to use DataBank's
services and products could have a material adverse effect on DataBank's
business, results of operations and financial condition. DataBank 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 DataBank's
expectations would have an immediate adverse effect on DataBank's business,
operating results and financial condition.
DataBank's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside DataBank's
control. These factors include:
o the level of usage of the Internet,
o demand for e-commerce,
o seasonal trends in Internet usage and online purchasing,
o the level of user traffic on DataBank's merchant's websites,
o the introduction of new products or services by DataBank or its
competitors,
o technical difficulties with respect to the use of DataBank's merchant's
websites,
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o general economic conditions and economic conditions specific to the
Internet and online media.
As a strategic response to changes in the competitive environment,
DataBank may from time to time make certain pricing, service or marketing
decisions or business combinations that could have a material adverse effect on
DataBank's business, results of operations and financial condition.
Due to all of the foregoing factors, in future quarters DataBank's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of DCTI's Common Stock would likely
be materially and adversely affected.
Dependence On Continued Growth In Use Of The Internet
DataBank's future success is substantially dependent upon continued
growth in the use of the Internet. Rapid growth in the use of and interest in
the Internet and the Web is a recent phenomenon. There can be no assurance that
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 Internet connections.
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 and DataBank's merchant's web sites. If use of
the Internet does not continue to grow, or if the Internet infrastructure does
not effectively support growth that may occur, DataBank's business, operating
results and financial condition would be materially and adversely affected.
Substantial Dependence Upon a Few Merchant Banks
Revenues from services provided to Bank of Nevis accounted for all of
DataBank's total revenues in 1998 and for the quarter ended March 31, 1999. Any
significant decrease in revenues from Bank of Nevis could materially adversely
affect DataBank's operating results. DataBank has no long-term contract that
requires Bank of Nevis to continue to use any of its services. Accordingly, Bank
of Nevis could cease using all or part of DataBank's services on short notice
without penalty.
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Substantial Dependence Upon Third Parties
DataBank depends substantially upon third parties for several critical
elements of its business including, among others, telecommunications, technology
and infrastructure, acquiring processors and merchant banks.
Technology And Infrastructure
DataBank depends substantially upon its own computer equipment and its
maintenance and technical support to ensure accurate and rapid presentation of
content to its customers and potential customers. Any failure by DataBank to
effectively maintain such equipment and provide such information could have a
material adverse effect on its business, operating results 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. DataBank's future success will depend in
significant part on its ability to continually improve the performance, features
and reliability of its processing products in response to both evolving demands
of the marketplace and competitive product offerings, and there can be no
assurance that DataBank will be successful in doing so.
RISK FACTORS REGARDING DCTI
We Have Incurred Substantial Losses
We incurred a loss of $5,597,967 from continuing operations during the
year ended June 30, 1998 and a loss of $17,846,073 from continuing operations
during the nine months ended March 31, 1999. Our operating activities used
$6,377,970 of cash during the year ended June 30, 1998 and $7,575,502 during the
nine months ended March 31, 1999.
Only One Year of Internet Based Revenues
We have a limited history of generating revenue on the Internet. Prior
to 1998, most of our revenues came from non-Internet businesses. In 1998 and
1999, we generated a small amount of revenue from WeatherLab's Internet-only
weather service, and from our previously owned Books Now, Inc. subsidiary. Since
we did not acquire SB.com until June 1999, revenues from fees derived from
internet payment processing have not yet been reflected in our operating
results.
Going Concern Opinion by our Auditors
The Report of Independent Public Accountants on our financial
statements as of and for the year ended June 30, 1998 includes the following,
"The Company has suffered recurring losses from continuing operations of
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$5,597,967, $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."
The Expected Fluctuations of Our Quarterly Results Could Cause Our Stock Price
to Fluctuate or Decline
We expect that our quarterly operating results will fluctuate
significantly in the future based upon a number of factors, many of which are
not within our control. We base our operating expenses on anticipated market
growth and our operating expenses are relatively fixed in the short term. As a
result, if our revenues are lower than we expect, our quarterly operating
results may not meet the expectations of public market analysts or investors,
which could cause the market price of our common stock to decline.
Our quarterly results may fluctuate in the future as a result of many
factors, including the following:
o changes in the number of transactions effected by our merchants,
especially as a result of seasonality or general economic conditions;
o our ability to attract and retain financial institutions as clients;
o our ability to attract new merchants and to retain our existing
merchants;
o merchant and financial institution acceptance of our pricing model; and
o our success in expanding our sales and marketing programs.
Other factors that may affect our quarterly results are set forth
elsewhere in this section. As a result of these factors, our revenues are not
predictable with any significant degree of certainty.
Due to the uncertainty surrounding our revenues and expenses, we
believe that quarter-to-quarter comparisons of our historical operating results
should not be relied upon as an indicator of our future performance.
We May Not Be Able to Secure Necessary Funding in the Future
We require substantial working capital to fund our business. We have
had significant operating losses and negative cash flow from operations in the
recent past. We believe that our existing revenues, including the revenues
generated by our newly acquired subsidiaries and DataBank, will be sufficient to
meet our operating and capital requirements for the next twelve months. However,
our capital requirements depend on several factors, including the rate of market
acceptance of our services, the ability to expand our customer base, the growth
of sales and marketing and other factors. If capital requirements vary
materially from those currently planned, we may require additional financing
sooner than anticipated. Additional financing may not be available when needed
on terms favorable to us or at all. If adequate funds are not available or are
not available on acceptable terms, we may be unable to develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures.
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Integration of DataBank, SB.com and Access Services
Uncertainty Relating to Integration. There are risks in attempting to
integrate the operations of previously separate companies. We acquired Access
Services, Inc., in April 1999 and SB.com in June 1999. We are putting forth a
significant effort to successfully integrate the two companies with us. Our
efforts include coordinating development of new products, commercializing
in-process development, integrating product offerings, and coordinating sales
and marketing efforts and business development efforts. In addition, we will
need to also integrate the operations of DataBank.
In order to build a successful company, we will need to integrate and
streamline overlapping functions successfully. Among the risks we face are:
o We must incur the costs generally associated with this type of
integration including the costs to:
o integrate product lines,
o cross-train the sales force, and
o position products in the market;
o We do not yet know what the ultimate cost of integration will be and
how significant the impact will be; the cost may have an adverse effect
on our operating results;
o Our integration of Access Services and Secure-Bank will require
management resources that may distract attention from normal
operations. Employee uncertainty and lack of focus may disrupt our
business; and
o Our failure to quickly and effectively accomplish the integration could
harm us. Uncertainty in the marketplace or customer concern regarding
the impact of our acquisitions could also have a material adverse
effect on our consolidated business, financial condition and results of
operations.
Dilutive Effect to Our Stockholders. Our issuance of up to 29,660,000
shares of common stock to acquire DataBank could reduce the market price of our
common stock, if DataBank does not bring a substantial revenue stream to our
business.
The Demand for Our Services Could Be Negatively Affected by a Reduced Growth of
E-commerce or Delays in the Development of the Internet Infrastructure
Sales of goods and services over the Internet do not currently
represent a significant portion of overall sales of goods and services. We
depend on the growing use and acceptance of the Internet as an effective medium
of commerce by merchants and customers. Rapid growth in the use of and interest
in the Internet is a relatively recent development. We cannot be certain that
acceptance and use of the Internet will continue to develop or that a
sufficiently broad base of merchants and consumers will adopt, and continue to
use, the Internet as a medium of commerce.
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The emergence of the Internet as a commercial marketplace may occur
more slowly than anticipated for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the number
of Internet users or their use of Internet resources continues to grow, it may
overwhelm the existing Internet infrastructure. Delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity could also have a detrimental effect. These factors could
result in slower response times or adversely affect usage of the Internet,
resulting in lower numbers of e-commerce transactions and lower demand for our
services.
Proprietary Technology is Important to our Business
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and use our technology without authorization, or
develop similar technology independently. Effective protection of intellectual
property rights may be unavailable or limited in foreign countries. We cannot be
certain that the protection of our proprietary rights will be adequate or that
our competitors will not independently develop similar technology, duplicate our
services or design around any patents or other intellectual property rights we
hold.
We also cannot be certain that third parties will not claim that our
current or future services infringe upon their rights. We have not conducted any
search to determine whether any of our services or technologies may be
infringing upon patent rights of third parties. As the number of services in our
market increases and functionalities increasingly overlap, companies such as
ours may become increasingly subject to infringement claims. In addition, these
claims also might require us to enter into royalty or license agreements. Any
infringement claims, with or without merit, could cause costly litigation that
could absorb significant management time. If required to do so, we may not be
able to obtain royalty or license agreements, or obtain them on terms acceptable
to us.
We Depend Upon Third Parties
We depend substantially upon third parties for several critical
elements of our business, including:
o Sprint, for telecommunications services;
o Hewlett Packard, for maintenance and upgrades of the HP-9000 computers
in our data center;
o Sun Microsystems, for maintenance and upgrades of the Sun Enterprise
500 servers in our data center;
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o Cisco, for maintenance and upgrades of our routers which are used to
connect our computer network to the Internet; and
o Other vendors of software and hardware for maintenance and upgrades of
software, systems, and hardware used to deliver our products on the
Internet.
Although we believe that there are other third party providers who can
provide the same services as those providers we currently use, loss or
interruption of service by such providers would have an adverse effect on our
business and prospects.
We Depend on our Existing Technology and Infrastructure
Our ability to deliver services to our merchants depends on the
uninterrupted operation of our Internet payments processing systems. Our systems
and operations are vulnerable to damage or interruption from:
o earthquake, fire, flood and other natural disasters;
o power loss, telecommunications or data network failure;
o operator negligence, improper operation by employees, physical and
electronic break-ins and similar events; and
o computer viruses.
Despite the fact that we have implemented redundant servers in our data
center, we may still experience service interruptions for the reasons listed
above and a variety of other reasons. If our redundant servers are not
available, we may suffer substantial losses as well as loss of business. In
addition, any interruption in our systems that impairs our ability to provide
services could damage our reputation and reduce demand for our services.
Our success also depends on our ability to grow, or scale, our payments
processing systems to accommodate increases in the volume of traffic on our
system, especially during peak periods of demand. We may not be able to
anticipate increases in the use of our systems and successfully expand the
capacity of our network infrastructure. Our inability to expand our systems to
handle increased traffic could result in system disruptions, slower response
times and other difficulties in providing services to our merchant banks and
customers, which could materially harm our business.
A Breach of Security Measures Could Reduce Demand for Our Services
A requirement of the continued growth of e-commerce is the secure
transmission of confidential information over public networks. We rely on SSL,
Secure Socket Layer Protocol, to provide the security and authentication
necessary for secure transmissions of confidential information. In addition, we
rely on private key cryptography, an encryption method that utilizes two keys
for encoding and decoding data, for ensuring the integrity of our computer
networks. Regulatory and export restrictions may prohibit us from using the
strongest and most secure cryptographic protection available and thereby expose
us to a risk of data interception. A party who is able to circumvent our
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security measures could misappropriate proprietary information or interrupt our
operations. Any compromise or elimination of our security could reduce demand
for our services.
We may be required to expend significant capital and other resources to
protect against security breaches or to address any problems they may cause.
Concerns over the security of the Internet and other online transactions and the
privacy of users may also inhibit the growth of the Internet and other online
services generally, and the Web in particular, especially as a means of
conducting commercial transactions. Because our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent security breaches may disrupt our
operations.
The Intense Competition in Our Industry Could Reduce or Eliminate the Demand for
Our Services
The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
Our primary source of competition comes from developers of other systems for
Internet payments processing such as Clear Commerce, CyberCash, Cyber Source,
Digital River, HNC Software, Open Market and Hewlett-Packard (VeriFone). In
addition, other companies may enter the market for our services. In the future,
we may also compete with large financial institutions that develop custom
systems for their use and their merchants' use.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in financial institution and
merchant requirements. Competition could seriously impede our ability to sell
additional services on terms favorable to us. Our current and potential
competitors may develop and market new technologies that render our existing or
future services obsolete, unmarketable or less competitive. Our current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with other solution providers, thereby
increasing the ability of their services to address the needs of our prospective
customers. Competitive pressures could reduce our market share or require the
reduction of the prices of our services, either of which could materially and
adversely affect our business, results of operations or financial condition.
We Must Continually Enhance our Systems To Remain Competitive
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our services and the underlying
network infrastructure. The Internet and the e-commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
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technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both internally develop and license leading technologies
to enhance our existing services and develop new services. We must continue to
address the increasingly sophisticated and varied needs of our financial
institutions and merchants, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of proprietary technology involves significant technical and
business risks. We may fail to develop new technologies effectively or to adapt
our proprietary technology and systems to merchant and financial institution
requirements or emerging industry standards. If we are unable to adapt to
changing market conditions, customer requirements or emerging industry
standards, our business would be materially harmed.
Management of Internal Growth
As we grow, we may not be able to effectively manage the expansion of
our operations and our systems, procedures or controls may not be adequate to
support our operations. Additionally, when market opportunities arise, we may
not have sufficient personnel or procedures in place to be able to take
advantage of those opportunities.
Our Management Team Must Work Together Effectively
Our performance is substantially dependent on the effectiveness of our
senior management and key technical personnel. In particular, our success
depends substantially on the continued efforts of our senior management team,
many of whom only recently joined the Company through acquisitions. Because
these members of our management team are new, there is an increased risk that
management will not be able to work together effectively as a team, especially
in the short term, to address the challenges to our business. We do not carry
key person life insurance on any of our senior management personnel. The loss of
the services of any of our executive officers or other key employees could
detrimentally affect us.
Attracting and Retaining Qualified Employees
Our future success and our ability to expand our operations depends on
our continuing ability to attract and retain highly qualified technical and
managerial employees. Competition for people experienced in the technical areas
in which we operate is intense due to the limited number of qualified
professionals and, as a small company, we may not be able to attract them.
Failure to attract and retain personnel, particularly marketing and technical
personnel, could make it difficult for us to manage our business and meet our
objectives.
We May Become Subject to Government Regulation and Legal Uncertainties
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
-36-
generally, export control laws and laws or regulations directly applicable to
e-commerce. However, due to the increasing usage of the Internet, it is possible
that a number of laws and regulations may be applicable or may be adopted in the
future with respect to conducting business over the Internet covering issues
such as:
o taxes;
o user privacy;
o pricing;
o content;
o right to access personal data;
o copyrights;
o distribution; and
o characteristics and quality of services.
For example, we believe that some of our services may require us to
comply with the Federal Credit Reporting Act. Complying with this statute would
require us to provide information about personal data stored by us or our
merchants. Failure to comply with this act could result in claims being made
against us.
Furthermore, the growth and development of the market for e-commerce
may prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for our services and
increase our cost of doing business.
The applicability of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, export or import matters and personal privacy to the Internet
is uncertain. The vast majority of laws were adopted prior to the broad
commercial use of the Internet and related technologies. As a result, they do
not contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes in the United States regarding taxation and
encryption and in the European Union regarding contract formation and privacy,
could create uncertainty in the Internet marketplace and impose additional costs
and other burdens. This uncertainty, costs and burden could reduce demand for
our services or increase the cost of doing business due to increased costs of
litigation or increased service delivery costs.
Concentration of Stock Ownership
Our present directors, executive officers, greater than 5% stockholders
and their respective affiliates beneficially own approximately __% of our
outstanding common stock, and will own __% of our outstanding common stock after
the DataBank Acquisition. As a result of their ownership, the directors,
executive officers, greater than 5% stockholders and their respective affiliates
collectively are able to control or significantly influence all matters
-37-
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 DCTI.
Volatility of Stock Price
Broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our operating performance. The trading
price of our common stock has been and may continue to be subject to wide
fluctuations. In the last twelve months our stock has traded as low as $1.875
and as high as $14. The wide swings in the price of our stock have not always
been in response to any factors that we can identify.
Future Issuance of Preferred Stock Could Hurt Common Stockholders
Rights of preferred stockholders take priority over common
stockholders. The only preferred stock currently outstanding consists of 360
shares of Series A Convertible Preferred Stock. Our Board of Directors has the
authority to issue up to 2,500,000 shares of preferred stock. They can determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
Although the Series A Preferred Stock does not have voting rights, future
preferred stockholders could delay, defer or prevent a change of control of
which our common stockholders may have been in favor.
Some of Our Equipment May Fail in Year 2000
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 we have invested $60,000 in an effort to certify all aspects of
the business are year 2000 compliant. The areas of the business which have been
targeted for compliance testing are our operations and our software products and
services. We conducted the certification process over a three-month period in
which all software products and service components under our direct control
certified year 2000 compliant. For the major operational components and
remaining software and services that are under the control of third party
organizations, we have received written confirmation and evidence of year 2000
compliance. We may realize operational exposure and risk if the systems for
which we are 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 we
transact business;
o server software which we use to present content and advertising to our
customers and partners; and
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o computers, software, telephone systems and other equipment used
internally.
In October 1997, we initiated the review and assessment of all of our
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, our computerized information systems have been substantially upgraded to
be year 2000 compliant.
We have not yet determined a contingency plan in the event that any
non-compliant critical systems are not remedied by the year 2000, nor have we
formulated a timetable to create such a contingency plan. It is possible that
costs associated with year 2000 compliance efforts may exceed our current
projections of an additional $20,000 to reach total compliance. In such a case,
these costs could have a material negative impact on our financial position and
results of operations. It is also possible that if systems material to our
operations have not been made year 2000 compliant, or if third parties fail to
make their systems compliant in a timely manner, the year 2000 issue could have
a material adverse effect on our business, financial condition, and results of
operations. This would result in an inability to provide functioning software
and services to our customers in a timely manner, and could then result in lost
revenues from these customers, until such problems are resolved by us or the
responsible third parties.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AUTHORIZE
THE ISSUANCE OF UP TO 29,660,000 SHARES OF COMMON STOCK IN CONNECTION WITH THE
ACQUISITION OF DATABANK INTERNATIONAL, LTD.
-39-
PROPOSAL No. 2
APPROVAL OF AMENDMENT TO COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK
The Board of Directors has unanimously adopted, subject to stockholder
approval, an amendment to Article IV of the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 shares to 75,000,000 shares. The text of Article
IV, as it is proposed to be amended, is as follows: "The total number of shares
of stock of all classes which the Corporation shall have the authority to issue
is Seventy Seven Million Five Hundred Thousand (77,500,000), of which Seventy
Five Million shares shall have a par value of One Hundredth of One Cent ($.0001)
each and shall be shares of common stock (the "Common Stock"), and Two Million
Five Hundred Thousand (2,500,000) shares shall have the par value of One
Hundredth of One Cent ($.0001) each and shall be shares of preferred stock (the
"Preferred Stock")."
The additional Common Stock to be authorized by adoption of the
proposed amendment would have rights identical to the currently outstanding
Common Stock of the Company. Adoption of the proposed amendment and issuance of
the Common Stock would not affect the rights of the holders of currently
outstanding Common Stock, except for effects incidental to increasing the number
of shares of the Common Stock outstanding, such as dilution of the earnings per
share and voting rights of current holders of Common Stock. The holders of
Common Stock do not presently have preemptive rights to subscribe for the
additional Common Stock proposed to be authorized. If the amendment is adopted,
it will become effective upon filing of a Certificate of Amendment of the
Company's Amended and Restated Certificate of Incorporation with the Secretary
of State of Delaware. Under the present Amended and Restated Certificate of
Incorporation, the Company has the authority to issue 50,000,000 shares of
Common Stock, $.0001 par value per share, and 2,500,000 shares of Preferred
Stock, $.0001 par value per share. At August 11, 1999, 18,456,355 shares of
Common Stock were issued and outstanding and 360 shares of Preferred Stock were
outstanding. Accordingly, as of August 11, 1999, after taking into account the
shares reserved for issuance upon the exercise of Company stock options and upon
the conversion or exercise of certain warrants issued by the Company, there
remained approximately 24,790,000 shares of Common Stock available for issuance.
If the First and Second Milestones of the DataBank Acquisition are met in full,
the Company would not have enough shares available for issuance to meet its
obligation to the DataBank Stockholders. If the proposed amendment were adopted,
an additional 25,000,000 shares of Common Stock would be available for issuance.
The purpose of the increase in authorized shares is to provide
additional shares of Common Stock that could be issued for the DataBank
Acquisition and other corporate purposes without further stockholder approval
unless required by applicable law or regulation. The Company currently expects
that purposes for additional shares will include effecting acquisitions of other
businesses or properties, providing equity incentives to employees, officers and
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directors, establishing strategic relationships with other companies, and
securing additional financing. The Board of Directors believes that it is in the
best interests of the Company to have additional shares of Common Stock
authorized at this time in order to alleviate the expense and delay of holding a
special meeting of stockholders if and when there is a need to issue additional
shares of Common Stock. The Company is not currently contemplating any specific
transactions involving the issuance of additional shares.
The additional shares of Common Stock that would become available for
issuance if the proposed amendment were adopted could also be used by the
Company to oppose a hostile takeover attempt or delay or prevent changes of
control (whether by merger, tender offer, proxy contest or assumption of control
by a holder of a large block of the Company's securities) or changes in or
removal of management of the Company. For example, without further stockholder
approval, the Board of Directors could strategically sell shares of Common Stock
in a private transaction to purchasers who would oppose a takeover or favor the
current Board of Directors. Although this proposal to increase the number of
authorized shares of Common Stock has been prompted by business and financial
considerations, not by the threat of any attempt to accumulate shares or
otherwise gain control of the Company (nor is the Board of Directors currently
aware of any such attempts directed at the Company), stockholders nevertheless
should be aware that approval of the proposal could facilitate future efforts by
the Company to deter or prevent changes of control of the Company, including
transactions in which the stockholders might otherwise receive a premium for
their shares over then-current market prices or benefit in some other manner. In
addition, the authority granted by the Company's Amended and Restated
Certificate of Incorporation to the Board of Directors to fix the designations,
powers, preferences, rights, qualifications, limitations and restrictions of any
class or series of the Company's stock could be used for anti-takeover purposes.
The proposal to increase the number of authorized shares of Common Stock,
however, is not part of any plan to adopt a series of amendments having an
anti-takeover effect, and the Company's management presently does not intend to
propose anti-takeover measures in future proxy solicitations.
For the reasons stated herein, the Board of Directors unanimously
recommends that stockholders vote FOR approval of the AMENDMENT TO THE AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK.
-41-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding Common Stock of
the Company beneficially owned as of August 17, 1999 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 August 17, 1999, there were 18,456,355 shares of Common Stock outstanding
and 360 shares of Preferred Stock outstanding.
Amount of Percentage
Names and Addresses of Common of Voting
Principal Stockholders Shares* Securities
---------------------- ------- ----------
L. H. Trust 995,296 5.4%
Castletown, Isle of Man
Brown Simpson Strategic Growth Fund, Ltd. 1,183,657 6.2%
152 West 57th Street
New York, New York 10019
Brown Simpson Strategic Growth Fund, L.P. 515,902 2.8%
152 West 57th Street
New York, New York 10019
Transaction Systems Architects, Inc. 2,250,000 11.6%
224 South 108th Avenue
Omaha, Nebraska, 68154
Officers and Directors
----------------------
James A. Egide 1,225,000 6.6%
136 Heber Avenue, Suite 204
Park City, Utah 84060
-42-
Raymond J. Pittman 1,930,127 10.5%
187 Fremont Street
San Francisco, California 94105
Kenneth M. Woolley 199,500 1.1%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Mitchell L. Edwards 294,625 1.6%
136 Heber Avenue., Suite 204
Park City, Utah 84060
Glen Hartman 66,667 0.4%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Donald Marshall 0 0.0%
136 Heber Avenue, Suite 204
Park City, Utah 84060
Allan Grosh 186,667 1.0%
136 Heber Avenue, Suite 204
Park City, Utah 84060
All Directors and Executive Officers 3,902,586 20.7%
(7 persons)
* Assumes exercise of all exercisable options and warrants held by listed
security holders which can be acquired within 60 days from August 17, 1999.
(1) Includes 520,000 shares which Brown Simpson Ltd. may acquire upon exercise
of warrants. Does not include Series A Convertible Preferred Stock which is
convertible into 444,444 shares of common stock which are not currently
convertible.
(2) Includes 280,000 shares which Brown Simpson L.P. may acquire upon exercise
of warrants. Does not include Series A Convertible Preferred Stock which is
convertible into 355,556 shares of common stock which are not currently
convertible.
(3) Includes 1,000,000 shares which Transactions Systems Architects, Inc. may
acquire upon exercise of warrants.
(4) Includes 37,500 shares which Mr. Woolley may acquire on exercise of options.
Does not include 75,000 shares which may be acquired on exercise of options
which are not currently exercisable.
-43-
(5) Includes 175,625 shares which Mr. Edwards may acquire on exercise of
options. Does not include 100,000 shares which may be acquired on exercise of
options which are not currently exercisable.
(6) Includes 186,667 shares which Mr. Grosh may acquire on exercise of options.
Does not include 373,333 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.
-44-
SELECTED CONSOLIDATED FINANCIAL DATA OF
DIGITAL COURIER TECHNOLOGIES, INC.
The following selected unaudited consolidated financial data should be
read in conjunction with the Company's financial statements and notes thereto
appearing elsewhere herein.
Quarterly Unaudited Results
The unaudited financial information of the Company is for the quarters
ended September 30, 1998, December 31, 1998 and March 31, 1999 and for each
quarter for fiscal 1998. 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.
For the three months ended
---------------------------
Sep. 30, Dec. 31, Mar. 31,
1998 1998 1999
------------ ------------ ------------
Net sales $ 319,352 $ 434,582 $ 464,300
Cost of sales 179,881 291,930 255,771
------------ ------------ ------------
Gross margin 139,471 142,652 208,529
------------ ------------ ------------
Operating expenses:
AOL interactive marketing contract costs -- 5,156,135 52,202
Acquired in-process research and
development 3,700,000 -- --
Depreciation and amortization 695,728 1,126,837 1,109,614
General and administrative 594,761 929,235 1,043,002
Selling 531,576 1,509,018 463,289
Research and development 38,670 843,996 496,578
------------ ------------ ------------
5,560,735 9,565,221 3,164,685
------------ ------------ ------------
Other income (expense), net 300,684 (180,079) (166,689)
------------ ------------ ------------
Net loss $ (5,120,580) $ (9,602,648) $ (3,122,845)
============ ============ ============
Net loss per common share:
Basic and diluted $ (0.56) $ (0.70) $ (0.22)
Weighted average common shares outstanding:
Basic and diluted 9,191,351 13,745,159 14,166,766
For the three months ended
--------------------------
Sep. 30, Dec. 31, Mar. 31, Jun 30,
1997 1997 1998 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 amortization 385,904 398,817 387,235 373,134
Research and development 473,350 373,717 454,218 130,721
Selling 642,006 336,355 188,861 122,790
----------- ----------- ----------- -----------
2,049,919 1,534,372 1,769,258 3,006,296
----------- ----------- ----------- -----------
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) (1,668,128) (3,017,452)
Benefit (provision) for income taxes -- (49,829) 2,733,829 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations (1,976,770) (1,669,446) 1,065,701 (3,017,452)
----------- ----------- ----------- -----------
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Discontinued operations:
Income from operations of discontinued direct
mail advertising operations, net of income taxes 110,558 51,368 (50,548) --
Loss from operations of discontinued internet
service provider 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) $ 5,622,083 $(3,017,452)
=========== =========== =========== ===========
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.23) $ (0.19) $ 0.12 $ (0.39)
Diluted (0.23) (0.19) 0.12 (0.39)
Net income (loss):
Basic (0.23) (0.20) 0.64 (0.39)
Diluted (0.23) (0.20) 0.64 (0.39)
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
The following audited selected financial data for the fiscal years
indicated should be read in conjunction with the Company's 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 1,545,090 398,066 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 -- -- --
Compensation expense related to issuance
of options by principal stockholder -- -- 1,484,375 -- --
----------- ----------- ----------- ----------- -----------
8,359,845 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 (8,281,967) (7,158,851) (3,678,412) (618,087)
Income tax benefit 2,684,000 -- 91,999 132,681 --
----------- ----------- ----------- ----------- -----------
Loss from continuing operations (5,597,967) (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 taxes (265,674) (3,040,643) -- -- --
Gain on sale of Internet service provider
subsidiary, net of income taxes 232,911 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from discontinued operations 4,473,331 (2,740,205) 153,332 221,136 62,998
----------- ----------- ----------- ----------- -----------
Net income (loss) $(1,124,636) $(9,899,056) $(3,433,081) $ (264,270) $ 62,998
=========== =========== =========== =========== ===========
Net income (loss) per common share:
Income (loss) from continuing operations:
Basic $ (0.66) $ (0.86) $ (0.61) $ (0.10) $-
Diluted (0.66) (0.86) (0.61) (0.10) --
-46-
Net income (loss):
Basic (0.13) (1.19) (0.58) (0.06) 0.01
Diluted (0.13) (1.19) (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 $ 3,639,313 $ 3,624,308 $12,774,113 $ 794,156 $ 350,428
Total assets 24,020,746 11,320,660 16,222,902 1,073,225 476,210
Long-term obligations 1,384,132 -- -- -- --
Stockholders' equity 18,995,696 9,826,083 15,541,624 1,073,225 476,210
-47-
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
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 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 two 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. The Company sold its WorldNow Online Network television affiliate
website and certain related assets in July 1998 and the assets of its Videos Now
and Books Now operations in June 1999.
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.
-48-
In January 1997, the Company acquired Sisna, Inc. ("Sisna"), an
Internet service provider headquartered in Salt Lake City, Utah, for an
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 Internet service provider 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 market price. 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, Inc. ("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 were 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., ("WeatherLabs") 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. At closing 253,260 common shares were issued
valued at $762,503, and an additional 523,960 common shares may be issued upon
-49-
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 consolidated 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 based on 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
consolidated financial statements from September 16, 1998, the date of
acquisition.
Results of Operations
Three months ended March 31, 1999 compared with three months ended March 31,
1998, and nine months ended March 31, 1999 compared with nine months ended March
31, 1998.
Net Sales
Net sales for the three months ended March 31, 1999 were $464,300 as
compared to $385,671 for the three months ended March 31, 1998. Books Now's
operations, which were acquired in January 1998, and WeatherLabs' operations,
which were acquired in May 1998, accounted for $230,426 and $143,731 of total
net sales for the three months ended March 31, 1999, respectively. Net sales of
videos from the Company's Videos Now site, which was launched in November 1998
accounted for $64,643 of total net sales for the three months ended March 31,
1999. Net sales for the three months ended March 31, 1999 also included $25,500
of technical support services revenue. Net sales for the three months ended
March 31, 1998 were $385,671. During the three months ended March 31, 1998,
Books Now accounted for $141,160 of the net sales and a one time sale of a
turn-key Internet computer system accounted for $240,854. Net sales from
WorldNow Online during the three months ended March 31, 1998 were $3,657.
Net sales for the nine months ended March 31, 1999 were $1,218,234 as
compared to $405,158 for the nine months ended March 31, 1998. Books Now's
operations, which were acquired in January 1998, and WeatherLabs' operations,
which were acquired in May 1998, accounted for $782,033 and $284,438 of total
net sales for the nine months ended March 31, 1999, respectively. Net sales of
videos from the Company's Videos Now site, which was launched in November 1998,
accounted for $111,161 of total net sales for the nine months ended March 31,
1999. Net sales for the nine months ended March 31, 1999 also included $40,468
of technical support services revenue. WorldNow advertiser and subscriber sales
accounted for $134 of net sales for the nine months ended March 31, 1999. During
the nine months ended March 31, 1998, Books Now accounted for $141,160 of net
-50-
sales and a one time sale of a turn-key Internet computer system accounted for
$240,854. Net sales from WorldNow Online during the nine months ended March 31,
1998 were $23,144.
Cost of Sales
Cost of sales for the three months ended March 31, 1999 were $255,771
or 55.1% of net sales. Cost of sales for the three months ended March 31, 1998
were $258,144 or 66.9% of net sales. The change in cost of sales as a percent of
net sales is due to the change in products and services.
Cost of sales for the nine months ended March 31, 1999 were $727,582 or
59.7% of net sales. Cost of sales for the nine months ended March 31, 1998 were
$323,201 or 79.8% of net sales. The change in cost of sales as a percent of net
sales is due to the change in products and services.
Operating Expenses
During the three months ended March 31, 1999, the Company incurred
$52,202 of advertising expense associated with the permanent placement on the
AOL shopping channel. During the nine months ended March 31, 1999, the Company
incurred total expenses of $5,208,337 associated with the AOL contract, $52,202
of advertising expense associated with the permanent placement on the AOL
Shopping channel and $5,156,135 associated with terminating the interactive
marketing agreement with AOL. Effective June 1, 1998, the Company entered into a
marketing agreement with AOL which gave the Compamy "permanent anchor tenancy"
and advertising for its 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 its Videos Now website on AOL, the
Company entered into discussions with AOL beginning in November 1998 to
restructure the terms of the marketing agreement with AOL. Effective January 1,
1999, the Company 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 the Company (a) 636,942 warrants to purchase common
shares and (b) 601,610 of the 955,414 shares of its common stock previously
issued to AOL under the marketing agreement. All advertising ceased immediately,
but the Company continues to have a permanent location or "button" on AOL's
shopping channel until August 31, 1999. The Company has 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
was providing advertising on its other channels to send customers to the
-51-
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.
As a result of the February 1, 1999 agreement with AOL, the Company
determined that the remaining balance of the AOL anchor tenant placement costs
of $12,364,123, less $139,206 representing the fair market value of the
permanent location on the shopping channel for 8 months, should be written off
as of December 31, 1998. A portion of the write-off has been offset by recording
the return of the 601,610 shares of common stock, which had a quoted market
price of $4,549,676 as of the termination date, and by recording the
cancellation of the warrants which had a recorded value of $2,519,106 as of
December 31, 1998. This resulted in the net write-off of $5,156,135 during the
nine months ended March 31, 1999.
The interactive marketing agreement with AOL was for an initial term of
39 months (the "Agreement"), which could be extended for successive one-year
terms by AOL thereafter. Under the Agreement, the Company was to 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 Performance Warrant was to vest over the term of the
agreement as certain promotion criteria were achieved by AOL. The agreement
included 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 write off of acquired in-process research and development during
the nine months ended March 31, 1999 was $3,700,000, which was attributable to
the acquisition of DCII (see Note 2 to the condensed consolidated financial
statements).
Depreciation and amortization expense increased 197.5% to $1,109,614
during the three months ended March 31, 1999 from $372,971 during the three
months ended March 31, 1998. The increase in depreciation and amortization
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.
Depreciation and amortization expense increased 153.3% to $2,932,179
during the nine months ended March 31, 1999 from $1,157,692 during the nine
months ended March 31, 1998. The increase in depreciation and amortization
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.
-52-
General and administrative expense increased 38.5% to $1,043,002 during
the three months ended March 31, 1999 from $753,208 during the three months
ended March 31, 1998. 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.
General and administrative expense increased 48.6% to $2,566,998 during
the nine months ended March 31, 1999 from $1,727,350 during the nine months
ended March 31, 1998. 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 increased 145.3% to $463,289 during the three months
ended March 31, 1999 from $188,861 during the three months ended March 31, 1998.
The increase in selling expense is attributable to selling expense related to
Books Now, WeatherLabs, and Videos Now, and $114,693 of advertising expense
associated with the @ Home contract, offset by the decreased emphasis on
WorldNow Online activities.
Selling expense increased 114.5% to $2,503,883 during the nine months
ended March 31, 1999 from $1,167,222 during the nine months ended March 31,
1998. The increase in selling expense is attributable to selling expense related
to Books Now, WeatherLabs, and Videos Now, $1,132,558 for the severance
agreement payments made to the former owner of Books Now (see Note 2 to the
condensed consolidated financial statements) and $229,385 of advertising expense
associated with the @ Home contract, offset by the decreased emphasis on
WorldNow Online activities.
On July 10, 1998, the Company entered into a Content License and
Distribution Agreement with @Home for an initial term of 36 months. Under this
agreement, the Company has agreed to pay @Home $800,000 in non-refundable
guaranteed cash payments, has issued 20,534 shares of the Company's common
stock, has issued seven-year warrants to purchase 100,000 shares of the
Company's common stock at $9.74 per share (the "Warrant Shares") and has issued
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 WeatherLabs 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 on the co-branded Weather@Home site. Included
in selling expense for the three and nine months ended March 31, 1999 is
$114,693 and $229,385, respectively, related to the @Home agreement.
Research and development expense increased 9.3% to $496,578 during the
three months ended March 31, 1999 from $454,218 during the three months ended
March 31, 1998. Research and development expense increased because of the
acquisition of DCII which is performing significant research and development
-53-
activities in the areas of Videos Now, netClearing, and WeatherLabs. Research
and development expense during the three months ended March 31, 1998 was
principally for the WorldNow Online operations.
Research and development expense increased 6.0% to $1,379,244 during
the nine months ended March 31, 1999 from $1,301,285 during the nine months
ended March 31, 1998. Research and development expense increased because of the
acquisition DCII which is performing significant research and development
activities in the areas of Videos Now, netClearing, and WeatherLabs. Research
and development expense during the nine months ended March 31, 1998 was
principally for the WorldNow Online operations.
Discontinued Operations
During the fiscal year ended June 30, 1998, the Company sold its direct
mail advertising and Internet service provider operations. The results from both
of these operations are presented as discontinued operations. During the three
months ended March 31, 1998, pretax loss from the direct mail advertising
operations was $80,877. During the three months ended March 31, 1998, the
Internet service provider operations incurred a pretax loss of $33,117. During
the three months ended March 31, 1998, the Company sold its direct mail
advertising operations and its Internet service provider operations for pretax
gains of $7,031,548 and $372,657, respectively.
During the nine months ended March 31, 1998, pretax income from the
direct mail advertising operations was $178,204. During the nine months ended
March 31, 1998, the Internet service provider operations incurred a pretax loss
of $425,078. During the nine months ended March 31, 1998, the Company sold its
direct mail advertising operations and its Internet service provider operations
for pretax gains of $7,031,548 and $372,657, respectively.
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
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.
-54-
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 288.1% to $1,545,090
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.
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 a pretax loss of $3,220,906 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.
-55-
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
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 $3,220,906.
There were no Internet service operations during the year ended June 30, 1996.
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.
-56-
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.
On June 1, 1998, the Company entered into a 39 month Interactive
Marketing Agreement with AOL, wherein the Company agreed to pay AOL $12,000,000
in cash. The Company made a cash payment to AOL of $1,200,000 in July 1998,
failed to make the scheduled payment to AOL of $4,000,000 prior to January 1,
1999, and was scheduled to make payments to AOL of $4,000,000 prior to July 1,
1999 and $2,800,000 prior to January 1, 2000. On February 1, 1999, the Company
entered into a Termination, Release and Transition Agreement with AOL, under
which the future cash payments have been terminated and AOL will return to the
Company (a) 636,942 warrants to purchase common shares and (b) 601,610 of the
955,414 shares of its common stock previously issued to AOL under the marketing
agreement. The Company has no further financial obligations to AOL (see Note 6
to the condensed consolidated financial statements).
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 warrrants to purchase 25,000 shares of the
Company's common stock at a price of $2.875 per share.
On November 24, 1998, the Company raised $1,800,000 by selling 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 $1,800,000 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 for 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
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respective closing to the lesser of the initial exercise price or 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 common stock is at least two times the
then-current exercise price.
The Amended Agreements also required 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 15 consecutive trading days. The price for a
Tranche B Unit is $7 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
common stock on the day of the sale of the Tranche B Units. The commitment to
purchase the Tranche B Units was subsequently terminated (see discussion below).
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 "he Purchasers (the "March Purchase
Agreement").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360
shares of the Series A Preferred Stock convertible into 800,000 shares of common
stock and five-year warrants to purchase an additional 800,000 shares of common
stock. The Preferred Stock 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 or the average price of the Company's
common stock during any five consecutive business days during the 22 business
days ending on such anniversary of the closing. The warrants are callable by the
Company if for 30 consecutive trading days, the closing bid price of the
Company's common stock is at least two times the then-current exercise price.
The 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 one share 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 30 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 discussed.
The Company filed an S-3 registration statement on December 11, 1998,
which was amended on February 12, 1999, May 5, 1999 and June 14, 1999, with the
Securities and Exchange Commission covering all of the shares of common stock
-58-
sold to the Purchasers as well as the shares of common stock underlying the
related warrants and preferred stock. The registration statement has yet to
become effective.
On March 25, 1999 the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for ACI's BASE24(R) software which
will be used to enhance the Company's existing Internet-based platforms that
offer secure payments processing for business-to-consumer electronic commerce.
Under the agreement the Company has agreed to pay ACI approximately $5,979,000
during the life of the contract. The Company made a payment of approximately
$629,000 upon signing the contract and is scheduled to make equal payments at
the beginning of each quarter totaling $1,000,000 for calendar year 2000,
$1,200,000 for calendar year 2001, $1,400,000 for calendar year 2002, $1,400,000
for calendar year 2003 and a final payment of $350,000 on January 1, 2004.
Operating activities used $7,575,502 during the nine months ended March
31, 1999 compared to $5,271,723 during the nine months ended March 31, 1998. The
net cash used for operating activities during the nine months ended March 31,
1999 was principally attributable to the payments made to AOL of $1,200,000 and
@Home of $266,000 and $6,109,502 for other operating expenses.
Operating activities used $6,377,970 during the year ended June 30,
1998 compared to $6,334,660 during the year ended June 30, 1997.
Cash used in investing activities was $1,231,750 and $1,531,476 during
the nine months ended March 31, 1999 and 1998, respectively. During the nine
months ended March 31, 1999, the Company's investing activities included cash
advances for operating activities to DCII of $849,203 and the acquisition of
equipment for $745,190 offset by the receipt of cash proceeds from the sale of
WorldNow assets of $286,418 and the net proceeds from the sale of equipment of
$76,225. During the nine months ended March 31, 1998, the Company's investing
activities included the acquisition of equipment for $802,414, an investment in
CommTouch, Ltd of $750,000, offset by proceeds of $20,938 from the sale of
equipment.
Cash provided by investing activities was $4,537,549 during the year
ended June 30, 1998 and used in investing activities was $3,697,694 during the
year ended June 30, 1997, respectively. During the year ended June 30, 1998, the
Company's investing activities included $810,215 of cash advances for operating
activities to Digital Courier International, Inc., the acquisition of equipment
for $794,344, an investment in CommTouch, Ltd. of $750,000 and the receipt of
proceeds from the sale of the direct mail advertising operations of $6,857,300
and from the sale of equipment of $20,938. During the year ended June 30, 1997,
the Company's 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 from financing activities was $7,734,867 during the nine
months ended March 31, 1999 as compared to $8,797,560 during the nine months
ended March 31, 1998. The cash provided during the nine months ended March 31,
1999 was attributable to the receipt of net proceeds from the issuance of common
-59-
shares and convertible preferred shares of $6,524,000, borrowings of $1,000,000
and proceeds from the issuance of common stock upon the exercise of stock
options of $943,750, offset by principal repayments on capital lease obligations
of $579,836 and repayments against borrowings of $153,047. The cash received
during the nine months ended March 31, 1998 was attributable to the net proceeds
from the sale of the direct mail marketing and Internet services operations of
$6,857,300, the receipt of $2,750,000 from the sale and lease back of equipment,
borrowings of $86,000 and $22,418 from the issuance of common stock upon the
exercise of options, offset by repayments on capital lease obligations of
$429,346, principal repayments on borrowings of $288,812 and the acquisition of
the Company's common stock for $200,000.
Cash provided by financing activities was $113,741 during the year
ended June 30, 1998 as compared to $1,811,354 during the year ended June 30,
1997. The cash provided was attributable to the net receipt of $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, offset in part by the payment of $1,700,000 for the retirement of
common stock owned by former officers of the Company and $690,183 and $264,493
of principal payments on capital leases and debt agreements. During the year
ended June 30, 1997, the Company received $1,854,555 from the issuance of common
stock and paid $43,201 of principal on debt obligations.
Although the Company has recently completed several private placements
of equity securities, the full amount committed will only become available to
the Company upon the occurrence of certain conditions over which the Company may
have little or'no control, such as the price of the Company's common stock. If
the Company does not receive the full amount committed, it may not have
sufficient cash flows from operating activities during the next 12 months to
provide the necessary capital to fully implement its marketing strategy or to
sustain operations at current levels. The Company is actively seeking additional
debt or equity funding. If adequate funding is not available, it may be required
to revise its plans and reduce future expenditures. As of March 31, 1999, the
Company had $2,139,339 of cash. 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. 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 additional
funding will be available or, if available, that it will be available on
acceptable terms or in required amounts.
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 "hat 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
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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
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 purchases, users or advertisers
anticipated, and (2) the costs to market the Company's Internet services.
-61-
SELECTED UNAUDITED FINANCIAL DATA OF
DATABANK INTERNATIONAL LIMITED
The following selected unaudited consolidated financial data should be
read in conjunction with the financial statements and notes of DataBank
International, Ltd. ("DataBank") included elsewhere herein.
Quarterly Results
The unaudited financial information of DataBank is for the quarters
ended March 31, 1998, June 30, 1998, September 30, 1998, December 31, 1998 and
March 31, 1999. This information has been derived from unaudited quarterly
financial statements of DataBank 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.
For the three months ended
--------------------------
Sep. 30, Dec. 31, Mar. 31,
1998 1998 1999
---------- ---------- ----------
Statement of Operations Data:
Revenue $ 724,937 $2,934,783 $4,614,588
Commissions and contract fees 335,592 2,118,393 2,923,325
---------- ---------- ----------
Gross profit 389,345 816,390 1,691,263
General and administrative expenses 60,000 75,597 412,434
---------- ---------- ----------
Net income $ 329,345 $ 740,793 $1,278,829
========== ========== ==========
For the three months ended
--------------------------
Mar 31, Jun. 30,
1998 1998
--------- ---------
Statement of Operations Data:
Revenue $ -- $ 31,704
Commissions and contract fees -- 14,676
--------- ---------
Gross profit -- 17,028
General and administrative expenses 35,000 50,000
--------- ---------
Net Loss $(35,000) $(32,972)
========= =========
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Annual Results
The following audited selected financial data as of and for the period
from inception (April 2, 1998) through December 31, 1998 should be read in
conjunction with DataBank's financial statements appearing elsewhere herein.
1998
Statement of Operations Data:
Revenues $3,691,424
Commissions and contract fees 2,468,661
----------
Gross profit 1,222,763
General and administrative expenses 220,597
----------
Net income $1,002,166
==========
December
31, 1998
----------
Balance Sheet Data:
Working capital deficit $(269,879)
Total assets 1,493,185
Stockholders' equity (197,833)
-63-
Market Price and Dividends of DCTI Stock
Market Price
On February 6, 1997, the Company's Common Stock began trading on the
NASDAQ National Market. 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. As of March 9, 1999, the day immediately prior to the
announcement of the transaction, the high and low bid quotations reported by the
NASDAQ National Market for the Company's Common Stock were $6.469 and $5.875,
respectively.
The following table sets forth the high and low bid prices for the
Company's Common Stock for each quarter for the period indicated.
Fiscal Year Ended June 30, 1999
-------------------------------
April 1 to June 30, 1999 $ 8.75 $ 4.81
January 1 to March 31, 1999 $ 8.19 $ 4.13
October 1 to December 31, 1998 $ 13.94 $ 1.81
July 1 to September 30, 1998 $ 17.00 $ 3.13
Fiscal Year Ended June 30, 1998
-------------------------------
April 1 to June 30, 1998 $ 10.50 $ 3.25
January 1 to March 31, 1998 $ 5.13 $ 1.88
October 1 to December 31, 1997 $ 5.25 $ 1.69
July 1 to September 30, 1997 $ 5.75 $ 2.75
On August 9, 1999, the Common Stock was quoted on the NASDAQ National
Market at a closing price of $5.50.
As of August 5, 1999, there were approximately 686 holders of record of
the Company's Common Stock.
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, 1998, the Company sold the following securities without
registration under the Securities Act of 1933 (the "Act"):
In July 1998, the Company issued 20,534 shares of Common Stock to At
Home Corporation in connection with a Content License and Distribution
Agreement.
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In September 1998, the Company issued 4,659,080 shares of its Common
Stock, in a private placement, in exchange for all the issued and outstanding
shares of Digital Courier International, Inc.
In November 1998, the Company issued 205,182 shares to the former
president of its Books Now, Inc subsidiary as part of a severance agreement.
In November 1998, the Company sold 400,000 shares of Common Stock and
warrants to purchase an additional 400,000 shares of Common Stock to two
institutional investors in a private placement.
In December 1998, the Company sold 400,000 shares of Common Stock and
warrants to purchase an additional 400,000 shares of Common Stock to the same
institutional investors in a private placement.
In March 1999, the Company sold 360 shares of its Series A Convertible
Preferred Stock and warrants to purchase 800,000 shares of the Company's Common
Stock to the same institutional investors in a private placement.
In April 1999, the Company issued 300,000 shares of its Common Stock,
in a private placement, in exchange for all the issued and outstanding shares of
Access Services, Inc.
In June 1999, the Company issued 2,840,000 shares of its Common Stock,
in a private placement, in exchange for all the issued and outstanding shares of
SB.com.
In June 1999, the Company sold 1,250,000 shares of its Common Stock and
warrants to purchase an additional 1,000,000 shares of Common Stock to an
institutional investor in a private placement.
During the twelve-month period ending June 30, 1999, the Company issued
747,696 shares of Common Stock pursuant to exercises of stock options issued
under the Company's Amended and Restated Incentive Plan.
-65-
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
RELATING TO
PROPOSAL - AUTHORIZATION OF ISSUANCE OF 29,660,000 SHARES OF COMMON
STOCK IN CONNECTION WITH THE MERGER OF THE COMPANY WITH
DATABANK INTERNATIONAL, LTD.
The following unaudited pro forma condensed consolidated financial data
is based upon the historical consolidated financial statements of Digital
Courier Technologies, Inc. and subsidiaries ("DCTI") as adjusted to give effect
to the issuance of common stock in connection with the merger of the Company
with Databank International, Ltd. ("DataBank") as if the transaction had
occurred on March 31, 1999, for purposes of the unaudited pro forma condensed
consolidated balance sheet and July 1, 1997 for purposes of the unaudited pro
forma condensed consolidated statements of operations for the year ended June
30, 1998 and for the nine months ended March 31, 1999.
The pro forma adjustments are based upon information set out in this
document and its attachments and information from the Company's books and
records that management of the Company believes are reasonable and accurate. The
unaudited pro forma condensed consolidated balance sheet as of March 31, 1999
and the unaudited pro forma condensed consolidated statements of operations for
the year ended June 30, 1998 and the nine months ended March 31, 1999, are not
necessarily indicative of the results of operations of DCTI, or its financial
position, had the sale actually occurred on March 31, 1999 or July 1, 1997. The
unaudited pro forma results of operations of DCTI for the nine months ended
March 31, 1999 are not necessarily indicative of the results of operations that
may be generated for the entire fiscal 1999 year. The unaudited pro forma
adjustments are described in the accompanying notes to unaudited pro forma
condensed consolidated financial data.
This unaudited pro forma condensed consolidated financial data should
be read in conjunction with the consolidated financial statements of DCTI and
the related notes thereto, and the financial statements of DataBank and the
related notes thereto, included herein.
-66-
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
As Of March 31, 1999
Historical Historical Pro Forma
Digital Courier DataBank Adjustments Pro Forma
------------- ------------- ------------- -------------
CURRENT ASSETS:
Cash $ 2,139,339 $ 914,333 -- $ 3,053,672
Trade accounts receivable, net 142,175 231,017 -- 373,192
Receivable from Focus Direct, Inc. 700,000 -- -- 700,000
Receivable from Gannaway, Inc. 200,000 -- -- 200,000
Prepaid advertising 1,146,922 -- -- 1,146,922
Prepaid software lease 628,861 -- -- 628,861
Current portion of AOL anchor tenant placement
costs 87,004 -- -- 87,004
Other current assets 506,801 -- -- 506,801
------------- ------------- ------------- -------------
Total current assets 5,551,102 1,145,350 -- 6,696,452
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,196,136 108,289 -- 6,304,425
Furniture, fixtures and leasehold -- -- -- 1,041,205
improvements 989,972 51,233 -- --
------------- ------------- ------------- -------------
7,186,108 159,522 7,345,630
Less accumulated depreciation
and amortization (3,225,223) (15,182) -- (3,240,405)
------------- ------------- ------------- -------------
Net property and equipment 3,960,885 144,340 -- 4,105,225
------------- ------------- ------------- -------------
GOODWILL, net 11,746,382 -- 91,105,457 (b) 102,851,839
OTHER ASSETS 784,900 -- -- 784,900
------------- ------------- ------------- -------------
Total assets $ 22,043,269 $ 1,289,690 $ 91,105,457 $ 114,438,416
============= ============= ============= =============
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 1,090,487 $ -- $ -- $ 1,090,487
Notes payable 1,121,828 -- -- 1,121,828
Accounts payable 256,950 1,095,147 -- 1,352,097
Accrued rental payments for vacated facilities 267,483 -- -- 267,483
Other accrued liabilities 508,912 -- -- 508,912
------------- ------------- ------------- -------------
Total current liabilities 3,245,660 1,095,147 -- 4,340,807
------------- ------------- ------------- -------------
CAPITAL LEASE OBLIGATIONS, net of current
Portion 720,715 -- -- 720,715
------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock 3,600,000 -- -- 3,600,000
Common stock 1,399 1 (1) (a) --
-- -- 1,660 (b) 3,059
Additional paid in capital 45,982,483 -- 91,298,340 (b) 137,280,823
Warrants outstanding 923,100 -- -- 923,000
Stock subscription receivable (12,000) -- -- (12,000)
Accumulated earnings (deficit) (32,418,088) 194,542 (194,542) (a) (32,418,088)
------------- ------------- ------------- -------------
Total stockholders' equity 18,076,894 194,543 91,105,457 109,376,894
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 22,043,269 $ 1,289,690 $ 91,105,457 $ 114,438,416
============= ============= ============= =============
-67-
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
Historical
Digital Historical Pro Forma
Courier DataBank Adjustments Pro Forma
------------ ------------ ------------ ------------
NET SALES $ 803,011 $ 31,704 $ -- $ 834,715
COST OF SALES 745,871 14,676 -- 760,547
------------ ------------ ------------ ------------
Gross margin 57,140 17,028 -- 74,168
------------ ------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 4,092,737 85,000 -- 4,177,737
Depreciation and amortization 1,545,090 -- 18,221,091 (c) 19,766,181
Research and development 1,432,006 -- -- 1,432,006
Selling 1,290,012 -- -- 1,290,012
------------ ------------ ------------ ------------
Total operating expenses 8,359,845 85,000 18,221,091 26,665,936
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (8,302,705) (67,973) (18,221,091) (26,591,768)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 178,354 -- -- 178,354
Interest expense (157,616) -- -- (157,616)
------------ ------------ ------------ ------------
Other income, net 20,738 -- -- 20,738
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS $ (8,281,967) $ (67,972) $(18,221,091) $(26,571,030)
============ ============ ============ ============
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE (Basic and Diluted): $ (0.98) -- -- $ (1.06)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING Basic and diluted) 8,422,345 -- 16,600,000 (d) 25,022,345
-68-
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 1999
Historical HistoricalDataBaPro Forma
Digital Courier Adjustments Pro Forma
------------ ------------ ------------ ------------
NET SALES $ 1,218,234 $ 8,274,308 -- $ 9,492,542
COST OF SALES 727,582 5,377,310 -- 6,104,892
------------ ------------ ------------ ------------
Gross margin 490,652 2,896,998 -- 3,387,650
------------ ------------ ------------ ------------
OPERATING EXPENSES:
AOL interactive marketing contract costs 5,208,337 -- -- 5,208,337
Acquired in-process research and development 3,700,000 -- -- 3,700,000
Depreciation and amortization 2,932,179 -- $ 13,665,819 (e) 16,597,998
General and administrative 2,566,998 -- -- 3,115,029
Selling 2,503,883 -- -- 2,503,883
Research and development 1,379,244 -- -- 1,379,244
------------ ------------ ------------ ------------
Total operating expenses 18,290,641 548,031 13,665,819 32,504,491
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (17,799,989) 2,348,967 (13,665,819) (29,116,841)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 45,979 -- -- 45,979
Gain on sale of WorldNow assets 308,245 -- -- 308,245
Loss on dispositions of equipment (136,660) -- -- (136,660)
Interest expense (263,648) -- -- (263,648)
------------ ------------ ------------ ------------
Other income, net (46,084) -- -- (46,084)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS $(17,846,073) $ 2,348,967 $(13,665,819) $(29,162,925)
============ ============ ============ ============
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE (Basic and Diluted): $ (1.44) -- -- $ (0.97)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING Basic and diluted) 12,354,627 -- 16,600,000 (d) 28,954,627
-69-
DIGITAL COURIER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
DESCRIPTION OF THE TRANSACTION
- - - ------------------------------
These financial statements assume that DCTI acquired 100% of DataBank's
common stock as described in proposal number 1.
(1) BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance
sheet has been prepared assuming that the acquisition of DataBank (proposal no.
1) occurred on March 31, 1999. The unaudited pro forma condensed consolidated
statements of operations have been prepared assuming that the acquisition had
occurred on July 1, 1997, the first day of the Company's most recent fiscal
year.
(2) PRO FORMA ADJUSTMENTS
(a) Adjustment to eliminate equity of DataBank International, Ltd.
(b) Adjustment to record the initial issuance of 16,600,000 shares of
common stock to acquire DataBank at March 31, 1999, pro forma
date of acquisition and resultant goodwill as follows:
Total shares issued 16,600,000
Average price for common stock $5.50
Total purchase price $91,300,000
Less: Assets acquired (1,289,690)
Add: Liabilities assumed 1,095,147
Goodwill $91,105,457
(c) Adjustment to record goodwill amortization on $91,105,457 over a
five year life for 1 year. ($91,105,457 x 20% = $18,221,091).
(d) Adjustment to record increase in common stock outstanding for
loss per share calculations as follows:
Shares issued to acquire DataBank 16,600,000
(e) Adjustment to record goodwill amortization on $91,105,457 over a
five year life for 9 months. ($91,105,457 x 20% x 9/12 =
$13,665,819).
-70-
CERTAIN 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, 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 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 officers and directors has an ownership interest.
Under the agreements, the Company provided software development services, and
configured hardware and other computer equipment.
During the year ended June 30, 1999, the Company made a cash loan to an
officer in the amount of $56,000, which was settled in full during the same
fiscal year.
In connection with the acquisition of SB.com in June 1999, the Company
made cash loans of $500,000 to each of four officers of SB.com. in exchange for
promissory notes. The notes accrue interest at a rate of ten percent per annum
and are due in full June 30, 2001or sooner if the makers receive proceeds from
the sale of Company stock.
STOCKHOLDER PROPOSALS
Stockholder proposals to be presented at the 2000 Annual Meeting of
Stockholders must be received at the Company's executive offices at 136 Heber
Avenue, Suite 204, P.O. Box 8000, Park City, Utah 84060, addressed to the
attention of the Secretary, by June 5, 2000 in order to be considered for
inclusion in the Proxy Statement and form of proxy relating to such meeting.
OTHER BUSINESS
The Board of Directors knows of no other business which will be
presented for consideration at the Special Meeting other than as stated in the
accompanying Notice of Special Meeting of Stockholders. If, however, other
matters are properly brought before the Special Meeting, it is the intention of
the persons named in the accompanying form of Proxy to vote the shares
represented thereby on such matters in accordance with their best judgment and
in their discretion, and authority to do so is included in the Proxy.
-71-
ADDITIONAL INFORMATION
DCTI files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any document we file at the SEC's public reference rooms at
450 Fifth Street, Mail Stop 1-2, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov.
incorporation by reference
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this proxy statement and information that we file later
with the SEC will automatically update and supersede this information. Our SEC
file number is 000-20771. We incorporate by reference the documents listed
below, and any future filings made by us with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended or under
Section 5 of the Securities Act of 1933, as amended:
1. Annual Report on Form 10-K for the fiscal year ended June 30, 1998, as
amended through the date hereof;
2. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
as amended through the date hereof;
3. Quarterly Report on Form 10-Q for the quarter ended December 31, 1998,
as amended through the date hereof;
4. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, as
amended through the date hereof;
5. Proxy Statement for the Special Meeting of Shareholders held September
16, 1998;
6. Proxy Statement for the Annual Meeting of Shareholders to be held
December 15, 1998;
7. Current Report on Form 8-K filed October 1, 1998;
8. Current Report on Form 8-K filed December 11, 1998;
9. Current Report on Form 8-K filed February 12, 1999;
10. Current Report on Form 8-K filed March 10, 1999;
11. Current Report on Form 8-K filed June 21, 1999, as amended through the
date hereof; and
-72-
12. Description of our capital stock contained in our registration
statement on Form 8-A, including all amendments or reports filed for
the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing or
telephoning DCTI at P.O. Box 8000, 136 Heber Avenue, Suite 204, Park City, Utah
84060, telephone (435) 655-3617, attention: Investor Relations.
-73-
INDEX TO digital courier technologies, inc. and subsidiaries
FINANCIAL STATEMENTS
Title of Documents Page No.
- - - ------------------ --------
UNAUDITED FINANCIAL STATEMENTS
- - - ------------------------------
Condensed Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998 75
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 77
Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 1999 and 1998 79
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1999 and 1998 81
Notes to Condensed Consolidated Financial Statements 83
AUDITED FINANCIAL STATEMENTS
- - - ----------------------------
Report of Independent Public Accountants 94
Consolidated Balance Sheets as of June 30, 1998, and 1997 95
Consolidated Statements of Operations for the Years Ended June 30, 1998,1997 and 1996 97
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 99
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 101
Notes to Consolidated Financial Statements 104
-74-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, June 30,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash $ 2,139,339 $ 3,211,724
Trade accounts receivable 142,175 16,459
Receivable from Focus Direct, Inc. 700,000 --
Receivable from Gannaway, Inc. 200,000 --
Prepaid advertising 1,146,922 675,000
Prepaid software lease 628,861 --
Inventory -- 21,046
Current portion of AOL anchor tenant placement costs 87,004 3,237,281
Other current assets 506,801 118,721
------------ ------------
Total current assets 5,551,102 7,280,231
------------ ------------
PROPERTY AND EQUIPMENT:
Computer and office equipment 6,196,136 6,225,817
Furniture, fixtures and leasehold improvements 989,972 777,419
------------ ------------
7,186,108 7,003,236
------------ ------------
Less accumulated depreciation and amortization (3,225,223) (2,109,736)
------------ ------------
Net property and equipment 3,960,885 4,893,500
------------ ------------
GOODWILL, net of accumulated amortization of $1,686,824 and $76,699, 11,746,382 1,441,459
respectively
------------ ------------
AOL ANCHOR TENANT PLACEMENT COSTS, net of current portion
-- 8,136,841
------------ ------------
RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL -- 810,215
------------ ------------
OTHER ASSETS 784,900 1,458,500
------------ ------------
$ 22,043,269 $ 24,020,746
============ ============
See accompanying notes to condensed consolidated financial statements.
-75-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1999 1998
------------ ------------
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 1,090,487 $ 1,006,906
Notes payable 1,121,828 100,000
Accounts payable 256,950 1,458,598
Accrued rental payments for vacated facilities 267,483 544,014
Other accrued liabilities 508,912 531,400
------------ ------------
Total current liabilities 3,245,660 3,640,918
------------ ------------
CAPITAL LEASE OBLIGATIONS, net of current portion 720,715 1,384,132
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, 2,500,000 shares authorized; 360 shares of Series A
convertible issued and outstanding 3,600,000 --
Common stock, $.0001 par value; 50,000,000 shares authorized, 13,989,211
and 8,268,489 shares outstanding, respectively 1,399 827
Additional paid-in capital 45,982,483 31,196,354
Warrants outstanding 923,100 2,519,106
Receivable to be settled through the repurchase of
common shares by the Company -- (148,576)
Stock subscription receivable (12,000) --
Accumulated deficit (32,418,088) (14,572,015)
------------ ------------
Total stockholders' equity 18,076,894 18,995,696
============ ============
$ 22,043,269 $ 24,020,746
============ ============
See accompanying notes to condensed consolidated financial statements.
-76-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------- -----------
NET SALES $ 464,300 $ 385,671
COST OF SALES 255,771 258,144
----------- -----------
Gross margin 208,529 127,527
----------- -----------
OPERATING EXPENSES:
Depreciation and amortization 1,109,614 372,971
General and administrative 1,043,002 753,208
Research and development 496,578 454,218
Selling 463,289 188,861
AOL interactive marketing contract costs 52,202 --
----------- -----------
Total operating expenses 3,164,685 1,769,258
----------- -----------
OPERATING LOSS (2,956,156) (1,641,731)
----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 19,583 27,140
Loss on dispositions of equipment (58,109) --
Interest expense (128,163) (53,537)
----------- -----------
Other expense, net (166,689) (26,397)
----------- -----------
LOSS BEFORE INCOME TAXES (3,122,845) (1,668,128)
INCOME TAX BENEFIT -- 2,733,829
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,122,845) 1,065,701
----------- -----------
See accompanying notes to condensed consolidated financial statements.
-77-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------ -----------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued direct mail advertising operations,
net of income tax benefit of $30,329 $ -- $ (50,548)
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 $12,419 -- (20,698)
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746 -- 232,911
------------ -----------
INCOME FROM DISCONTINUED OPERATIONS -- 4,556,382
------------ -----------
NET INCOME (LOSS) $ (3,122,845) $ 5,622,083
============ ===========
NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations:
Basic $ (0.22) $ 0.12
Diluted $ (0.22) $ 0.12
============ ===========
Income from discontinued operations:
Basic $ -- $ 0.52
Diluted $ -- $ 0.52
============ ===========
Net income (loss):
Basic $ (0.22) $ 0.64
Diluted $ (0.22) $ 0.64
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 14,166,766 8,763,505
Diluted 14,166,766 8,832,086
============ ===========
See accompanying notes to condensed consolidated financial statements.
-78-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
NET SALES $ 1,218,234 $ 405,158
COST OF SALES 727,582 323,201
------------ ------------
------------ ------------
Gross margin 81,957
490,652
------------ ------------
OPERATING EXPENSES:
AOL interactive marketing contract costs --
5,208,337
Acquired in-process research and development 3,700,000 --
Depreciation and amortization 1,157,692
2,932,179
General and administrative 1,727,350
2,566,998
Selling 2,503,883 1,167,222
Research and development 1,379,244 1,301,285
------------ ------------
Total operating expenses 5,353,549
18,290,641
------------ ------------
OPERATING LOSS (17,799,989) (5,271,592)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 45,979 115,823
Gain on sale of WorldNow assets 308,245 --
Loss on dispositions of equipment (136,660) --
Interest expense (263,648) (108,746)
------------ ------------
Other income (expense), net (46,084) 7,077
------------ ------------
LOSS BEFORE INCOME TAXES (17,846,073) (5,264,515)
INCOME TAX BENEFIT -- 2,684,000
------------ ------------
LOSS FROM CONTINUING OPERATIONS (17,846,073) (2,580,515)
------------ ------------
See accompanying notes to condensed consolidated financial statements.
-79-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------------------ -----------
DISCONTINUED OPERATIONS:
Income from operations of discontinued direct mail advertising operations,
net of income tax provision of $66,827 $ -- $ 111,377
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 -- (265,674)
Gain on sale of Internet service provider subsidiary, net of income tax
provision of $139,746
-- 232,911
------------------ -----------
INCOME FROM DISCONTINUED OPERATIONS -- 4,473,331
================== ===========
NET INCOME (LOSS) $ (17,846,073) $ 1,892,816
================== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Loss from continuing operations:
Basic $ (1.44) $ (0.30)
Diluted $ (1.44) $ (0.29)
================== ===========
Income from discontinued operations:
Basic $ -- $ 0.52
Diluted $ -- $ 0.50
================== ===========
Net income (loss):
Basic $ (1.44) $ 0.22
Diluted $ (1.44) $ 0.21
================== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,354,627 8,660,717
Diluted 12,354,627 8,862,132
================== ===========
See accompanying notes to condensed consolidated financial statements.
-80-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
Increase (Decrease) in Cash
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(17,846,073) $ 1,892,816
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Amortization and write-off of AOL anchor tenant placement costs 5,208,337 --
Gain on sale of direct mail marketing and Internet service operations -- (7,404,205)
Acquired in-process research and development 3,700,000 --
Depreciation and amortization 2,932,179 1,157,692
Issuance of common stock and warrants in connection with
@Home agreement 1,110,307 --
Issuance of common stock for settlement with former
Shareholders of Books Now, Inc. 1,051,558 --
Gain on sale of WorldNow assets (308,245) --
Loss on dispositions of equipment 136,660 11,196
Stock issued in lieu of compensation -- 61,250
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions-
Trade accounts receivable (125,716) 98,563
Receivable from Gannaway, Inc. (178,172) --
Inventory 21,046 193,886
Prepaid advertising (471,922) --
Prepaid software leases (628,861) --
Other assets (456,438) (307,023)
Accounts payable (1,370,143) (805,328)
Accrued liabilities (73,488) (170,570)
Accrued rental payments for vacated facilities (276,531) --
------------ ------------
Net cash used in operating activities (7,575,502) (5,271,723)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Digital Courier International, Inc. (849,203) --
Purchase of property and equipment (745,190) (802,414)
Net cash proceeds from sale of WorldNow assets 286,418 --
Increase in investments -- (750,000)
Proceeds from sale of equipment 76,225 20,938
------------ ------------
Net cash used in investing activities (1,231,750) (1,531,476)
------------ ------------
See accompanying notes to condensed consolidated financial statements.
-81-
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
Increase (Decrease) in Cash
1999 1998
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common and convertible
preferred stock $ 6,524,000 $ --
Net proceeds from sale of direct mail marketing and Internet services
operations -- 6,857,300
Net proceeds from borrowings 1,000,000 86,000
Net proceeds from issuance of common stock upon exercise of stock options 943,750 22,418
Net proceeds from sale and lease back of equipment -- 2,750,000
Principal payments on capital lease obligations (579,836) (429,346)
Principal payments on borrowings (153,047) (288,812)
Acquisition of common stock -- (200,000)
----------- -----------
Net cash provided by financing activities 7,734,867 8,797,560
----------- -----------
NET INCREASE (DECREASE) IN CASH (1,072,385) 1,994,361
CASH AT BEGINNING OF PERIOD 3,211,724 4,952,274
=========== ===========
CASH AT END OF PERIOD $ 2,139,339 $ 6,946,635
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 259,969 $ 108,746
See accompanying notes to condensed consolidated financial statements.
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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 March 31,
1999 and for the three and nine months ended March 31, 1999 and 1998 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
and nine months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire fiscal year ending June 30, 1999. Certain
previously reported amounts have been reclassified to conform to the current
period presentation. These reclassifications had no affect on the previously
reported net income (loss).
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 the quoted market 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 was expensed as of the date
of the severance agreement.
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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 stock 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
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 Digital Courier International, Inc., a
Nevada corporation ("DCII"). 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 was 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 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.
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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
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 estimated that
approximately $4,000,000 would be required during the 12 to 18 months following
the acquisition 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 rate used to discount the net cash flows from the
purchased in-process technology was 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 were unknown at the time of the acquisition.
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As evidenced by its 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
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 e-commerce 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
nine months ended March 31, 1999 and the three and nine months ended March 31,
1998 (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 development of $3,700,000 in connection with the DCII acquisition) are as
follows:
1999 1998 1998
---- ---- ----
Nine MonthsEnded ThreeMonthsEnded Nine Months Ended
---------------- -------------- --------------
Net sales $ 1,218,234 $ 452,271 $ 818,346
Loss from continuing
operations (15,023,988) (2,589,878) (6,683,895)
Loss per share from
continuing operations (1.10) (0.19) (0.49)
Access Services, Inc.
On April 1, 1999, the Company entered into an Agreement to acquire all
of the outstanding stock of Access Services, Inc. ("Access Services"), a credit
card processing company. The acquisition was closed in April 1999. At closing,
the shareholders of Access Services were issued 300,000 shares of the Company's
common stock valued at $1,631,400, $75,000 in cash and warrants to purchase
100,000 shares of the Company's common stock at $5.50 per share. The acquisition
will be accounted for as a purchase.
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
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the issued and outstanding shares of Sisna. The issuance of the common shares
was recorded at the quoted market price on the date of the acquisition. 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 had 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
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 Henry 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
March 31, 1998 as discontinued operations. The Sisna revenues were $143,982 and
$555,685 and the loss from operations was $33,117 and $425,078 during the three
and nine months ended March 31, 1998, respectively.
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 an 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
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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.
The direct mail advertising operations have been reflected as
discontinued operations in the accompanying condensed consolidated financial
statements for the three and nine month periods ended March 31, 1998. The direct
mail advertising revenues were $2,028,430 and $7,508,212 and the pretax income
(loss) from operations was $(80,877) and $178,204 during the three and nine
months ended March 31, 1998, respectively.
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 679,793 and 1,340,000 shares of common stock at
weighted average exercise prices of $4.36 and $5.70 per share as of March 31,
1999 and 1998, respectively, warrants to purchase 1,935,000 shares of common
stock at a weighted average exercise price of $7.21 per share as of March 31,
1999 and 360 shares of Series A preferred stock convertible to 800,000 shares of
common stock at $4.50 per share at March 31, 1999 were not included in the
computation of Diluted EPS. The inclusion of the options, warrants and preferred
stock would have been antidilutive, thereby decreasing net loss per common
share. As of March 31, 1999, the Company has agreed to issue up to an additional
523,940 shares of common stock in connection with the acquisition of WeatherLabs
(see Note 2), contingent on the future price of the Company's common stock.
These contingent shares have also been excluded from the computation of diluted
EPS.
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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. Of 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, $1,146,922 has been recorded as prepaid advertising expense
as of March 31, 1999 and will be expensed as advertising services are provided.
NOTE 5 - EQUITY AND DEBT FINANCING
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 receivables owed to 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. The finders fee and the
fair market value of the two-year warrants have been capitalized and are being
amortized over the life of the loan.
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").
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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 required 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. The
commitment to purchase the Tranche B Units was subsequently terminated (see
discussion below).
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").
Pursuant to the March Purchase Agreement, the Purchasers acquired 360
shares of Series A Preferred Stock convertible into 800,000 shares of common
stock and five-year warrants to purchase an additional 800,000 shares of common
stock. The Preferred Stock 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 22 business
days ending on such anniversary of the closing. The warrants are callable by the
Company if for 30 consecutive trading days, the closing bid price of the
Company's common stock is at least two times the then-current exercise price.
The 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 30 consecutive trading days. The price for the
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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.
The Company filed an S-3 registration statement on December 11, 1998,
which was amended on February 12, 1999 and May 5, 1999, with the Securities and
Exchange Commission covering all of the shares of common stock sold to the
Purchasers as well as the shares of common stock underlying the related warrants
and preferred stock. The registration statement became effective on June 17,
1999.
NOTE 6 - MODIFICATION TO AMERICA ONLINE CONTRACT
Effective June 1, 1998, the Company entered into a marketing agreement
with America Online ("AOL"), which gave the Company "permanent anchor tenancy"
and advertising for its 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 the Videos Now website on AOL, the
Company entered into discussions with AOL beginning in November, 1998 to
restructure the terms of the marketing agreement with AOL. Effective January 1,
1999, the Company 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, the Company entered into a second amendment with
AOL, under which AOL will return to the Company (a) 636,942 warrants to purchase
common stock and (b) 601,610 of the 955,414 shares of its common stock
previously issued to AOL under the marketing agreement. All advertising will
cease immediately, but the Company will continue to have a permanent location or
"button" on AOL's shopping channel until August 31, 1999. The Company has 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
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.
As a result of the February 1, 1999 agreement with AOL, the Company
determined that the remaining balance of the AOL anchor tenant placement costs
of $12,364,123, less $139,206 representing the fair market value of the
permanent location of the shopping channel for 8 months, was written off as of
December 31, 1998. A portion of the write-off was offset by recording the return
of the 601,610 shares of common stock, which had a fair market value of
$4,549,676 as of the date the agreement was terminated, and by recording the
cancellation of the warrants which had a recorded value of $2,519,106 as of
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December 31, 1998. This resulted in a net write-off of $52,202 during the three
months ended March 31, 1999 and $5,208,337 during the nine months ended March
31, 1999.
NOTE 7 - SOFTWARE LICENSE AGREEMENT
On March 25, 1999, the Company entered into a 60 month software license
agreement with ACI Worldwide, Inc. ("ACI") for ACI's BASE24(R) software which
will be used to enhance the Company's existing Internet-based platforms that
offer secure payments processing for business-to-consumer electronic commerce.
Under the agreement the Company has agreed to pay ACI approximately $5,979,000
during the life of the contract. The Company made a payment of approximately
$629,000 upon signing the contract and is scheduled to make equal payments at
the beginning of each quarter totaling $1,000,000 for calendar year 2000,
$1,200,000 for calendar year 2001, $1,400,000 for calendar year 2002, $1,400,000
for calendar year 2003 and a final payment of $350,000 on January 1, 2004. The
payments made under the agreement will be expensed ratably over the term of the
agreement. The initial payment of approximately $629,000 was recorded as prepaid
software lease in the accompanying March 31, 1999 balance sheet.
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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
93
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 (as restated, see Note 1). 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 $5,597,967, $7,158,851 and $3,586,413 during the
years ended June 30, 1998, 1997 and 1996, respectively. The Company had 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
May 3, 1999
94
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AS RESTATED)
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 --
Prepaid expenses and other current assets 793,721 74,742
Net current assets of discontinued operations -- 105,739
------------ ------------
Total current assets 7,280,231 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 $76,699 1,441,459 --
------------ ------------
RECEIVABLE FROM DIGITAL COURIER INTERNATIONAL, INC
810,215 --
------------ ------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS
-- 709,063
------------ ------------
OTHER ASSETS 1,458,500 38,636
------------ ------------
$ 24,020,746 $ 11,320,660
============ ============
See accompanying notes to consolidated financial statements.
95
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AS RESTATED) (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 31,196,354 23,272,606
Warrants outstanding 2,519,106 --
Receivable to be settled through the repurchase of common shares by the
Company (148,576) --
Accumulated deficit (14,572,015) (13,447,379)
------------ ------------
Total stockholders' equity 18,995,696 9,826,083
------------ ------------
$ 24,020,746 $ 11,320,660
============ ============
See accompanying notes to consolidated financial statements.
96
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED)
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 1,545,090 398,066 86,828
Research and development 1,432,006 3,966,185 1,478,890
Selling 1,290,012 1,897,665 --
Compensation expense related to issuance of options
by principal stockholder -- -- 1,484,375
----------- ----------- -----------
Total operating expenses 8,359,845 7,662,832 3,735,621
----------- ----------- -----------
OPERATING LOSS (8,302,705) (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
(8,281,967) (7,158,851) (3,678,412)
INCOME TAX BENEFIT 2,684,000 -- 91,999
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (5,597,967) (7,158,851) (3,586,413)
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
97
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED) (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) (3,040,643) --
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 (2,740,205) 153,332
----------- ----------- -----------
NET LOSS $(1,124,636) $(9,899,056) $(3,433,081)
=========== =========== ===========
NET LOSS PER COMMON SHARE:
Loss from continuing operations:
Basic and diluted $ (0.66) $ (0.86) $ (0.61)
=========== =========== ===========
Income (loss) from discontinued operations:
Basic and diluted $ 0.53 $ (0.33) $ 0.03
=========== =========== ===========
Net Loss:
Basic and diluted $ (0.13) $ (1.19) $ (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.
98
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AS RESTATED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Additional
Common Stock Paid-in Warrants
Shares Amount Capital Outstanding
------------ ------------ ------------ ------------
BALANCE, June 30, 1995 $ 5,539,953 $ 554 $ 1,187,913 $ --
Issuance of common stock for cash, net of offering
costs of $1,524,538 1,992,179 199 13,914,650 --
Stock subscriptions, net of commissions of $166,238 214,500 21 1,496,116 --
Exercise of stock warrants 321,775 32 2,493,724 --
Issuance of options by principal stockholder -- -- 1,484,375 --
Exercise of stock options 17,000 2 8,498 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, June 30, 1996 8,085,407 808 20,585,276 --
Exercise of stock options 102,400 10 78,405 --
Collection of stock subscriptions receivable -- -- -- --
Exercise of stock warrants 36,125 4 279,965 --
Issuance of common stock to purchase computer
software 12,000 1 95,999 --
Issuance of common stock to acquire Sisna 325,000 33 2,232,961 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, June 30, 1997 8,560,932 856 23,272,606 --
------------ ------------ ------------ ------------
Stock
Receivable To Be Subscriptions Accumulated
Settled In Receivable Deficit
------------- ------------ ------------
BALANCE, June 30, 1995 $ -- $ $ (115,242)
Issuance of common stock for cash, net of offering
costs of $1,524,538 -- -- --
Stock subscriptions, net of commissions of $166,238 -- (1,496,137) --
Exercise of stock warrants -- -- --
Issuance of options by principal stockholder -- -- --
Exercise of stock options -- -- --
Net loss -- -- (3,433,081)
------------- ------------ ------------
BALANCE, June 30, 1996 -- (1,496,137) (3,548,323)
Exercise of stock options -- -- --
Collection of stock subscriptions receivable -- 1,496,137 --
Exercise of stock warrants -- -- --
Issuance of common stock to purchase computer
software -- -- --
Issuance of common stock to acquire Sisna -- -- --
Net loss -- -- (9,899,056)
------------- ------------ ------------
BALANCE, June 30, 1997 -- -- (13,447,379)
------------- ------------ ------------
See accompanying notes to consolidated financial statements.
99
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AS RESTATED) (Continued)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Additional
Common Stock Paid-in Warrants
Shares Amount Capital Outstanding
------------ ------------ ------------ ------------
BALANCE, June 30, 1997 8,560,932 $ 856 $ 23,272,606 $ --
Exercise of stock options 424,815 42 539,093 --
Acquisition of shares in cashless exercise of stock
options (132,822) (13) (488,329) --
Issuance of common stock for compensation 20,000 2 61,248 --
Compensation expense recorded in connection with
grant of stock options -- -- 343,750 --
Issuance of common stock to acquire Books Now, Inc.
100,000 10 312,490 --
Issuance of common stock to acquire WeatherLabs, Inc.
253,260 26 762,478 --
Issuance of common stock and warrants in connection
with AOL agreement 955,414 96 8,329,920 2,519,106
Purchase of common stock from officers for cash (1,866,110) (187) (1,699,813) --
Reacquisition and retirement of common stock in
connection with sale of Sisna (35,000) (4) (141,090) --
Reacquisition of common stock issued to purchase (12,000) (1) (95,999) --
Receivable to be settled through the repurchase of
common shares by the Company -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, June 30, 1998 $ 8,268,489 $ 827 $ 31,196,354 $ 2,519,106
============ ============ ============ ============
Stock
Receivable To Be Subscriptions Accumulated
Settled In Receivable Deficit
------------ ------------ ------------
BALANCE, June 30, 1997 $ -- $ -- $ (13,447,37
Exercise of stock options -- -- --
Acquisition of shares in cashless exercise of stock
options -- -- --
Issuance of common stock for compensation -- -- --
Compensation expense recorded in connection with
grant of stock options -- -- --
Issuance of common stock to acquire Books Now, Inc.
-- -- --
Issuance of common stock to acquire WeatherLabs, Inc
-- -- --
Issuance of common stock and warrants in connection
with AOL agreement -- -- --
Purchase of common stock from officers for cash -- -- --
Reacquisition and retirement of common stock in
connection with sale of Sisna -- -- --
Reacquisition of common stock issued to purchase -- -- --
Receivable to be settled through the repurchase of
common shares by the Company (148,576) -- --
Net loss -- -- (1,124,636)
------------ ------------ ------------
BALANCE, June 30, 1998 $ (148,576) $ -- $(14,572,015)
============ ============ ============
See accompanying notes to consolidated financial statements.
100
`
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Increase (Decrease) in Cash
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,124,636) $(9,899,056) $(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 1,545,090 398,066 86,828
Provision for reserve against CommTouch Ltd. Investment 375,000 -- --
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 -- 2,232,961 --
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) -- --
Prepaid expenses and other current assets (520,737) (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 (6,377,970) (6,334,660) (1,385,567)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (794,344) (3,188,360) (2,589,212)
Net proceeds from the sale of direct mail advertising operations 6,857,300 -- --
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 -- --
Investment in CommTouch, Ltd. (750,000) -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 4,537,549 (3,697,694) (2,659,840)
----------- ----------- -----------
See accompanying notes to consolidated financial statements
101
DIGITAL COURIER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED) (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 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 113,741 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.
102
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. Approximately
$3,700,000 of the total purchase price of approximately $14,000,000 will be
allocated to in process research and development and will be expensed in the
first quarter of fiscal year 1999. 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.
103
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 the 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 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 a portion of
the 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.
Subsequent Restatement of Amounts Previously Reported
Subsequent to the Company filing its Annual Report on Form 10-K for the
year ended June 30, 1998 with the Securities and Exchange Commission ("SEC"),
the Company restated certain amounts previously reported for fiscal years 1998
and 1997. 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 and
WeatherLabs (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 and increased the WeatherLabs purchase price by $53,375. In addition,
the Company had previously expensed $675,000 of direct response advertising
related to the AOL 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 direct response advertising. The restated amount of direct
expense advertising will be expensed as the advertising services are received.
The impacts of the restatement on loss from continuing operations and net loss
are as follows:
Previously Previously
Reported Restated Reported Restated
------------------------------------------------------------------
Year Ended June 30, 1998 1997
- - - -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $(6,264,265) $(5,597,967) $(7,158,851) $(7,158,851)
Net loss $(1,790,934) $(1,124,636) $(9,340,816) $(9,899,056)
Diluted loss per share:
Loss from continuing operations $(0.74) $(0.66) $(0.86) $(0.86)
Net loss $(0.21) $(0.13) $(1.12) $(1.19)
104
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 to 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.
As reflected in the accompanying consolidated financial statements, the
Company has incurred losses from continuing operations of $5,597,967, $7,158,851
105
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 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. In October 1998, the Company borrowed $1,200,000 from
a group of individual lenders. The loan bears interest at 24 percent, is secured
by certain receivables due to the Company, and is due October 22, 1999. In
November 1998, the Company raised $1,800,000 through the sale of 400,000 shares
of common stock and warrants to purchase 400,000 shares of common stock at an
initial price $5.53 per share to The Brown Simpson Strategic Growth Funds (the
"Purchasers"). On December 2, 1998, the Company raised an additional $1,800,000
by selling 400,000 shares of common stock and warrants to purchase 400,000
shares of common stock at an initial price of $9.49 per share to the Purchasers.
In March 1999, the Company raised an additional $3,600,000 through the sale of
Series A Convertible Preferred Stock and warrants to purchase common stock to
the Purchasers. The Purchasers acquired 360 shares of the preferred stock
convertible into 800,000 shares of common stock and warrants to purchase an
additional 800,000 shares of common stock at an initial price of $5.23 per
share. Additionally, in connection with the above transactions, the Purchasers
have agreed to purchase 1,600,000 additional units, each unit consisting of one
share of common stock and one warrant to purchase one share of common stock, if
certain conditions are met. A condition to the sale of the additional units is
that the closing bid price of the Company's common stock be more than $7 per
share for 30 consecutive days. 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.
(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.
106
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.
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.
Accounting for Impairment of Long-Lived Assets
The Company accounts for its property and equipment, AOL anchor tenant
placement costs and other long lived assets in accordance with Statement of
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Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the book value of the asset may not be
recoverable. If the sum of the expected future net cash flows (undiscounted and
without interest charges) from an asset to be held and used is less than the
book value of the asset, an impairment loss must be recognized in the amount of
the difference between the book value and fair value. As discussed above, as of
June 30, 1998 the Company determined that its investment in CommTouch was
partially impaired.
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.
Options to purchase 1,445,000, 1,424,815, and 1,072,215 shares of
common stock at weighted average exercise prices of $3.82, $5.36, and $4.63 per
share as of June 30, 1998, 1997, and 1996, respectively, and warrants to
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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 as of June 30, 1998, 1997
and 1996, 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 share. 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 Books 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
SFAS No. 130, "Reporting Comprehensive Income" and SFAS 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,
geographic 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
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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.
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 purchase price (as restated, see Note 1) has
been determined based on the quoted market price of the Company's common stock
on 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 $616,764 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
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statements since the date of acquisition. The purchase price (as restated, see
Note 1) has been determined based on the quoted market price of the Company's
common stock on 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 $901,394 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 (6,344,701) (7,600,932)
Loss from continuing operations per share (0.73) (0.88)
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
restricted common stock in exchange for all of the issued and outstanding shares
of Sisna. The acquisition was accounted for as a purchase. The purchase price
(as restated, see Note 1) has been determined based on the quoted market price
of the Company's common stock on the date of acquisition. The excess of the
purchase price over the estimated fair value of the acquired assets less
liabilities assumed was $2,232,961, 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
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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
former major shareholder, who was a director of the Company, in exchange for
35,000 shares of the Company's common stock with a quoted market value of
approximately $141,000. The purchaser of Sisna received tangible assets with
carrying values 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 with carrying values 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.
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 AOL for an initial term of 39 months (the "Agreement"). Under the
Agreement, the Company agreed to 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 agreed to
112
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. During the term of the Agreement, AOL agreed
to deliver 500 million impressions to the Company's Videos Now site. The
Performance Warrant vests quarterly over the term of the agreement as the
specified quarterly impressions are delivered by AOL. During the second through
fifth quarters of the Agreement AOL agreed to deliver at least 25 million
impressions each quarter and during the sixth through thirteenth quarters AOL
agreed to deliver at least 50 million impressions each quarter.
The agreement included 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 $12,000,000 of cash payments and the estimated fair market
value of the Performance Warrant, to be determined as the warrant vests, will be
accounted for as follows: (i) the estimated fair market 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 occurred in
November 1998, through the term of the agreement; and (ii) the remaining amount
will be treated as advertising costs and will be expensed as the advertising
services are received (as restated, see Note 1). The estimated fair market value
of the permanent anchor tenant placements on the AOL Network was determined
based on information obtained from AOL as to the amounts paid by other companies
to AOL for comparable placements.
The fair market value of the common shares issued of $8,330,016 and the
estimated fair market value of the Option Warrant of $2,519,106 represent the
value of the permanent anchor tenant placements on AOL.com (a separate and
distinct website from the AOL Network) and will be charged to expense ratably
over the period from the launch of the Company's interactive site on AOL.com,
which occurred in November 1998, through the 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 prepaid advertising expense.
The fair market value of the common stock issued and the Option Warrant was
recorded as AOL anchor tenant placement costs in the accompanying consolidated
financial statements.
Effective January 1, 1999, the Company and AOL amended the 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 before January 31, 1999, and (2) eliminate
any additional cash payments to AOL in the future under the Agreement. On
February 1, 1999, the Company and AOL entered into a second amendment, under
which AOL agreed to return to the Company the warrants to purchase 636,942
shares of common stock and 601,610 of the 955,414 shares of common stock
previously issued to AOL under the Agreement. All advertising was ceased
immediately; however, the Company continues to have a permanent location or
"button" on AOL's shopping channel until August 31, 1999.
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
113
purchase videos. In addition to the predominant display on the AOL channels, AOL
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.
As a result of the amendments to the Agreement, the Company determined
that the AOL anchor tenant placement costs, less the fair market value of the
permanent location on the AOL shopping channel of $139,206, should be written
off as of December 31, 1998. A portion of the write-off was offset by recording
the return of the 601,610 shares of common stock, which had a fair market value
of $4,549,676 as of the date the Agreement was terminated, and by recording the
cancellation of the warrants which had a recorded value of $2,519,106 as of
December 31, 1998. This resulted in a net write-off of $5,156,135 as of December
31, 1998 related to the AOL Agreement.
(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 $ 3,341,000 $ 3,464,800
Accrued liabilities 271,400 83,400
Receivable reserves and other 162,000 22,000
----------- -----------
Total deferred income tax assets 3,777,400 3,570,200
Valuation allowance (3,777,400) (3,570,200)
----------- -----------
Net deferred income tax asset $ -- $ --
=========== ===========
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
114
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.
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:
Operating Leases
Minimum --------------------------------------------------------------
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
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an estimated $544,014 of future rental payments for vacated facilities that will
not be covered by subleases.
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.
In November 1998, the Company and the former owner reached a severance
agreement, wherein, the former owner will receive severance payments equal to
one year's salary of $81,000 and the Company will issue 205,182 shares of common
stock to the former shareholders of Books Now. The additional shares had a value
of $1,051,558 based on the quoted market price on the date of the severance
agreement. Because the operations of Books Now were not achieving the
performance goals pursuant to the purchase agreement, the severance payments and
the value of the common shares were expensed at the date of the severance
agreement.
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
(7) 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.
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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.
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.
As discussed in Note 1, subsequent to June 30, 1998 the Company has
issued 800,000 shares of common stock in exchange for $3,600,000 and has issued
360 shares of Series A Convertible Preferred Stock in exchange for $3,600,000.
The 360 Series A preferred shares are convertible into 800,000 shares of common
stock. In connection with the above transactions, the Company also issued
warrants to purchase up to 1,600,000 shares of common stock at various prices
per share.
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(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 exercisable 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.
118
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, 1996 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:
119
1998 1997 1996
-------------------------------------------------
Net loss:
As reported $ (1,124,636) $ (9,899,056) $ (3,433,081)
Pro forma (4,229,002) (10,936,543) (3,926,658)
Net loss per share (basic and diluted):
As reported (0.13) (1.19) (0.58)
Pro forma (0.50) (1.32) (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.
120
(12) SUBSEQUENT EVENT
Agreement to Sell Certain Assets Related to WorldNow
On July 15, 1998, the Company signed an agreement to sell a portion of
the 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 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.
121
INDEX TO dATABANK INTERNATIONAL, LTD. FINANCIAL STATEMENTS
Title of Documents Page No.
- - - ------------------ --------
UNAUDITED FINANCIAL STATEMENTS
- - - ------------------------------
Condensed Balance Sheets as of March 31, 1999 and June 30, 1998 123
Condensed Statements of Operations for the Three Months Ended March 31, 1999.and 1998 124
Condensed Statements of Operations for the Nine Months Ended March 31, 1999.and 1998 125
Condensed Statements of Cash Flows for the Nine Months Ended March 31, 1999 126
Notes to Condensed Financial Statements 127
AUDITED FINANCIAL STATEMENTS
- - - ----------------------------
Report of Chartered Accountants 129
Balance Sheets as at December 31, 1998 130
Statement of Income and Retained Earnings for the Period April 2, 1998 through December 31, 1998 131
Statement of Cash Flows for the Period April 2, 1998 through December 31, 1998 132
Notes to Financial Statements 133
122
DATABANK INTERNATIONAL, LTD.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, June 30,
1999 1998
--------------------------
CURRENT ASSETS:
Cash $ 914,333 $ 1,189,122
Trade accounts receivable 231,017 231,017
Other current assets -- 1,000
----------- -----------
Total current assets 1,145,350 1,421,139
----------- -----------
PROPERTY AND EQUIPMENT:
Computer and office equipment 108,289 63,672
Furniture, fixtures and leasehold improvements 51,233 14,591
----------- -----------
159,522 78,263
Less accumulated depreciation and amortization (15,182) (6,217)
----------- -----------
Net property and equipment 144,340 72,046
----------- -----------
$ 1,289,690 $ 1,493,185
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 1,095,147 1,628,578
Dividends payable -- 62,440
----------- -----------
Total current liabilities 1,095,147 1,691,018
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 1 1
Retained earnings (deficit) 194,542 (197,834)
----------- -----------
Total stockholders' equity 194,543 (197,833)
----------- -----------
$ 1,289,690 $1493,185
=========== ===========
123
DATABANK INTERNATIONAL, LTD.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------------------------
NET SALES $1,301,651 $ --
COST OF SALES 697,513 --
---------- ----------
Gross margin 604,138 --
211,228 35,000
GENERAL AND ADMINISTRATIVE EXPENSES
---------- ----------
NET INCOME (LOSS) $ 392,910 $ (35,000)
---------- ----------
124
DATABANK INTERNATIONAL, LTD.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
----------------------------
NET SALES $4,614,588 $ --
COST OF SALES 2,923,325 --
---------- ----------
Gross margin 1,691,263 --
412,434 35,000
GENERAL AND ADMINISTRATIVE EXPENSES
---------- ----------
NET INCOME (LOSS) $1,278,829 $ (35,000)
---------- ----------
125
DATABANK INTERNATIONAL, LTD.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
Increase (Decrease) in Cash
1999
-----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,278,829
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,965
Changes in operating assets and liabilities
Decrease in other assets 1,000
Decrease in accounts payable (533,431)
Decrease in dividends payable (62,440)
-----------
Net cash provided by operating activities 692,923
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (81,259)
-----------
Net cash used in investing activities (81,259)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (886,453)
-----------
Net cash provided by financing activities (886,453)
-----------
NET DECREASE IN CASH (274,789)
CASH AT BEGINNING OF PERIOD 1,189,122
-----------
CASH AT END OF PERIOD $914,333
-----------
126
DATABANK INTERNATIONAL, LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED FINANCIAL STATEMENTS
The accompanying interim condensed financial statements as of March 31,
1999 and for the three months ended March 31, 1999 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 for the
period April 2, 1998 through December 31, 1998, included herein. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 1999
127
DATABANK INTERNATIONAL LIMITED
Financial Statements
For the Period from April 2, 1998 the date of incorporation, to
December 31,1998
128
PRICEWATERHOUSECOOPERS
AUDITOR'S REPORT
To the Shareholders of Databank International Limited
We have audited the accompanying balance sheet of Databank International Limited
as at December 31, 1998 and the related statements of income and retained
earnings and cash flows for the period then ended. 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 audit.
We conducted our audit in accordance with International Standards on Auditing.
Those standards require that we plan and perform an audit to obtain reasonable
assurance as to 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 audit provides a reasonable basis for our opinion.
In our opinion these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1998 and the
results of its operations and its cash flows for the period then ended, in
accordance with International Accounting Standards.
PricewaterhouseCoopers
Chartered Accountants
St Johns, Antigua
January 25, 1999
129
DATABANK INTERNATIONAL LIMITED Balance Sheet
As At December 31, 1998
(expressed in United States dollars)
- - - ------------------------------------------------------------------------------
1998
Notes $
- - - ------------------------------------------------------------------------------
ASSETS
Current Assets
Cash 1,189,122
Accounts receivable 231,017
Prepaid expenses 1,000
--------------------
1,421,139
--------------------
Current Liabilities
Accounts payable and accrued liabilities 1,628,578
Dividends payable 62,440
--------------------
1,691,018
--------------------
Working Capital Deficiency (269,879)
Fixed Assets 4 72,046
--------------------
Net Assets (197,833)
====================
Represented by:-
Shareholder's Equity
Share capital 5 1
Accumulated Deficit (197,834)
--------------------
(197,833)
====================
The accompanying notes form an integral part of these financial statements.
/s/ Don Marshall Director
- - - ------------------
Don Marshall
130
DATABANK INTERNATIONAL LIMITED
Statement of Income and Retained Earnings
For the Period from April 2, 1998 the date of incorporation, to December 31 1998
(expressed in United States dollars)
- - - -----------------------------------------------------------------------
1998
$
- - - -----------------------------------------------------------------------
Revenue 3,691,424
Commissions and Contract Fees (2,468,661)
-------------------
Gross Profit 1,222,763
General and Administrative Expenses (220,597)
-------------------
Net Income for the Period 1,002,166
Dividends Declared (1,200,000)
-------------------
Loss for the Period and Accumulated Deficit (197,834)
===================
The accompanying notes form an integral part of these financial statements.
131
DATABANK INTERNATIONAL LIMITED
Statement of Cash Flows
For the Period from April 2, 1998 the date of incorporation, to December 31,
1998 (expressed in United States dollars)
- - - -------------------------------------------------------------------------------
1998
$
- - - -------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss for the period (197,834)
Adjustment for:
Depreciation 6,217
Dividends declared 1,200,000
-------------------
Operating income before working capital
changes 1,008,383
Net changes in non-cash working capital items relating to
operations 1,396,561
-------------------
Net cash generated by operating activities 2,404,944
-------------------
Cash Flows From Investing Activities
Purchase of fixed assets (78,263)
-------------------
Cash Flows From Financing Activities
Proceeds from share issuance 1
Dividends paid (1,137,560)
-------------------
Net cash used in financing activities (1,137,559)
-------------------
Net Increase in Cash 1,189,122
Cash - Beginning of Period 0
-------------------
Cash - End of Period 1,189,122
===================
The accompanying notes form an integral part of these financial statements.
132
DATABANK INTERNATIONAL LIMITED
Notes to Financial Statements
For the Period from April 2, 1998 the date of incorporation, to December 31,
1998 (expressed in United States dollars)
1. Incorporation
The company was incorporated as an exempt company under the Laws of St.
Christopher and Nevis (Companies Act of 1996, #22 of 1996) on April 2,
1998.
2. Principal Activities
The company provides data processing services to clients in the
financial institution sector.
3. Significant Accounting Policies
These financial statements are prepared in accordance with International
Accounting Standards. Significant accounting policies are as follows:-
(a) Basis of accounting
These financial statements are prepared in accordance with the
historical cost convention.
(b) Depreciation
Depreciation is calculated on a straight-line basis, so as to
write off the cost of fixed assets over their estimated useful
lives as follows:-
Leasehold improvements - 3 yrs
Computers - 18 months
Furniture and fixtures - 10 years
Office equipment - 5 years
(c) Foreign currencies
Transactions denominated in foreign currencies are translated
into United States dollars at the exchange rates prevailing at
the time of the transactions. Amounts receivable and payable
in foreign currencies are translated into United States
dollars at exchange rates ruling at the balance sheet date and
the resulting gain or loss is included in the results of
operations for the period.
(d) Income tax
The act under which the company is incorporated exempts the
company from the payment of income tax. Accordingly no
provision for income taxes has been made in these accounts.
133
DATABANK INTERNATIONAL LIMITED
Notes to Financial Statements
For the Period from April 2, 1998 the date of incorporation, to December 31,
1998 (expressed in United States dollars)
4. Fixed Assets
Leasehold Furniture and Office
Improvements Computers Fixtures Equipment Total
$ $ $ $ $
---------------------------------------------------- --------------- ----------
Cost
Balance - Beginning 0 0 0 0 0
of period
Additions 1,395 63,672 11,797 1,399 78,263
------------------ ---------------- ---------------- --------------- ----------
Balance - End of 1,395 63,672 11,797 1,399 78,263
period
================== ================ ================ =============== ==========
Accumulated
Depreciation
Balance - Beginning 0 0 0 0 0
of period
Depreciation 194 5,483 482 58 6,217
------------------ ---------------- ---------------- --------------- ----------
Balance - End of 194 5,483 482 58 6,217
period
================== ================ ================ =============== ==========
Net Book Value 1,201 58,189 11,315 1,341 72,046
================== ================ ================ =============== ==========
134
DATABANK INTERNATIONAL LIMITED
Notes to Financial Statements
For the Period from April 2, 1998 the date of incorporation, to December 31,
1998 (expressed in United States dollars)
5. Share Capital
1998
$
-----------------
Authorised
10,000,000 shares of US$1.00 each 10,000,000
=================
Issued
1 share ofUS$1.00 1
=================
6. Financial Instruments
In accordance with provision of International Accounting
Standard No.32, disclosure is required regarding credit risk and fair
value of financial assets and liabilities. All of the company's assets
and liabilities are financial instruments, with the exception of fixed
assets.
Credit risk
Credit risk arises from the possibility that counterparties
may default on their obligations to the company. The company has made
adequate provision for any potential credit losses and the amount of
the company's maximum exposure to credit risk is indicated by the
carrying amount of its financial assets.
Fair value
Fair value amounts represents estimates of the consideration
that would currently be agreed upon between knowledgeable, willing
parties who are under no compulsion to act and is best evidenced by a
quoted market value, if one exists. With the exception of cash, none of
the Company's financial instruments are traded in a formal market.
Estimated fair values are assumed to approximate their carrying values
due to their short-term nature.
135
DATABANK INTERNATIONAL LIMITED
Additional Information to Financial Statements
For the Period from April 2, 1998 the date of incorporation, to
December 31, 1998
136
PRICEWATERHOUSECOOPERS
ADDITIONAL COMMENTS OF AUDITORS
The Board of Directors of Databank International Limited
The accompanying page two is presented as additional information only. In this
respect, it does not form part of the financial statements of Databank
International Limited for the period ended December 31, 1998 and hence is
excluded from the opinion expressed in our report dated January 25, 1999 to the
shareholders on such financial statements. The information on this page has been
subject to audit procedures only to the extent necessary to express an opinion
on the financial statements of the company and, in our opinion, is fairly
presented in all respects material to those financial statements.
PricewaterhouseCoopers
Chartered Accountants
January 25, 1999
137
DATABANK INTERNATIONAL LIMITED
Schedule of General and Administrative Expenses
For the Period from April 2, 1998 the date of incorporation, to December 31,
1998 (expressed in United States dollars)
- - - ---------------------------------------------------------------------
1998
$
- - - ---------------------------------------------------------------------
Depreciation 6,217
Consulting fees 40,995
Salaries and related costs 22,410
Accounting and professional fees 47,332
Office expenses and stationery 5,599
Advertising 1,850
Utilities 494
Motor Vehicles 5,842
Miscellaneous 5,960
Bank Charges 901
Rent 9,464
Telephone 24,357
Travel and entertainment 46,494
Repairs and maintenance 2,682
-------------------
220,597
===================
138
ANNEX I
STOCK PURCHASE AND EXCHANGE AGREEMENT
-------------------------------------
THIS STOCK PURCHASE AND EXCHANGE AGREEMENT (this "Agreement") is made
and entered into as of August 13, 1999, by and among Digital Courier
Technologies, Inc., a Delaware corporation ("DCTI") and DataBank International,
Ltd, a company incorporated under the laws of St. Christopher and Nevis (the
"Company"), and the stockholders of the Company listed on Schedule A hereto (the
"Stockholders").
RECITALS
WHEREAS, the Company is engaged in the business of credit card
transaction processing (the "Business").
WHEREAS, the Stockholders own all of the issued and outstanding shares
of capital stock of the Company; and
WHEREAS, the Stockholders desire to sell to DCTI, and DCTI desires to
purchase from the Stockholders, all of such issued and outstanding shares of
capital stock of the Company on the terms and conditions set forth herein (the
"Acquisition").
NOW, THEREFORE, in consideration of the premises, representations and
mutual covenants hereinafter set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, agree as follows:
Article I.
PURCHASE AND SALE OF THE SHARES
-------------------------------
1.1 Purchase and Sale of the Shares. The Stockholders hereby
agree to exchange, sell, transfer and deliver to DCTI, and DCTI hereby agrees to
purchase and acquire from the Stockholders, on the Closing Date (as hereinafter
defined) all of the outstanding capital stock (the "Shares") of the Company free
from any charge, lien, encumbrance or adverse claim of any kind whatsoever.
1.2 Consideration for Shares. DCTI shall deliver at the Closing
(as hereinafter defined) to the Stockholders, in addition to the items set forth
in Section 9.3, in exchange and as consideration for the Shares, stock
certificates representing in the aggregate 16,600,000 shares of DCTI's Common
Stock (the "DCTI Shares"), par value $.0001 per share.
139
1.3 Delivery of Shares. At the Closing, the Stockholders shall
deliver to DCTI, in addition to those items set forth in Section 9.2, in
exchange for the DCTI Shares, stock certificates representing all of the Shares,
duly endorsed in favor of DCTI or accompanied by stock powers duly executed in
favor of and in a form reasonably acceptable to DCTI, free from any charge,
lien, encumbrance or adverse claim of any kind whatsoever, together with the
minute books and stock ledger of the Company.
1.4 Milestone Shares. DCTI shall deliver additional shares of its
Common Stock as specified in this Section 1.4, if the Company meets the
following Milestones.
(a) During the twelve month period beginning July 1, 1999 and
ending June 30, 2000, (i) if the Business has a reported net income
of $6,000,000 for such twelve month period, DCTI shall deliver to the
Stockholders 3,250,000 shares of DCTI Common Stock; (ii) if the
Business has a reported net income of more than $6,000,000 but less
than $8,000,000 for such twelve month period, DCTI shall deliver to
the Stockholders the number of shares determined by the following
formula:
[(Net income - 6,000,000) x 3,280,000 / 2,000,000] plus 3,250,000
and (iii) if the Business has a reported net income of $8,000,000 or
more for such twelve month period, DCTI shall deliver to the
Stockholders 6,530,000 shares of DCTI Common Stock (the "First
Milestone Shares"). DCTI shall deliver the First Milestone Shares on
the First Milestone Closing Date (as defined in Section 10.1).
(b) During the twenty-four month period beginning July 1, 1999
and ending June 30, 2001, (i) if the Business has a reported net
income of $14,000,000 for such twenty-four month period, DCTI shall
deliver to the Stockholders 6,500,000 shares of DCTI Common Stock
minus the number of shares delivered on the First Milestone Closing
Date; (ii) if the Business has a reported net income of more than
$14,000,000 but less than $20,500,000 for such twenty-four month
period, DCTI shall deliver to the Stockholders the number of shares
determined by the following formula:
[(Net income - 14,000,000) x 6,560,000 / 6,500,000] plus 6,500,000
minus the number of shares delivered on the First Milestone Closing
Date and (iii) if the Business has a reported net income of more than
$20,500,000 for such twenty-four month period, DCTI shall deliver to
the Stockholders 13,060,000 shares of DCTI Common Stock minus the
number of shares delivered on the First Milestone Closing Date (the
"Second Milestone Shares"). DCTI shall deliver the Second Milestone
Shares on the Second Milestone Closing Date (as defined in Section
10.2).
(c) For purposes of this Section 1.4, "net income" shall mean
profits from the Company's operations before any royalties paid or
corporate allocations from DCTI and net of any tax effects or
goodwill due to the Acquisition and taking into account processing or
other fees paid to third parties prior to the Acquisition which are
provided by affiliates after the Acquisition.
140
1.5 Legends. The certificates evidencing the DCTI Shares and the
Milestone Shares, if issued, shall bear the following legend and any legends
required by any state securities laws:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN EXEMPTION UNDER THE ACT THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE REASONABLE
SATISFACTION OF THE COMPANY."
Article II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company and each of the Stockholders jointly and severally agree
with, and represent and warrant to DCTI as follows:
2.1 Corporate Existence, Good Standing and Authority. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation. The Company has full corporate power
and corporate authority to carry on its business as now being conducted and is
entitled to own, lease or operate the property and assets now owned, leased or
operated by it. The Company is qualified to do business, is in good standing and
has all required and appropriate licenses in each jurisdiction in which its
failure to obtain or maintain such qualification, good standing or licensing (i)
would, individually or in the aggregate, have or reasonably could be expected to
have a material adverse effect on the assets, liabilities, business, financial
condition, results of operations, or prospects of the Company (a "Material
Adverse Effect"), or (ii) would result in a material breach of any of the other
representations, warranties or covenants set forth in this Agreement. The
Company has all requisite corporate power and corporate authority to enter into
this Agreement all other agreements and documents contemplated hereby (the
"Ancillary Agreements") and to consummate the transactions contemplated hereby
and thereby. This Agreement has been, and the Ancillary Agreements, when
executed, will be, duly executed and delivered by the Company and each of the
Stockholders, has been authorized by all necessary corporate action of the
Company and constitutes a legal, valid and binding obligation of the Company and
each of the Stockholders, enforceable against the Company and each of the
Stockholders in accordance with its terms, except as enforcement may be limited
by equitable principles or bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to creditors' rights generally.
2.2 Capitalization. The authorized capital stock of the Company
consists of 10 million shares of common stock, of which 10 million shares are
issued and outstanding (the "Shares"). All of the Shares have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
options, warrants, conversion rights, rights of exchange, or other rights,
plans, agreements or other commitments providing for the purchase, issuance or
sale of any shares of the Company's capital stock or any securities convertible
into or exchangeable for any shares of the Company's capital stock.
141
2.3 Good and Marketable Title To Shares. All of the Shares are owned,
beneficially and of record, only by the Stockholders and are free from any
charge, lien, encumbrance or adverse claim of any kind whatsoever. The
Stockholders have the absolute and unrestricted right, power, authority and
capacity to transfer the Shares to DCTI and upon the Closing, without exception,
DCTI will acquire from the Stockholders legal and beneficial ownership of, good
and valid title to, and all rights to vote, the Shares, free from any charge,
lien, encumbrance or adverse claim of any kind whatsoever.
2.4 Subsidiaries. Except as set forth on Schedule 2.4, the Company
does not presently own, directly or indirectly, any interest in any other
corporation, association, joint venture or other business entity.
2.5 Financial Statements. The audited balance sheet and related
statements of income and cash flows of the Company at and for its fiscal year
ended December 31, 1998 and the unaudited balance sheet and related statements
of income and cash flows at and for the quarter ended March 31, 1999 (the
"DataBank Financial Statements") have been provided to DCTI. The internal books
and records of the Company from which the December 31, 1998 were prepared do not
contain any information which is false or misleading. The DataBank Financial
Statements (i) were prepared in accordance with such books and records; (ii)
were prepared in accordance with the Company's accounting policies and
principles, and are in accordance with international accounting standards
("IAS"), applied on a consistent basis; and (iii) present fairly the Company's
financial position and results of operations at the dates and for the periods
reflected therein.
2.6 Properties. The Company does not own or hold title to any real
property. The Company has beneficial ownership of and good and marketable title
to all properties and assets it owns which are used in its operations or
necessary for the conduct of its business, and such properties and assets are
not subject to no mortgages, liens, pledges, loans or encumbrances of any kind
whatsoever. With respect to property and assets it leases, the Company is in
compliance in all material respects with such leases and holds a valid leasehold
interest free of any liens, claims or encumbrances of any kind whatsoever. All
real and tangible personal property, including machinery, equipment and fixtures
currently used by the Company in the operation of its businesses is, and at the
time of Closing will be, in good operating condition and repair, ordinary wear
and tear excepted.
2.7 Litigation. No litigation, arbitration or proceeding is pending
or, to the best knowledge of the Company, threatened by or against the Company,
its properties or assets, the Shares or its officers, directors or the
Stockholders before any court or any government agency, and, to the knowledge of
the Company, no facts exist which might form the basis for any such litigation,
arbitration or proceeding. To the knowledge of the Company, the Company is not
the subject of any investigation for violation of any laws, regulations or
administrative orders applicable to its businesses by any governmental authority
or any other person. There is no judgment, writ, decree, injunction, rule or
order of any court, governmental department, commission, agency, instrumentality
or arbitrator outstanding against the Company, its properties or assets or the
Shares.
2.8 Non-Contravention. The execution and delivery of this Agreement by
the Company and consummation of the transactions contemplated hereby will not
result in or constitute any of the following: (i) a conflict, violation or
default with or an event that, with notice or lapse of time or both, would be a
default, breach, or violation of the Articles of Incorporation or Bylaws of the
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Company, any contract, lease, license, permit, promissory note, conditional
sales contract, commitment, indenture, mortgage, deed of trust, or other
agreement, instrument or arrangement to which the Company is a party or by which
the Company or its assets are bound; (ii) an event that would permit any party
to terminate any agreement or instrument or to accelerate the maturity of or
permit the subordination of any indebtedness or other obligation of the Company;
(iii) the creation or imposition of any lien, charge, or encumbrance on any of
the assets of the Company; or (iv) conflict with or result in the violation or
breach of any law, rule or regulation of any governmental authority, or any
judgment, order, injunction or decree applicable to the Company or its assets.
2.9 Absence of Certain Changes. Except as set forth in Schedule
2.9, since March 31, 1999, there has not been:
(a) Any Material Adverse Effect;
(b) Any increase in the compensation paid or payable by the
Company, other than in the ordinary course of business, to any of its
officers, directors, employees, agents or stockholders;
(c) Any split-up or other recapitalization in respect of the
capital stock of the Company or any direct or indirect redemption,
purchase or other acquisition of any such capital stock or any agreement
to do any of the foregoing;
(d) Any issuance, transfer, sale or pledge by the Company of any
shares of its capital stock or other securities or of any commitment,
option, right or privilege under which the Company is or may become
obligated to issue any shares of its capital stock or other securities;
(e) Any indebtedness incurred by the Company, except such as may
have been incurred or entered into in the ordinary course of business;
(f) Any loan made or agreed to be made by the Company, nor has the
Company become liable or agreed to become liable as a guarantor with
respect to any loan;
(g) Any waiver or compromise by the Company of any right or rights
of material value or any payment, direct or indirect, of any material
debt, liability or other obligation;
(h) Any change in the accounting methods, practices or policies
followed by the Company from those in effect at March 31, 1999;
(i) Any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets of material value
other than licenses granted in the ordinary course of business;
(j) Any purchase or other acquisition of, or any sale, lease,
disposition of, mortgage, pledge or subjection to any lien or
encumbrance on, any material property or asset, tangible or intangible,
of the Company or any agreement to do any of the foregoing;
(k) Any actual or threatened amendment, termination or loss of (i)
any material contract, lease, license or other agreement to which the
Company is a party; or (ii) any certificate or other authorization
required for the continued operation by the Company of any material
portion of any of its business;
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(l) Any resignation or termination of employment of any officer or
employee of the Company;
(m) Any change in or amendment to the charter documents ("Articles
of Incorporation") or Bylaws of the Company; or (n) Any agreement or
commitment by the Company to do any of the things described in this
Section 2.9.
2.10 Employees. The Company has complied in all material respects with
all applicable laws, rules and regulations relating to employment, including
those relating to wages, hours, collective bargaining and the payment and
withholding of taxes and other sums as required by appropriate governmental
authorities.
2.11 Insurance. There is set forth in Schedule 2.11 hereto a complete
and accurate list and summary of all policies of insurance maintained by the
Company pertaining to the businesses of the Company, showing the amount of
coverage, the company issuing the policy and expiration date of each policy.
Such policies are in full force and effect and have been in full force and
effect since the Company's inception. Copies of all current insurance policies
of the Company have been made available to DCTI for inspection. The Company is
not in default under any of such policies. The Company is not aware of any facts
concerning the Company or its operations, assets and liabilities, contingent or
otherwise, upon which an insurer might be justified in reducing coverage or
increasing premiums on existing policies or terminating existing policies.
2.12 Compliance with Law; Consents. The business and operations of the
Company have been and are being conducted in compliance with all laws, rules,
regulations and licensing requirements applicable thereto, except where failure
to be so in compliance would not have a Material Adverse Effect. The Company is
unaware of any facts which might form the basis for a claim that any material
violation of such laws exists. No consent, approval, order or authorization of,
or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority or any third party on the part of
the Company or the Stockholders is required in connection with the execution,
delivery and performance by the Company or the Stockholders of this Agreement,
the consummation of the transactions contemplated hereby or DCTI's operation of
the business of the Company following the Closing Date.
2.13 Contracts and Other Agreements. Schedule 2.13 sets forth a list of
all contracts and other agreements to which the Company is a party or by or to
which it or its assets or properties are bound or subject, whether or not made
in the ordinary course of business, that have or would be reasonably expected to
have a material effect on the Business of Company. True and complete copies of
all the contracts and other agreements (and all amendments, waivers or other
modifications thereto and all appendices and attachments) set forth on the
Company Disclosure Schedule have been furnished to DCTI. Each of such contracts
is valid, existing, in full force and effect, binding upon the Company, and to
the best knowledge of the Company, binding upon the other parties thereto in
accordance with their terms (subject in each case to the application of general
144
principles of equity or by the effect of bankruptcy, insolvency, reorganization,
moratorium or similar laws generally affecting creditors' rights), and the
Company is not in default under any of them, nor, to the best knowledge of the
Company, is any other party to any such contract or other agreement in default
thereunder, nor does any condition exist that with notice or lapse of time or
both would constitute a default thereunder, except, in each case, such defaults
as would not, individually or in the aggregate, have a material adverse effect
on the Business of Company.
2.14 Affiliate Relationships. Other than as provided on Schedule 2.14,
the Company does not have any material financial interest, direct or indirect,
in any supplier or service provider to, or customer of, the Company or other
party to any contract or other arrangement which is material to the Company. For
purposes of this Section 2.14, the term the Company shall be deemed to include
the Company, the Stockholders and any person, firm or corporation which,
directly or indirectly, alone or together with others, controls, is controlled
by, or is under common control with the Company.
2.15 No Termination of Business Relationship. None of the entities with
which the Company has a material business relationship or any other present
material customer of the Company has given notice of any intention to cancel or
otherwise terminate a material business relationship with the Company and the
Company has no knowledge of any event (including, without limitation, the
transactions contemplated hereby) which would precipitate the cancellation or
termination of, or entitle any such entity or customer to terminate, such a
material business relationship.
2.16 Consents of Non-Governmental Third Parties. No consent, waiver or
approval of any non-governmental third party is necessary for the consummation
by the Stockholders and the Company of the transactions contemplated hereby.
2.17 Intellectual Property Rights. To the Company's best knowledge ,
the Company possesses all patents, patent rights, trademarks, trademark rights,
service marks, service mark rights, trade names, trade name rights and
copyrights (collectively, the "Intellectual Property") necessary for its
business without any conflict with or infringement of the valid rights of others
and the lack of which could have a Material Adverse Effect, and the Company has
not received any notice of infringement upon or conflict with the asserted
rights of others. Schedule 2.17 contains a complete list of patents, patent
applications, trade names, trademarks, service marks, brandmarks copyrights,
registrations owned or used by the Company and any applications for the
foregoing. All Intellectual Property is vested in (or, if applicable, leased or
licensed by) the Company free and clear of any equities, claims, liens,
encumbrances or restrictions of any kind whatsoever. All Intellectual Property
which is licensed to the Company by others are identified in Schedule 2.17, and
all such licenses will continue in full force and effect upon the consummation
of the transactions contemplated hereby. The Company has a valuable body of
trade secrets, including know-how, concepts, computer programs and other
technical data (the "Proprietary Information") for the operation of its
business. To the Company's best knowledge, the Company has the right to use the
Proprietary Information free and clear of any rights, liens, encumbrances or
claims of others. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company, except
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for inventions that have been assigned or licensed to the Company as of the date
hereof. Each employee, officer and consultant of the Company has executed a
Proprietary Information and Inventions Agreement in the form provided by DCTI.
To the Company's best knowledge, no employee, officer or consultant is in
violation thereof, and the Company will use its best efforts to prevent any such
violation.
2.18 No Undisclosed Liabilities. The Company does not have, and as of
the Closing Date will not have, any liabilities, obligations or commitments of
any nature (absolute, accrued, contingent or otherwise) matured or unmatured
("Liabilities") except (i) Liabilities which are adequately reflected or fully
reserved against in the DataBank Financial Statements; (ii) Liabilities which
have been incurred in the ordinary course of business and consistent with past
practice since December 31, 1998; (iii) Liabilities disclosed in the Schedules
hereto; and (iv) Liabilities arising under contracts or other agreements which
because of the dollar amount involved are not required to be listed in Schedule
2.13.
2.19 Representations Complete. None of the representations and
warranties made by the Stockholders or the Company herein, nor any statement
made in any Exhibit, Schedule or certificate furnished pursuant to this
Agreement, contains or will contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein, or necessary in
order to make the statements made, in light of the circumstances under which
they were made, not misleading.
2.20 Broker's and Finder's Fees. Neither the Company nor the
Stockholders has incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finder's fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
Article III.
REPRESENTATIONS AND WARRANTIES of STOCKHOLDERS
----------------------------------------------
Each of the Stockholders agree with, and represent and warrant to DCTI
as follows:
3.1 Good and Marketable Title to Shares. The Stockholders have and
will have on the Closing Date, full right, power, and authority to sell,
transfer and deliver the Shares as provided in this Agreement.
3.2 Compliance With Laws. The DCTI Shares and the Milestone Shares to
be received by each Stockholder, (for purposes of Article III, the "Securities")
will be acquired for investment purposes only, and not with a present view to
distribution. Each Stockholder acknowledges that the Shares, when issued, will
be "restricted" securities under the United States securities laws, and no
Stockholder will be entitled to sell or transfer such Shares until they are
either registered for resale under the Securities Act of 1933, as amended, or
until such sale or transfer is exempt from the registration requirements. Each
Stockholder will comply in all respects with applicable United States federal
and state securities laws with respect to the transfer of Shares. Each
Stockholder represents that it has full power and authority to enter into this
Agreement.
3.3 Disclosure of Information. Each Stockholder believes that it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Securities. Each Stockholder further represents that it
146
has had an opportunity to ask questions and receive answers from DCTI regarding
DCTI and its business and operations and the terms and conditions of the
offering of the Securities.
3.4 Investment Experience. Each Stockholder acknowledges that it is
able to fend for itself, can bear the economic risk of its investment and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Securities.
3.5 Accredited Stockholder. Each Stockholder is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act of 1993, as now in effect.
3.6 Restricted Securities. Each Stockholder understands that the DCTI
Shares it is purchasing are characterized as "restricted securities" under the
United States securities laws inasmuch as they are being acquired from DCTI in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, each Stockholder represents that it is
familiar with Rule 144 promulgated under the Act, as now in effect, and
understands the resale limitations imposed thereby and by the Act. Each Selling
Stockholder agrees that it will (i) not sell, assign or transfer any of the
Databank Shares to anyone other than DCTI or to a transferee who has agreed to
be bound by the Exchange Agreement, (ii) not make any disposition of all or any
portion of the DCTI Shares unless such disposition is in compliance with all
applicable federal and state securities law, and (iii) not, to the extent
requested by an underwriter of common stock (or other securities) of DCTI during
a two-year period following the Closing, sell or otherwise transfer or dispose
of any such securities during a reasonable and customary period of time, as
agreed to by DCTI and the underwriters.
3.7 Foreign Investor. If such Stockholder is not a United States
person, such Stockholder hereby represents that it has satisfied itself as to
the full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Securities or any use of this Agreement,
including (i) the legal requirements within its jurisdiction for the purchase of
the Securities, (ii) any foreign exchange restrictions applicable to such
purchase, (iii) any governmental or other consents that may need to be obtained,
and (iv) the income tax and other tax consequences, if any, that may be relevant
to the purchase, holding, redemption, sale or transfer of the Securities. Such
Investor's subscription and payment for, and its continued beneficial ownership
of the Securities, will not violate any applicable securities or other laws of
its jurisdiction.
Article IV.
REPRESENTATIONS AND WARRANTIES OF DCTI
--------------------------------------
DCTI represents and warrants to the Stockholders and the Company that:
4.1 Corporate Existence, Good Standing and Authority. DCTI has been
duly incorporated and is validly existing and in good standing under the laws of
the State of Delaware. DCTI has full corporate power and authority to enter
into, deliver, perform its obligations under and carry out this Agreement and
the Ancillary Agreements to which it is a party. This Agreement constitutes, and
all agreements and Ancillary Agreements will constitute, valid and legally
binding obligations of DCTI enforceable in accordance with their terms, subject
147
as to enforcement to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
4.2 Capitalization. The authorized capital stock of DCTI consists of
50,000,000 shares of common stock, par value $.0001 per share, of which
18,553,928 shares are issued and outstanding, and 2,500,000 shares of preferred
stock, par value $.0001 per share, of which 360 shares are issued and
outstanding. All outstanding shares of DCTI capital stock have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
set forth on Schedule 4.2, there are no options, warrants, conversion rights,
rights of exchange or other rights, plans, agreements or commitments of any
nature whatsoever (including, without limitation, conversion or preemptive
rights) providing for the purchase, issuance, or sale of any shares of DCTI's
capital stock or any securities convertible into or exchangeable for any shares
of DCTI capital stock, other than as contemplated by this Agreement.
4.3 DCTI Shares and Milestone Shares Fully Paid and Non-Assessable.
The DCTI Shares deliverable pursuant to Section 1.2, and the Milestone Shares
deliverable pursuant to Section 1.4, when issued and delivered as herein
provided, will be validly issued and outstanding shares of DCTI Common Stock,
fully paid and non-assessable, free and clear of all liens, encumbrances,
restrictions and claims of every kind.
4.4 Consents and Approvals. Except as otherwise described herein, no
consent, approval, authorization, order, registration or qualification of or
with any court or any regulatory authority or any other governmental body is
required for the consummation by DCTI of the transactions contemplated by this
Agreement has been obtained or will be obtained prior to or upon the Closing
Date.
4.5 No Breach. The execution and delivery of this Agreement by DCTI
and consummation of the transactions contemplated hereby will not result in or
constitute any of the following: (i) a conflict, violation or default with or an
event that, with notice or lapse of time or both, would be a default, breach, or
violation of the Certificate of Incorporation or Bylaws of DCTI, any contract,
lease, license, permit, promissory note, conditional sales contract, commitment,
indenture, mortgage, deed of trust, or other agreement, instrument or
arrangement to which DCTI is a party or by which DCTI or its assets are bound;
(ii) an event that would permit any party to terminate any agreement or
instrument or to accelerate the maturity of or permit the subordination of any
indebtedness or other obligation of the DCTI; (iii) the creation or imposition
of any lien, charge, or encumbrance on any of the assets of the DCTI; or (iv)
conflict with or result in the violation or breach of any law, rule or
regulation of any governmental authority, or any judgment, order, injunction or
decree applicable to DCTI or its assets.
4.6 Financial Statements. The consolidated audited financial
statements of DCTI and its subsidiaries as filed with the Securities and
Exchange Commission (the "SEC") on Form 10K/A on October 14, 1998, as amended
(the "DCTI Audited Financial Statements") and the unaudited consolidated
financial statements of DCTI and its subsidiaries as filed with the SEC on Form
10-Q/A on June 14, 1999 (the "DCTI Unaudited Financial Statements")comply as to
form in all material respects with applicable accounting requirements and with
applicable rules and regulations of the Securities and Exchange Commission. The
DCTI Audited Financial Statements and the DCTI Unaudited Financial Statements
148
(i) were prepared in accordance with DCTI's internal books and records; (ii)
were prepared in accordance with DCTI's accounting policies and principles, and
are in accordance with generally accepted accounting principles ("GAAP"),
applied on a consistent basis; and (iii) present fairly DCTI's financial
position and results of operations at the dates for the periods reflected
therein.
4.7 Properties. DCTI does not own or hold title to any real property.
DCTI has beneficial ownership of and good and marketable title to all
properties and assets it owns which are used in its operations or
necessary for the conduct of its business, and such properties and
assets are not subject to any mortgages, liens, pledges, loans or
encumbrances of any kind whatsoever. With respect to property and
assets it leases, DCTI is in compliance in all material respects with
such leases and holds a valid leasehold interest free of any liens,
claims or encumbrances of any kind whatsoever. All real and tangible
personal property, including machinery, equipment and fixtures
currently used by DCTI in the operation of its businesses is, and at
the time of Closing will be, in good operating condition and repair,
ordinary wear and tear excepted.
4.8 Litigation. Except as set forth in Schedule 4.8 hereto or in which
an adverse outcome would not have a Material Adverse Effect, no
litigation or proceeding is pending or, to the knowledge of DCTI,
threatened by or against DCTI, its assets or the DCTI Shares before any
court or any government agency, and, to the best knowledge of DCTI, no
facts exist which might form the basis for any such litigation or
proceeding. To the knowledge of DCTI, DCTI is not the subject of any
investigation for violation of any laws, regulation or administrative
orders applicable to its business by any governmental authority or any
other person. There is no judgment, decree, injunction, rule or order
of any court, governmental department, commission, agency,
instrumentality or arbitrator outstanding against DCTI or the DCTI
Shares.
4.9 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
(and, with correlative meaning, "Taxes" and "Taxable") means any and
all federal, state, local and foreign taxes, assessments and other
governmental charges, duties, impositions and liabilities, including
taxes based upon or measured by gross receipts, income, profits, sales,
use and occupation, and value added, ad valorem, transfer, franchise,
withholding, payroll, recapture, employment, excise and property taxes,
together with all interest, penalties and additions imposed with
respect to such amounts. "Tax Returns" means any return, declaration,
report, claim for refund or information return or statement filed or
required to be filed with any taxing authority in connection with the
determination, collection or imposition of any Taxes.
(b) All Tax Returns of DCTI required to be filed on or prior to
the date hereof have been timely filed. All such Tax Returns were
correct and complete in all material respects when filed. All
Taxes shown as due and payable on such Tax Returns have been paid
in full. Taxes not yet due and payable do not exceed by any
material amount the reserve for Taxes set forth on the most recent
balance sheet of DCTI. DCTI has not been a member of an affiliated
group filing a consolidated federal income Tax Return. The Company
is not a party to any Tax allocation or sharing agreement.
149
(c) DCTI has withheld and paid all material Taxes required to have
been withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor, stockholder, or
other third party.
(d) No Tax Return of DCTI is currently under audit, and, to the
best knowledge of DCTI, no issue exists which would cause it to
believe that a material Tax deficiency may be imposed by any Tax
authority. The Company has not waived any statute of limitations
in respect of Taxes or agreed to any extension of time for the
assessment of any Tax. No claim has ever been made by an authority
in a jurisdiction where DCTI does not file Tax Returns that it is
or may be subject to taxation by that jurisdiction.
(e) DCTI is not obligated to make any payments, and is not a party
to any agreement that under certain circumstances could obligate
it to make any payments that will not be deductible under Code
Section 162(m) or Section 280G whether paid prior to or after the
Closing. Prior to the Closing, DCTI will not have experienced a
ownership change within the meaning of Code Section 382. DCTI has
not been an United States real property holding corporation within
the meaning of Code Section 897(c)(2).
(f) DCTI does not have any liability for the Taxes of any other
Person (i) under Treasury Regulations Section 1.1502-6 (or any
similar provision of state, local, or foreign law), (ii) as a
transferee or successor, (iii) by contract, or (iv) otherwise.
4.10 Insurance. There is set forth in Schedule 4.10 hereto a complete
and accurate list and summary of all policies of insurance maintained by DCTI
pertaining to the businesses of DCTI, showing the amount of coverage, the
company issuing the policy and expiration date of each policy. Such policies are
in full force and effect and have been in full force and effect since DCTI's
inception. Copies of all current insurance policies of DCTI have been made
available to DCTI for inspection. DCTI is not in default under any of such
policies. DCTI is not aware of any facts concerning DCTI or its operations,
assets and liabilities, contingent or otherwise, upon which an insurer might be
justified in reducing coverage or increasing premiums on existing policies or
terminating existing policies.
4.11 Representations Complete. None of the representations and
warranties made by DCTI herein, nor any statement made in any Exhibit, Schedule
or certificate furnished pursuant to this Agreement, contains or will contain
any untrue statement of a material fact, or omit to state any material fact
required to be stated therein, or necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading.
4.12 Broker's and Finder's Fees. DCTI has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finder's fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
Article V.
COVENANTS of the company and stockholders
-----------------------------------------
5.1 Maintenance of Business. From the date hereof until the Closing,
each of the Company and the Stockholders shall use its best efforts, to cause
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the Company to carry on and preserve the business, goodwill and the
relationships of the Company with customers, suppliers, employees, agents and
others in substantially the same manner as they have been prior to the date
hereof.
5.2 Conduct of Business.
(a) From the date hereof until the Closing, except as expressly
permitted hereby, the Company shall not, and the Stockholders shall not
permit the Company to, without DCTI's prior express written consent:
(i) incur any additional indebtedness, or guarantee any
indebtedness or obligation of any other party;
(ii) issue, redeem or purchase any of the Company's
capital stock or securities convertible into its capital
stock or grant or issue any options, warrants or rights to
subscribe for its capital stock or securities convertible
into its capital stock or commit to do any of the foregoing;
(iii) pay out or declare any dividends or other
distributions in respect of the capital stock of the Company
amounting to more than the Net Income for the period
beginning on the date hereof;
(iv) enter into, amend or terminate any material agreement
or arrangement, other than in the ordinary course of
business; provided, that the Company shall notify DCTI prior
to entering into, amending or terminating any material
agreement or arrangement in the ordinary course of business;
(v) increase the compensation payable or to become
payable to any of the Company's officers, employees or
agents, or adopt or amend any employee benefit plan or
arrangement;(vi) enter into any employment contract or
agreement with any existing or prospective employee which is
not terminable at will;
(vi) pay any obligation or liability, fixed or contingent,
other than current liabilities;
(vii) cancel, without full payment, any note, loan or other
obligation owing to the Company;
(viii) acquire or dispose of any properties or assets used
in the businesses of the Company except in the ordinary
course of business hereof;
(ix) create or suffer to be imposed any lien, mortgage,
security interest or other charge on or against the
Company's properties or assets;
(x) engage in any activities or transactions outside the
ordinary course of the Company's business as conducted at
the date hereof;
151
(xi) make or adopt any change in the Articles of
Incorporation or Bylaws of the Company as in force and
effect on the date hereof; or
(xii) take any action, or omit to take any action, within
their control, that would cause, and shall promptly notify
DCTI in writing of any event or occurrence which causes any
of the representations and warranties set forth in Article
II hereof to become untrue, incomplete, or inaccurate in any
material respect as or prior to the Closing Date.
(b) From the date hereof until the Closing, except as expressly
permitted hereby, the Company shall, and the Stockholders shall cause
the Company to, unless otherwise expressly consented to in writing by
DCTI:
(i) maintain the Company's existing insurance policies,
unless comparable insurance is substituted therefor, and
shall not take any action to terminate or modify those
insurance policies;
(ii) maintain the Company's books and records consistent
with past practices and policies and in accordance with IAS;
(iii) maintain in good working condition, ordinary wear and
tear excepted, and in compliance in all material respects
with all applicable laws and regulations, all fixed assets
owned, leased or operated, as the case may be, by the
Company;
(iv) observe and perform, and remain in compliance with,
the Company's obligations in agreements and contracts the
breach or violation of which would have, individually or in
the aggregate, a Material Adverse Effect and not enter into
any agreements or contracts which would require payments by
the Company of more than $25,000 over any period of twelve
(12) months; and
(v) maintain compliance with the terms and conditions of
all license or permits held by the Company or under which it
operates or conducts its businesses and use their best
efforts to maintain all such license or permits in full
force and effect.
5.3 Necessary Consents. Prior to the Closing, the Company will
obtain such written consents and take such other actions as may be necessary or
appropriate to allow the consummation of the transactions contemplated hereby
and to allow the continuation of the Company's businesses by DCTI after the
Closing as conducted at the date hereof.
5.4 Access to Information. The Company shall give DCTI and its
accountants, legal counsel and other representatives full access, during normal
business hours throughout the period prior to the Closing, to all of the
properties, books, contracts, commitments and records relating to the business,
assets and liabilities of the Company, and will furnish DCTI, its accountants,
legal counsel and other representatives during such period all such information
concerning its affairs as DCTI may reasonably request; provided, that any
furnishing of such information pursuant hereto or any investigation by DCTI
shall not affect DCTI's right to rely on the representations, warranties and
covenants made by the Company in this Agreement. Pending the Closing, DCTI will
hold in confidence all information so obtained and will use such information
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only for purposes related to the transactions contemplated hereby. DCTI further
agrees that, pending the Closing, it will not disclose any such information to
any third party except upon the prior written consent of the Company, or except
as required by law or except to its advisors who have agreed to maintain the
confidentiality of such information. If the transactions contemplated hereby are
not consummated, DCTI will return all data to the Company and continue to honor
the foregoing confidentiality and non-disclosure covenants for a period of three
(3) years. Such obligation of confidentiality shall not extend to any
information (i) which is shown to be or to have been generally known to others
engaged in the same trade or business as the Company; (ii) previously known to
DCTI prior to the start of discussions leading to the execution of this
Agreement; (iii) obtained by DCTI in good faith from third parties who are not
obligated to maintain the information confidential; or (iv) that is or shall be
public knowledge through no act or omission by DCTI or any of its directors,
officers, employees, or representatives.
5.5 Certain Defaults; Litigation. The Company will give prompt
notice to DCTI of:
(a) any notice of default received by the Company
subsequent to the date of this Agreement and prior to the Closing
under any instrument or agreement to which the Company or its assets
is a party or by which it is bound, which default could, if not
remedied, result in a Material Adverse Effect or which would render
incorrect any representation made herein, and
(b) any suit, action, proceeding or investigation
instituted or threatened against or affecting the Company or the
transactions contemplated hereby subsequent to the date of this
Agreement and prior to the Closing.
5.6 Other Negotiations. Prior to the Closing, or such earlier
date on which this Agreement is terminated in accordance with its terms, the
Company and the Stockholders will not, and the Company will cause the Company's
officers, directors, employees, agents and representatives not to, directly or
indirectly, initiate discussions or negotiate, or authorize any person or entity
to discuss or negotiate on behalf of the Company, with any other party, or
entertain or consider any inquiries or proposals received from any other party,
concerning the possible disposition of the Company's business, assets or capital
stock, in whole or in part. The Company will not furnish any information
concerning the Company to any person other than DCTI for the purpose of, or with
the intent of, permitting such person or entity to evaluate a possible
acquisition of the Company's business, assets or capital stock, in whole or in
part.
5.7 Non-Competition Agreements. The Company shall cause Don
Marshall to enter into a non-competition agreement (the "Non-Competition
Agreement") substantially in the form attached hereto as Exhibit ____.
5.8 No Transfer. The Stockholders agree not to sell, assign or
transfer any of the Shares to anyone other than DCTI, or to a tranferee who has
agreed in writing to be bound by the terms of this Agreement. The Company shall
close its transfer books against any attempt to sell, assign or transfer any
Shares in violation of the foregoing sentence.
5.9 Best Efforts. Each of the Company and the Stockholders will
use its best efforts to perform and fulfill all obligations on their respective
parts to be performed and fulfilled under this Agreement, and to cause all the
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conditions precedent to the consummation of the transactions to be timely
satisfied, to the end that the transactions contemplated by this Agreement shall
be effected substantially in accordance with its terms. Each of the Company and
the Stockholders shall each cooperate with DCTI in such actions and in securing
requisite approvals and shall deliver such further documents as DCTI may
reasonably request as necessary to evidence such transactions.
Article VI.
COVENANTS OF DCTI
-----------------
6.1 Necessary Consents. Prior to the Closing, DCTI will use its
best efforts to obtain such consents and take such other actions as may be
necessary or appropriate to allow the consummation of the transactions
contemplated hereby.
6.2 Access to Information. DCTI shall give the Company and the
Stockholders and its accountants, legal counsel and other representatives full
access, during normal business hours throughout the period prior to the Closing,
to all of the properties, books, contracts, commitments and records relating to
the business, assets and liabilities of DCTI, and will furnish the Company and
the Stockholders, its accountants, legal counsel and other representatives
during such period all such information concerning its affairs as the Company or
the Stockholders may reasonably request; provided, that any furnishing of such
information pursuant hereto or any investigation by the Company or the
Stockholders shall not affect the Company or the Stockholders' right to rely on
the representations, warranties and covenants made by DCTI in this Agreement.
Pending the Closing, each of the Company and the Stockholders will hold in
confidence all information so obtained and will use such information only for
purposes related to the transactions contemplated hereby. Each of the Company
and the Stockholders further agree that, pending the Closing, it will not
disclose any such information to any third party except upon the prior written
consent of DCTI, or except as required by law or except to its advisors who have
agreed to maintain the confidentiality of such information. If the transactions
contemplated hereby are not consummated, the Company and the Stockholders will
return all data to DCTI and continue to honor the foregoing confidentiality and
non-disclosure covenants for a period of three (3) years. Such obligation of
confidentiality shall not extend to any information (i) which is shown to be or
to have been generally known to others engaged in the same trade or business as
DCTI; (ii) previously known to the Company or the Stockholders prior to the
start of discussions leading to the execution of this Agreement; (iii) obtained
by the Company or the Stockholders in good faith from third parties who are not
obligated to maintain the information confidential; or (iv) that is or shall be
public knowledge through no act or omission by the Company or the Stockholders
or any of its directors, officers, employees, or representatives.
6.3 Stockholder's Meeting The Company shall cause a meeting of
its stockholders to be duly called and held as soon as practicable for the
purpose of voting on the approval and adoption of this Agreement and
transactions contemplated hereby. The Board of Directors of DCTI shall, subject
to its fiduciary duties, recommend approval and adoption of such matters by
DCTI's stockholders. In connection with such meeting, DCTI shall prepare and
file with the SEC a proxy statement in regard to such actions to be taken at
such stockholder meeting.
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6.4 Employee Matters. The Company shall enter into an employment
agreement with Don Marshall (the "Marshall Employment Agreement"), substantially
in the form attached hereto as Exhibit .
6.5 Best Efforts. DCTI will use its best efforts to perform and
fulfill all obligations on its part to be performed and fulfilled under this
Agreement, and to cause all the conditions precedent to the consummation of the
transactions to be timely satisfied, to the end that the transactions
contemplated by this Agreement shall be effected substantially in accordance
with its terms.
Article VII.
CONDITIONS PRECEDENT TO
OBLIGATIONS OF DCTI
-------------------
The obligation of DCTI to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, at or before the Closing, of all
the following conditions, unless waived in writing by DCTI:
7.1 Certificates for Shares. DCTI shall have received
certificates for the Shares, which shall constitute all of the issued and
outstanding capital stock of the Company.
7.2 Representations and Warranties True. All representations and
warranties of the Company and the Stockholders in this Agreement or the
Schedules and Exhibits hereto, or in any written statement or certificate that
shall be delivered to DCTI by the Company or the Stockholders under this
Agreement, shall be true and correct on and as of the Closing Date as if made on
the date thereof.
7.3 Covenants Performed. The Company and the Stockholders shall
have performed, satisfied, and complied with all covenants, agreements, and
conditions required by this Agreement to be performed or complied with by the
Company and the Stockholders on or before the Closing Date.
7.4 Certificate. DCTI shall have received from the Company and
the Stockholders a certificate, dated the Closing Date, certifying, in such
detail as DCTI and its counsel may reasonably request, that the conditions
specified in this Article VII have been satisfied.
7.5 Opinion of Counsel for the Company. DCTI shall have received
an opinion from counsel for the Company, dated the Closing Date, substantially
in the form attached hereto as Exhibit A (the "Seller's Counsel Opinion").
7.6 No Violations; No Actions. The consummation of the
transactions contemplated by this Agreement shall not violate any order, decree
or judgment of any court or governmental body having competent jurisdiction and
no action or proceeding shall have been instituted or threatened by any person,
entity or governmental agency which, in any such case, in the sole judgment of
DCTI, has a reasonable probability of resulting in (i) the obtaining of material
damages from DCTI or the Company; (ii) an order, judgment or decree restraining,
prohibiting or rendering unlawful the consummation of the transactions
contemplated by this Agreement; or (iii) other relief in connection therewith.
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7.7 No Material Adverse Effect. During the period from December
31, 1998 to the Closing, there shall not have been any Material Adverse Effect.
DCTI shall have received a certificate from the Company dated the Closing Date
to the foregoing effect.
7.8 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated hereby and all
documents and instruments incident to such transactions shall be in form and
substance reasonably satisfactory to DCTI and its counsel, and DCTI shall have
received all such counterpart originals or certified or other copies of such
documents as it may reasonably request.
7.9 Resignation of Directors. Each of the members of the Company's Board of
Directors, other than David Hicks and Don Marshall, shall have tendered his
resignation (the "Resignations") to the Company, such resignation to be
effective upon the Closing.
7.10 Delivery of Documents. The Stockholders and DCTI shall have
entered into registration rights agreement (the "Registration Rights Agreement")
substantially in the form attached hereto as Exhibit C.
7.11 Schedules. The Company shall have completed and attached
hereto all Schedules required by this Agreement, and all such Schedules shall
have been acceptable to DCTI, in its sole discretion.
7.12 Required Consents. All consents, approvals and waivers from
third parties and governmental authorities necessary to the transactions as
contemplated hereby and to the continued validity and effectiveness of the
Licenses shall have been obtained without the imposition on DCTI or the Company
of any burdensome conditions, restrictions, or obligations that were not
applicable prior to the Company during the fiscal year ended December 31, 1998.
Article VIII.
CONDITIONS PRECEDENT TO
OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS
-----------------------------------------------
The obligation of the Company and the Stockholders to consummate the
transactions contemplated by this Agreement is subject to the satisfaction, at
or before the Closing, of all the following conditions, unless waived in writing
by the Company and the Stockholders:
8.1 Representations and Warranties True. All representations and
warranties by DCTI in this Agreement or the Schedules and Exhibits hereto, or in
any written statement or certificate that shall be delivered to the Company by
DCTI under this Agreement shall be true on and as of the Closing as though such
representations and warranties were made on and as of that date, and a duly
authorized DCTI officer shall have delivered a certificate, dated the Closing
Date, to the Company so certifying.
8.2 Covenants Performed. DCTI shall have performed, satisfied,
and complied with all covenants, agreements, and conditions required by this
Agreement to be performed or complied with by DCTI on or before the Closing, and
a duly authorized DCTI officer shall have delivered a certificate, dated the
Closing Date, to the Company so certifying.
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8.3 No Violations; No Actions. Consummation of the transactions
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction and no action or
proceeding shall have been instituted or threatened by any person, entity or
governmental agency which, in any such case, in the sole judgment of the
Company, has a reasonable probability of resulting in (i) the obtaining of
material damages from the Company, (ii) an order, judgment or decree
restraining, prohibiting or rendering unlawful the consummation of the
transactions contemplated by this Agreement, or (iii) other relief in connection
therewith.
8.4 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated hereby and all
documents and instruments incident to such transactions shall be in form and
substance reasonably satisfactory to the Company and its counsel, and the
Company shall have received all such counterpart originals or certified or other
copies of such documents as it may reasonably request.
8.5 Delivery of Documents. The Company shall have received all
documents and other items to be delivered by DCTI under Section 9.3.
8.6 No Material Adverse Change. During the period from the date
hereof to the Closing, there shall not have been any material adverse change in
the condition (financial or other), liabilities, business or prospects of DCTI.
The Company shall have received a certificate from DCTI dated the Closing Date
to the foregoing effect.
8.7 Required Consents. All consents, approvals and waivers from
third parties and governmental authorities necessary to the transactions as
contemplated hereby shall have been obtained.
8.8 Stockholder Approval. DCTI shall have received stockholder
approval of this Agreement and the transactions contemplated hereby.
8.9 Board of Directors. DCTI shall have taken all necessary
corporate action such that immediately following the Closing, the number of the
directors of the Company shall be seven and that immediately following the
Closing, the Board of Directors shall include three member nominated by the
Stockholders.
8.10 Delivery of Documents. DCTI and the Stockholders shall have
entered into the Royalty Agreement and the Registration Rights Agreement.
Article IX.
CLOSING
-------
9.1 Time and Place. The purchase and sale of the Shares hereunder
(the "Closing") shall occur at DCTI's office in Park City, Utah at 10:00 a.m. on
October 15, 1999 or at such other time and date to which the parties may agree
in writing (the "Closing Date").
9.2 Deliveries of the Company. At the Closing, the Company will
execute and deliver or cause to be executed and delivered to DCTI:
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(a) Stock Certificates. Certificates representing the Shares,
endorsed over to DCTI or accompanied by duly executed stock powers;
(b) Corporate Documents. The Articles of Incorporation of the
Company, certified by the appropriate government agency as of a
recent date and the Bylaws of the Company, certified by the secretary
of the Company as in effect at the Closing;
(c) Certificate of Good Standing. Certificates of Good Standing,
dated as of a recent date, with respect to the Company, issued by the
appropriate authority of each jurisdiction listed in Schedule 8.2(c);
(d) Resolutions. A copy of the resolutions of the Board of
Directors of the Company, certified by the secretary of the Company
as having been duly and validly adopted and being in full force and
effect, authorizing execution and delivery of this Agreement and
performance of the transactions contemplated hereby by the Company;
(e) Books and Records. All of the minute books, stock ledgers and
similar corporate records of the Company;
(f) Consents. Evidence that all consents, approvals, or
authorizations of or notifications to any third parties (including
governmental agencies), if any, required to sell and exchange the
Shares and to consummate the transactions contemplated hereby have
been obtained by the Company;
(g) Resignations. The Resignations.
(h) Opinion of Counsel. The Seller's Counsel Opinion;
(i) Company's Certificate. A certificate from Company dated the
Closing Date, containing the information required pursuant to Section
7.4;
(j) Registration Rights Agreements. The Registration Rights
Agreement between DCTI and the Stockholders, in which DCTI agrees to
register 550,000 DCTI Shares per quarter up to a maximum of 2.2
million DCTI Shares and substantially in the form attached hereto as
Exhibit C (the "Registration Rights Agreement");
(k) Non-Competition Agreements.The Non-competition Agreements;
and
(l) Other Documents. Such other documents and instruments as DCTI
or its counsel reasonably shall deem necessary to consummate the
transactions contemplated hereby.
All documents delivered to DCTI shall be in form and substance
reasonably satisfactory to DCTI and its counsel.
9.3 Deliveries of DCTI. At the Closing, DCTI will execute and
deliver or cause to be executed and delivered to the Company simultaneously with
delivery of the items referred to in Section 9.2 above:
158
(a) Payment of the Consideration. The DCTI Shares;
(b) Resolutions. A copy of the resolutions of the Board of
Directors of DCTI, certified by the secretary thereof as having been
duly and validly adopted and being in full force and effect,
authorizing execution and delivery of this Agreement and performance
of the transactions contemplated hereby by DCTI;
(c) Corporate Documents. The Certificate of Incorporation of
DCTI, certified by the Secretary of State of Delaware as of a recent
date and the Bylaws of DCTI, certified by the secretary of DCTI as in
effect at the Closing;
(d) Certificates of Good Standing. Certificates of Good Standing
dated as of a recent date, with respect to DCTI, issued by the
Secretary of State of Delaware;
(e) Consents. Evidence that all consents, approvals, or
authorizations of or notifications to any third parties (including
governmental agencies), if any, required to issue and exchange the
DCTI Shares and to consummate the transactions contemplated hereby
have been obtained by DCTI;
(f) Officer's Certificate. A certificate from an officer of DCTI,
dated the Closing Date, containing the information required pursuant
to Sections 8.1 and 8.2;
(g) Registration Rights Agreement. The Registration Rights
Agreement;
(h) Other Documents. Such other documents and instruments as DCTI
or its counsel reasonably shall deem necessary to consummate the
transactions contemplated hereby.
Article X.
All documents delivered to the Company shall be in form and
substance reasonably satisfactory to DCTI.
Milestone closings
------------------
10.1 First Milestone Closing. The delivery and sale of the First
Milestone Shares (the "First Milestone Closing") shall occur at DCTI's offices
in Park City at 10:00 a.m. on the 30th day following confirmation by DCTI's
principal accounting officer that DCTI is obligated to deliver the First
Milestone Shares.
10.2 Second Milestone Closing. The delivery and sale of the Second
Milestone Shares (the "Second Milestone Closing") shall occur at DCTI's offices
in Park City at 10:00 a.m. on the 30th day following confirmation by DCTI's
principal accounting officer that DCTI is obligated to deliver the Second
Milestone Shares.
10.3 Conditions to DCTI's Obligations at Milestone Closings. The
obligation of DCTI to deliver the First Milestone Shares or the Second Milestone
Shares, as the case may be, is subject to the satisfaction of the following
conditions, unless waived in writing by DCTI:
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(a) Representations. All representations of the Stockholders in
this Agreement or the Schedules and Exhibits hereto, or in any
written statement or certificate that shall be delivered to DCTI
under this Agreement, other than those representations which
reference a specific date therein, shall be true on and as of the
First Milestone Closing Date or Second Milestone Closing Date, as the
case may be, as though such representations and warranties were made
on and as of that date, and the Stockholders, shall have delivered a
certificate, dated the First Milestone Closing date or the Second
Milestone Closing Date, as the case may be, so certifying.
(b) No Violations; No Actions. Consummation of the transactions
contemplated by the First Milestone Closing or the Second Milestone
Closing, as the case may be, shall not violate any order, decree or
judgment of any court or governmental body having competent
jurisdiction and no action or proceeding shall have been instituted
or threatened by any person, entity or governmental agency which has
a reasonable probability of resulting in (i) an order, judgment or
decree restraining, prohibiting or rendering unlawful the
consummation of the transactions contemplated by the First Milestone
Closing or the Second Milestone Closing, as the case may be, or (ii)
other relief in connection therewith.
10.4 Deliveries of the Company and the Stockholders. At the First
Milestone Closing or the Second Milestone Closing, as the case may be, the
Company and each of the Stockholders will execute and deliver or cause to be
executed and delivered to DCTI such documents and instruments as DCTI or its
counsel reasonably shall deem necessary to consummate the transactions
contemplated by the First Milestone Closing or Second Milestone Closing, as the
case may be.
10.5 Deliveries of DCTI at Milestone Closings. At the First
Milestone Closing or the Second Milestone Closing, as the case may be, DCTI will
execute and deliver or cause to be executed and delivered to the Stockholders:
(a) Shares. The First Milestone Shares or the Second Milestone
Shares, as the case may be.
(b) Certificate Good Standing. Certificate of Good Standing
dated as of a recent date, with respect to DCTI, issued by the
Secretary of State of DCTI's jurisdiction of incorporation.
(c) Consents. Evidence that all consents, approvals, or
authorizations of or notifications to any third parties (including
governmental agencies), if any, required to issue and deliver the First
Milestone or Second Milestone Shares, as the case may be, have been
obtained.
Article XI.
OBLIGATIONS OF PARENT AND DCTI AFTER CLOSING
--------------------------------------------
11.1 Indemnification by the Stockholders. The Stockholders shall
indemnify and hold harmless DCTI and its respective officers, directors,
employees, successors and assigns in respect of any and all claims, actions,
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suits or other proceedings and any and all losses, costs, expenses, liabilities,
fines, penalties, interest, and damages, whether or not arising out of any
claim, action, suit or other proceeding (and including reasonable counsel and
accountants' fees and expenses and all other reasonable costs and expenses of
investigation, defense or settlement of claims and amounts paid in settlement)
incurred by, imposed on or borne by DCTI (collectively "Damages") resulting
from:
(a) The breach of any of the representations or warranties made
by the Company or the Stockholders in this Agreement;
(b) The breach or the failure of performance by the Company or
the Stockholders of any of the covenants that they are to perform
hereunder;
(c) The payment of any taxes (including interest and penalties)
of any kind or nature imposed, whether before or after the Closing,
by any government or subdivision thereof upon the business, assets or
employees or independent contractors of the Company or otherwise
resulting from or relating to the respective businesses or operations
of the Company prior to the Closing or any of its properties or
assets as they existed as of or any time prior to the Closing Date
and the transactions contemplated by this Agreement;
(d) The death of or injury to any person or damage to property
that occurred prior to the Closing and arose out of or in connection
with the business or operations of the Company (whether asserted,
discovered or established before or after the Closing), and whether
or not it is the subject matter of a claim or action disclosed in the
Schedules to this Agreement; and
(e) All employment-related claims and causes of action, and all
other claims and causes of actions, that have arisen or arise out of
in connection with the operations of the businesses of the Company
conducted prior to the Closing (whether asserted, discovered or
established before or after the Closing).
Damages shall exclude any amount with respect to which DCTI or the
Company as the case may be shall have received under any insurance policy which
provides coverage for the liability to which such amount relates.
11.2 Indemnification by DCTI. DCTI shall indemnify and hold
harmless the Stockholders, in respect of any and all claims, losses,
costs, expenses, liabilities, fines, penalties, interest, and damages
(including reasonable counsel and accountants' fees and expenses and
all other reasonable costs and expenses of investigation, defense or
settlement of claims and amounts paid in settlement) incurred by,
imposed on or borne by the Stockholders resulting from:
(a) The breach of any of the representations or warranties made
by DCTI in this Agreement; or
(b) The breach or the failure of performance by DCTI of any of
the covenants that it is to perform hereunder.
11.3 Indemnification Procedure for Claims. Whenever any claim
shall arise for indemnification hereunder, the party entitled to indemnification
(the "indemnified party") shall promptly notify the other party or parties (the
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"indemnifying party") of the claim and, when known, the facts constituting the
basis for such claim; provided, that the indemnified party's failure to give
such notice shall not affect any rights or remedies of an indemnified party
hereunder with respect to indemnification for damages except to the extent that
the indemnifying party is materially prejudiced thereby. In the event of any
claim for indemnification hereunder resulting from or in connection with any
claim or legal proceedings by a third party, the notice to the indemnifying
party shall specify, if known, the amount or an estimate of the amount of the
liability arising therefrom. The indemnified party shall not settle or
compromise any claim by a third party for which it is entitled to
indemnification hereunder, without the prior written consent of the indemnifying
party (which shall not be unreasonably withheld) unless suit shall have been
instituted against it and the indemnifying party shall not have taken control of
such suit after notification thereof as provided in Section 13.8 this Agreement.
11.4 Defense by Indemnifying Party. In connection with any claim
giving rise to indemnity hereunder or resulting from or arising out of any claim
or legal proceeding by a person who is not a party to this Agreement, the
indemnifying party at its sole cost and expense may, upon written notice to the
indemnified party, assume the defense of any such claim or legal proceeding if
it acknowledges to the indemnified party in writing its obligations to indemnify
the indemnified party with respect to all elements of such claim, and thereafter
diligently conducts the defense thereof with counsel reasonably acceptable to
the indemnified party. The indemnified party shall be entitled to participate in
(but not control) the defense of any such action, with its counsel and at its
own expense. If the indemnifying party does not assume or fails to conduct in a
diligent manner the defense of any such claim or litigation resulting therefrom,
(i) the indemnified party may defend against such claim or litigation, in such
manner as it may deem appropriate, including, without limitation, settling such
claim or litigation, after giving notice of the same to the indemnifying party,
on such terms as the indemnified party may deem appropriate, and (ii) the
indemnifying party shall be entitled to participate in (but not control) the
defense of such action, with its counsel and at its own expense. If the
indemnifying party thereafter seeks to question the manner in which the
indemnified party defended such third party claim or the amount or nature of any
such settlement, the indemnifying party shall have the burden to prove by a
preponderance of the evidence that the indemnified party did not defend or
settle such third party claim in a reasonably prudent manner. Each party agrees
to cooperate fully with the other, such cooperation to include, without
limitation, attendance at depositions and the provision of relevant documents as
may be reasonably requested by the indemnifying party; provided, that the
indemnifying party will hold the indemnified party harmless from all of its
expenses, including reasonable attorneys' fees, incurred in connection with such
cooperation by the indemnified party.
11.5 Manner of Indemnification. All indemnification hereunder
shall be effected by payment of cash or delivery of a certified or official bank
check to the indemnified party.
11.6 Limitations on Indemnification. Notwithstanding any provision
of this Agreement to the contrary, the Stockholders shall (i) have no obligation
to indemnify any person entitled to indemnity under Section 11.1 unless the
persons so entitled to indemnity thereunder have suffered Damages in an
aggregate amount in excess of $25,000 (the "Deductible") and then only to the
extent of such excess, and (ii) the Stockholders' aggregate liability under
Section 11.1 shall in no event exceed the value (determined as of the Closing
Date) of the DCTI Shares.
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Article XII.
TERMINATION
-----------
12.1 Termination by Mutual Consent. At any time prior to the
Closing, this Agreement may be terminated by written consent of DCTI and the
Stockholders.
12.2 Termination by DCTI. DCTI may terminate this Agreement at any
time after October 30, 1999 by delivery of written notice to the Stockholders
and the Company, if the Closing has not occurred by such date because the
conditions contained in Article VI are or have not been satisfied.
12.3 Termination by the Stockholders. The Stockholders may
terminate this Agreement at any time after October 30, 1999 by delivery of
written notice to DCTI, if the Closing has not occurred by such date because the
conditions contained in Article VII are or have not been satisfied.
12.4 Effect of Termination. In the event of termination as
provided above, this Agreement shall forthwith become of no further force or
effect and all parties hereto shall bear their own costs associated with this
Agreement and all transactions mentioned herein; provided, that Article XI
hereof shall survive such termination and continue in full force and effect, and
such termination shall not relieve any person of liability for breach of or
interference with this Agreement.
Article XIII.
GENERAL PROVISIONS
------------------
13.1 Survival. The representations and warranties of the Company
and the Stockholders set forth in this Agreement or in any instrument or
document furnished in connection herewith shall survive the Closing and all
representations and warranties set forth herein or in any instrument or document
furnished in connection herewith will expire on the third anniversary of the
Closing Date. No claim or action for indemnity pursuant to Sections 11.1 or 11.2
hereof for breach of any representation or warranty shall be asserted or
maintained by any party hereto after the expiration of such representation or
warranty pursuant to the provisions of this Section 13.1 except for claims made
in writing prior to such expiration and actions (whether instituted before or
after such expiration) based on any claim made in writing prior to such
expiration. Each party hereto may rely on the representations and warranties
made by the other parties hereto notwithstanding any investigation of the facts
constituting the basis of the representations and warranties of any party by any
other party hereto.
13.2 Further Assurances. At the request of any of the parties
hereto, and without further consideration, the other parties agree to execute
such documents and instruments and to do such further acts as may be necessary
or desirable to effectuate the transactions contemplated hereby.
13.3 Each Party to Bear Own Costs. Each of the parties shall pay
all costs and expenses incurred or to be incurred by it in negotiating and
preparing this Agreement and in closing and carrying out the transactions
contemplated by this Agreement.
163
13.4 Headings. The subject headings of the Articles and Sections
of this Agreement are included for purposes of convenience only, and shall not
affect the construction or interpretation of any of its provisions.
13.5 Entire Agreement; Waivers. This Agreement and the Exhibits
and Schedules hereto constitute the entire agreement between the parties
pertaining to the contemporaneous agreements, representations, and
understandings of the parties. No supplement, modification, or amendment of this
Agreement shall be binding unless executed in writing by all parties. No waiver
of any of the provisions of this Agreement shall be deemed, or shall constitute,
a waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
13.6 Third Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
13.7 Successors and Assigns. This Agreement shall not be assigned
by the Company or the Stockholders without the written consent of DCTI. This
Agreement shall be binding on, and shall inure to the benefit of, the parties to
it and their respective heirs, legal representatives, successors, and assigns.
13.8 Notices. All notices, requests, demands, and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given when so delivered in person, by overnight courier, by
facsimile transmission (with receipt confirmed by telephone or by automatic
transmission report) or two business days after being sent by registered or
certified mail (postage prepaid, return receipt requested) as follows:
To the Company at: DataBank International, SKB
P.O. Box 1385
Central Street, Basseterre
St. Kitts, West Indies
To the Stockholders: c/o Don Marshall
P.O. Box 1385
Central Street, Basseterre
St. Kitts, West Indies
To DCTI at: Digital Courier Technologies, Inc.
136 Heber Avenue, Suite 204
P.O. Box 8000
Park City, UT 84060
Facsimile: (435) 655-3648
Attention: Executive Vice President
164
Any party may change its address for purposes of this paragraph by
giving notice of the new address to each of the other parties in the manner set
forth above.
13.10 Arbitration. Any controversy or claim arising out of or
relating to this Agreement shall be determined by arbitration administered by
the American Arbitration Association under its International Arbitration Rules.
13.11 Attorneys' Fees. If any party to this Agreement shall bring
any action, suit, counterclaim or appeal for any relief against the other,
declaratory or otherwise, to enforce the terms hereof or to declare rights
hereunder (collectively, an "Action"), the Prevailing Party shall be entitled to
recover as part of any such Action its reasonable attorneys' fees and costs,
including any fees and costs incurred in bringing and prosecuting such Action
and/or enforcing any order, judgment, ruling or award granted as part of such
Action. "Prevailing party" within the meaning of this Section 13.10 includes,
without limitation, a party who agrees to dismiss an Action upon the other
party's payment of all or a portion of the sums allegedly due or performance of
the covenants allegedly breached, or who obtains substantially the relief sought
by it.
13.12 Governing Law. The terms of this Agreement shall be governed
by the laws of the State of Utah applicable to agreements entered into, to be
wholly performed in and among residents exclusively of, Utah.
13.13 Consent to Jurisdiction and Forum Selection. The parties
agree that all actions or proceedings arising in connection with this Agreement
shall be tried and litigated exclusively in the State and Federal courts located
in Utah. The aforementioned choice of venue is intended by the parties to be
mandatory and not permissive in nature, thereby precluding the possibility of
litigation between the parties with respect to or arising out of this Agreement
in any jurisdiction other than that specified in this Section 13.12. Each party
hereby waives any right it may have to assert the doctrine of forum non
conveniens or similar doctrine or to object to venue with respect to any
proceeding brought in accordance with this paragraph, and stipulates that the
State and Federal courts located in Utah shall have in personam jurisdiction and
venue over each of them for the purposes of litigating any dispute, controversy
or proceeding arising out of or related to this Agreement. Each party hereby
authorizes and accepts service of process sufficient for personal jurisdiction
in any action against it as contemplated by this Section 13.11 by registered or
certified mail, return receipt requested, postage prepaid, to its address for
the giving of notices as set forth in this Agreement, or in the manner set forth
in Section 13.8 of this Agreement for the giving of notice. Any final judgment
rendered against a party in any action or proceeding shall be conclusive as to
the subject of such final judgment and may be enforced in other jurisdictions in
any manner provided by law.
13.14 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
13.15 Severability. All provisions contained herein are severable
and in the event that any of them shall be held to be to any extent invalid or
otherwise unenforceable by any court of competent jurisdiction, such provision
shall be construed as if it were written so as to effectuate to the greatest
possible extent the parties' expressed intent; and in every case the remainder
of this Agreement shall not be affected thereby and shall remain valid and
enforceable, as if such affected provision were not contained herein.
165
13.16 Publicity. The parties shall cooperate with each other in the
development and distribution of all news releases and other public disclosures
relating to the transactions contemplated hereby. None of the parties shall
issue or make, or cause to have issued or made, any press release or
announcement concerning the transactions contemplated hereby without the advance
approval in writing of the form and substance thereof by the other parties,
unless otherwise required by applicable law.
166
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase and Exchange Agreement as of the date first above written.
DATABANK INTERNATIONAL LIMITED
By:/s/ Don Marshall
----------------
Name:Don Marshall
Title: President
DIGITAL COURIER TECHNOLOGIES, INC.
By:/s/ Jim Egide
---------------------------
Name: Jim Egide
Title: Chief Executive Officer
STOCKHOLDERS
/s/ Don Marshall
-----------------
Don Marshall
/s/
Name:
/s/
Name:
/s/
Name:
167
STOCKHOLDERS (cont.):
Carib Venture Partners, Ltd.
By:/s/
Name:
Title:
Prospect Creek, Ltd.
By:/s/
Name:
Title:
Next Generation, Ltd.
By:/s/
Name:
Title:
By:/s/
Name:
Title:
By:/s/
Name:
Title:
168
Digital Courier Technologies, Inc.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS ON SEPTEMBER 30, 1999
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Mitchell L. Edwards and Michael D. Bard, or
either of them, each with full power of substitution, as proxies, attorneys and
agents of the undersigned, to attend the Special Meeting of Stockholders of
Digital Courier Technologies, Inc., at the offices of the Company, 136 Heber
Ave., Suite 204, Park City, UT 84060, on September 30, 1999 at 10:00 am Mountain
Time, and any adjournment or postponement thereof, and to vote the number of
shares the undersigned would be entitled to vote if personally present on the
following:
1. To approve the issuance of shares of Common Stock in connection with the
acquisition by the Company of DataBank International, Ltd.
__ For __ Against __ Abstain
2. To approve an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the authorized number of Common Shares
outstanding:
__ For __ Against __ Abstain
3. In their discretion, upon any and all such other matters as may properly
come before the meeting or any adjournment or postponement thereof.
The Board of Directors recommends a vote FOR each of the above proposals.
THIS PROXY WILL BE VOTED AS SPECIFIED, OR IF NO CHOICE IS SPECIFIED, WILL BE
VOTED FOR AND FOR PROPOSALS 1 AND 2.
Date: , 1999
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Signature
- - - --------------------
Signature, if held jointly.
Please sign exactly as name appears. When shares are held by joint tenants, both
should sign. When signing as attorney, as executor, as administrator, trustee,
or guardian, please give full title as such. If a corporation, please sign full
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
STOCKHOLDERS ARE URGED TO MARK, DATE, SIGN AND RETURN THIS PROXY IN THE ENVELOPE
PROVIDED WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.